Section 5 (50 pts) Flashcards
- characteristics, advantages, and disadvantages of a pooling arrangement.
- what’s the payout formula look like?
-typically for regulated lines. when cant insure elsewhere legally or feasibly.
ADVANTAGES:
-cost stability, cost reduction, fostered increased focus on loss control, coverage forms to meet members needs, rating plans can be flexible enough to reflect groups combined loss experience
DISADVANTAGES:
- joint and several liability
- members w good losses can leave pool if others are having bad losses
- risk sharing with smaller universe makes more susceptible to swings
- financial problems of individual members are shared
- board members lack expertise in ins co mgmt
PAYOUT:
- losses beyond excess
- aggregate excess
- gap
- retained earnings
- claim fund
6 types of captives
- Single Parent Captive or Pure Captive (most common. fortune 500)
- Group Captive (homogenous or heterogenous)
- Association Captive (formed by trade association)
- Agency Captive
- Rent-a-Captive (core is owned by a sponsor. made of cells which hold insureds)
- Risk Retention Group (liability only for owner-insureds. domiciled and regulated by 1 state and permitted by federal law to operate in all states w/out meeting multiple states regulation)
Risk Retention Group
type of Captive: liability only for owner-insureds. domiciled and regulated by 1 state and permitted by federal law to operate in all states w/out meeting multiple states regulation
Risk Retention Group
type of Captive: liability only. for owner-insureds. domiciled and regulated by 1 state and permitted by federal law to operate in all states w/out meeting multiple states regulation
reasons not to join a captive
reasons not to join a captive:
- if only for tax advantages
- if for estate planning
- increases tax audit probability
reasons to join a captive
reasons to join a captive:
- availability of coverage
- pricing equity
- need for improved existing products & services
- greater flexibility - customized coverage
- appropriate regulation to protect the organization
- increased value over conventional insurance transactions - policies based on specific organizations needs, and focus on the ins cos loss ratio
reasons to join a captive
reasons to join a captive:
- availability of coverage
- pricing equity
- need for improved existing products & services
- greater flexibility - customized coverage
- appropriate regulation to protect the organization
- increased value over conventional insurance transactions - policies based on specific organizations needs, and focus on the ins cos loss ratio
- cash flow benefits
- reduction in long-term TCOR
disadvantages of captive
- internal admin costs
- dependence upon service providers
- long term capitalization & commitment
- inadequate loss reserves may require an addl infusion of capital
- complex tax issues
explain the development process of a captive
Feasibility determination
Domicile selection
Application for the insurance license
Formation and funding
characteristics, common features, and the types of finite risk insurance contracts
- typically finances a high severity, low frequency exposure.
- full annual aggregate expected losses are funded during the policy term
- a program for only 1 insured
- multi-year contracts
- nearly everything can be insured
- dampens effects of catastrophic losses on organization’s financial statements
- experience acct holds funds & investment income
- can’t cancel if in deficit
- TYPES OF CONTRACTS: -Retrospective OR Prospective
