Risk Mechanisms

Deductible

  • Premium reduction for assuming risk
  • Indemnity-only deductible or indemnity and expense deductible are available
  • Annual aggregate limit to provide overall cap
  • Deductible amount tailored to expected loss costs and financial capacity of the insured
  • Full claims handling by the insurer
  • Collateral may be required, usually by letter of credit (LOC)

Profit Sharing

  • Premium adjusted based on actual loss experience
  • One-way – good experience results in return premium, but no additional premium due
  • Higher initial premium than fixed-price insurance, but potentially lower ultimate cost
  • Return premium if loss ratio (losses divided by premiums) is below a pre-agreed threshold
  • Premiums deductible when paid; taxable income if profits are returned
  • Collateral not required
  • Full claims handling by the insurer

Retrospective Rating Plan

  • Premium adjusts up or down, within limits, based on actual loss experience
  • Minimum and maximum premium levels tailored to willingness to assume risk
  • Per-claim cap to limit the effect of large claims
  • Can pay minimum premium and collateralize difference with LOC, reducing initial cash outlay
  • Full claims handling by the insurer
  • Most of the benefits of captive programs without the administrative costs or complexity

Captive’s: Single Parent – Segregated Cell

A captive is a wholly owned insurance company usually formed by a noninsurance entity or group to provide risk transfer or financing for a corporation on a specific line of business. There are multiple captive structures all of which have some common components. One of these is the participation of a risk sharing partner, or traditional insurer. Risk sharing partners provide both necessary and desirable services such as; reinsurance; risk and claims management; underwriting and regulatory response and assistance. Two of the more commonly used captive structures for medical professional liability are Single Parent and Segregated Cell.

Single Parent

  • A special purpose insurance company established to insure and reinsure the risks of the shareholder(s).
  • Usually insures specific line of coverage and does not entertain risks outside its own business.
  • The single parent captive structure is a corporation; therefore some thought must be given to who will serve as owners, directors, and officers.
  • There may be no tax advantage at all under this structure and the use and advice of qualified counsel is strongly recommended
  • Can reduce operating costs and provide both underwriting and investment profit.
  • All captives should be initiated with a serious commitment of time and financing, and thought of their contribution to the bottom line.

Segregated Cell Captive

  • The segregated protected cell structure uses a captive usually owed by an existing insurance company or service provider.
  • The sponsoring company or service provide is responsible for compliance with the regulations.
  • Usually legislation in the jurisdiction used protects a cell and its shareholder from claims by creditors of other cells within the sponsored captive.
  • No large capital commitment is needed and may provide both underwriting and investment profit.
  • Allows a group to test the captive concept without making as long a term commitment as other captive models.
  • All captives should be initiated with a serious commitment of time and financing, and thought of their contribution to the bottom line.