Alternative Risk Financing / Transfer / Captives

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• RISK FINANCING / TRANSFER OPTIONS
• INSURANCE LAYERS
• DECISION CRITERIA
• SOURCES OF ARF / CAPTIVE INSURANCE FACILITIES
• RECIPROCALS / RISK RETENTION
• OTHER RESOURCES

Risk Financing / Transfer Options

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The following are some of the alternatives to traditional guaranteed cost insurance:

• Fund from Cash-Flow (Self Insure / Large Deductible or Self Insured Retention / Internal Fund / Sinking Fund / Lending Agreement)
• Retrospective Rating Program
• Finite Risk / Financial Reinsurance / Chronological Loss Stabilization Program / Multi-Line Integrated Program / Multi Year / Multi Trigger / Blended Risk Contracts (Operational Risk Only) / Blended Risk Contracts (Operational & Financial Risks)
• Wholly Owned Captive / Rent-a-Captive / Protected Cell Company / Association Captive / Agent Owned Captive
• Risk Retention Group / Purchasing Group / Pooling Arrangements
• Reciprocal Insurance Exchange (Canada - except Quebec)
• Industry Focused Insurance Companies
• Insurance Linked Securities (Catastrophe Bond / Securitization) / Non-Catastrophic Securitization / Future Flow Transactions / Financial Guarantee / Loan Guarantee / Derivatives / Futures / Options / Swaps /
• Insuritization - Using an insurance contract to hedge against financial risks (e.g. currency/portfolio risks)
• Loss Portfolio Transfer

Many large organizations will structure their risk financing program to incorporate two or more of these options, and usually the optional choice will be different for each layer of coverage.

The merits of each option should be evaluated individually, however, it is important to reach an overall conclusion that considers the most effective combination of alternative options.

Insurance Layers

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With risk financing it is common to consider an organization's risk and / or insurance arrangements in terms of various layers of cover. These layers are generally defined as follows:

• Primary Layer - This layer contains the high frequency / low severity losses which are essentially predictable. It is unlikely that any single loss in this layer could seriously impact a large organization although an accumulation of claims in any one financial period may create a problem. This layer generally falls within local deductibles with claims paid by Operating Companies.
• Working Layer - This layer contains the medium frequency / medium severity losses where there are only a few losses a year expected. An individual loss may seriously distort the budget / financial performance of any operating unit although it is not likely to present a major problem for the Group as a whole. The decision to insure or self-insure this layer of risk depends upon the appetite for risk-taking that the management of the organization has and sometimes is influenced by the terms offered by insurers.
• Catastrophe Layer - This layer contains the low frequency / high severity losses. An individual loss of this magnitude can seriously distort the financial results of the organization in any one financial year and, may even threaten the whole organization. It is essential that insurance or an alternative method of risk transfer is used to deal with these risks.

Depending on the size of the organization, the definition of these layers will vary based on its financial strength and the historical claims experience. The next step is to evaluate the most effective risk financing option for each one.

Decision Criteria

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The following decision criteria have been identified as common standards for evaluating risk financing alternatives:

Ensure Continuity of Operations

For most companies the objective of insurance / risk transfer is to ensure continuity of operations following a catastrophic loss. This may often be referred to as providing 'peace of mind'.

Ensure Preservation of Assets

Key assets should be protected by insurance or other methods of risk transfer to ensure restoration / rebuild in the event of a loss.

Minimize Long-Term Costs

The objective of an insurance program and the selection and position of appropriate risk financing vehicles is to minimize cost over the long-term. Except in very soft market conditions it is not usually cost-effective for a large organization to buy full ground-up insurance because the smaller, predictable claims can be self-insured more efficiently.

Smooth Profits or Losses Over Time

From a financial budgeting point of view, it is much easier to work with costs that do not vary wildly from one year to another, as can often be the case when relying on traditional insurance markets.

Availability of Capital

The organization may already be committed to a significant capital investment program. This may influence decision-makers against options that involve short-term and significant capital outlay e.g. a captive insurance company.

Plan for the future

Most large commercial organizations restructure operations on a regular basis. It is important that any risk financing strategy including the selection of a vehicle, should be flexible enough to respond to the future structure of the company.

Control Over The Program

The risk financing vehicle selected must allow the organization to maintain and develop control over risk exposures. When assuming responsibility for the cost of retained losses and uninsured losses it will naturally require the promotion of risk management, better communication, motivation and awareness. The risk financing method selected should enhance the level of these various aspects of the organization thereby aiding in control.

Be Practical and Achievable Within a Reasonable Timeframe

The risk financing vehicle selected should be practical and there should be reasonable expectation on implementation to an agreed, acceptable timeframe e.g. within a year.

Weighting of Criteria

An insurance / risk retention program for a large organization normally involves a mixture of risk financing alternatives. In finding the optimal risk financing option, it is necessary to take into account that some of the criteria identified above are more important than others. The weightings applied to each of the criteria are therefore selected and refined following discussions with management of the organization.

For the working and catastrophe layers a much higher weight is usually assigned to the availability of capital. For the primary and working layers the first three criteria (i.e. continuity of operations / preservation of assets / minimize long-term costs) have been allocated zero weight because they have little relevance.

Sources of ARF / Captive Insurance Facilities

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• ACE
• AMS Group - A leading provider of offshore financial services and solutions in the areas of offshore company incorporation & administration, offshore trusts, captive insurance, offshore mutual fund structuring and administration and offshore e-commerce in the British Virgin Islands (BVI), Nevis, Hong Kong, Luxembourg, Mauritius and London.
• Andrew Robinson International - Some of our Insurance Advisory services: Insurance Coverage Audits, Exposure Analysis, Design of Insurance Specifications for Competitive Bidding, Analysis and Evaluation of Quotations from Brokers and Insurers, Insurance Program Monitoring & Management, Claim Preparation, Negotiation and Audits, Cost Allocation Systems Some of our Risk Management services:

  Evaluation of Service Providers in the Risk Value Chain, Risk & Insurance Assessment as part of M&A Due Diligence, Self-Insurance Feasibility Studies, Alternative Risk Transfer and Finite Risk Transfer Solutions, Outsourced Risk Management ("rent-a-risk manager"), Enterprise Risk Management, Risk Mapping, Risk Process & Product Design (integrated disability, etc.), Risk Securitization, Intellectual Property Strategies, Operational Reviews (benchmarking, best practices, etc.), Expert Testimony.

• Arch Capital Group Ltd.
• ARTEMIS - Alternative risk transfer site.
• Andrew Barile Consulting Corporation - A 40 year veteran of the insurance and reinsurance industry, Barile is a well-known consultant to insurance agents, insurance and reinsurance companies, and major corporations on topics including marketing strategy, litigation support, and the formation of offshore insurance companies.
• Bermuda on-line - Good list of Bermuda international and local insurance & reinsurance companies.
• CCMSI has been in operation since 1978 and is a recognized leader in alternative risk options and fully insured programs. CCMSI has a strong history of designing alternative risk funding mechanisms for private and public employers, specializing in the administration of workers compensation, employee benefits, property and liability programs and excess and reinsurance placement.
• Chubb Atlantic Indemnity Ltd
• Dion Durrell
• Discover Re Managers, Inc.
• FM Global - Captives and Alternative Risk
• IMG International
• Insurance Futures Exchange Services Ltd. (IFEX)
• Liberty Mutual Captives
• The Claymore Group - Turks & Caicos. Formation of an insurance company in TCI is a straightforward exercise and we normally expect to complete an application within two weeks of the initial inquiry provided that the client is able to submit the necessary details in a timely manner. It is essential that an application be complete and that the essential attachments are included in the package prior to submission to the regulatory authorities.
• The Taft Companies- W. A. Taft & Company Ltd. is a Bermuda domiciled captive management and consulting group providing feasibility studies, captive formation, accounting, investment, administration and reporting services.
• Travelers
• William R Storie & Co Ltd - Bermuda based consultants - captive insurer and Internet services advice. BerBiz newsletter.
• Willis Captives
• XL Capital

Reciprocals / Risk Retention

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• Canadian Petroleum Insurance Exchange
• Canadian Universities Reciprocal Insurance Exchange
• Community Newspapers Reciprocal Insurance Exchange
• Dion Durrell
• Governmental Interinsurance Exchange
• MEARIE - Municipal Electric Association Reciprocal Insurance Exchange.
• Municipal Insurance Association of B.C.
• National Risk Retention Association
• Ontario Municipal Insurance Exchange
• OSBIE - 106 members, representing over 95% of the school boards in Ontario.
• Risk Retention Reporter
• The National Catholic Risk Retention Group, Inc.
• United Educators Insurance - U.S. school risk retention group.

Other Resources

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• Appleby Spurling & Kempe - A leading provider of sophisticated offshore legal services attracting a client base that includes many of the world's blue-chip companies and high net worth individuals.
• Canadian Captive Insurance Association
• Barbados Investment & Development Corporation
• Barbados Ministry of Economic Development (Supervisor of Insurance)
• Bermuda Chamber of Commerce
• Bermuda Insurance Market
• Bermuda Laws On-Line
• Bermuda Monetary Authority
• Bermuda Registrar of Companies
• Bermuda Stock Exchange
• CAPTIVE.COM - Information on captives, self insureds, risk retention groups, reciprocals, associations etc.
• CaptiveGuru.com - Excellent Resource.
• Captive Insurance Companies Association (CICA)
• Captive Insurance Company Domiciles - From IRMI
• Captive Insurance Council of the District of Columbia
• Conyers Dill & Pearman - Bermuda law firm.
• Dublin International Insurance & Management Association
• Financial Action Task Force on Money Laundering
• Guernsey Financial Services Commission - Guernsey is Europe's largest and longest established captive domicile.
• Incisive Media Plc
• Insurance Association of the Caribbean
• Insurance Taxation and Regulation Publications
• International Compliance Association - The International Compliance Association supports and educates compliance professionals in the fight against terrorist financing, corruption, money laundering and financial crime.
• Internal Revenue Service
• IsleofMan.com
• KPMG Bermuda
• KYC News - The company publishes two investigative newsletters, called OffshoreAlert and InsideBermuda, and owns several proprietary due diligence databases, including those containing details of every civil lawsuit filed at Bermuda Supreme Court since January, 1986, and the Grand Court of the Cayman Islands since January, 1987.
• Ruchelman Law Firm - International Tax Lawyers
• Self-Insurance Institute of America, Inc.
• The Bermuda Foundation for Insurance Studies - A private sector, non-profit organization formed and supported by Bermuda’s insurance industry. Its aim is to provide opportunities for Bermudian students interested in developing a career in insurance.
• Vermont Captive Insurance Association
• Who's Who in Bermuda
• WWWoods & Co