Rental Captive: Agency
Facing the problems of the ever changing workers' compensation market and finding the opportunities to increase revenue plagues most insurance agencies across the United States.
A KRM Agency Rental Captive program addresses these issues. The Agency
selects preferred accounts from their controlled book of business to place
in a Rental Captive. In addition to the commissions paid, any underwriting
profit (premium less expenses and losses) and investment income (from unearned
premium reserves and outstanding losses), are returned to the Agency through
a contractual agreement. The risk or exposure to the Agency for implementing
a Rental Captive program is determined by the placement of an aggregate
It is determined that INNOVATIVE controls approximately $5,000,000 of annual workers' compensation premium. The average size account generates $25,000 of premium per year. They determine that 50 of their clients, who have low historical loss ratios, would generate a combined premium of $1,500,000 and would be perfect candidates for their Agency Rental Captive program. INNOVATIVE puts a submission together, including five years of loss runs, payrolls and premiums for each account and sends it to KRM.
KRM markets the submission to several licensed and admitted insurance companies in order to obtain the best overall program. It is determined by the KRM professionals that PDQ Insurance Company offers the best overall quotation for the INNOVATIVE Agency Rental Captive program. The principals of INNOVATIVE are informed that a proposal for their Agency Rental Captive has been prepared and is ready to be presented. A meeting is scheduled the following week with the principals, PDQ Insurance Company and a KRM representative at the Agency's office.
At the meeting the quotation is presented as follows:
AGENCY RENTAL CAPTIVE PROGRAM
Premium: $1,500,000. 100.00% Expenses: $ 600,000. 40.00% Insurance Company 7.50% Specific Excess Reinsurance* 10.25% Aggregate Excess Reinsurance 2.50% Taxes, Boards, Bureaus & Residuals** 4.00% Captive Management 2.00% Claims Administration 6.00% Loss Control .75% Agency Commission 5.00% KRM Fee 2.00% Loss Fund $ 900,000. 60.00% Aggregate Attachment $1,350,000. 90.00% Potential Liability $ 450,000. 30.00% Maximum Exposure $1,950,000. 130.00% *Specific Attachment is $250,000. ** Taxes, Boards, Bureaus & Residuals are determined by each state and will be adjusted to actual.
It is explained that the risk to the Agency Rental Captive program works very similar to an Individual Client Rental Captive program. PDQ, a licensed and admitted insurance company, will provide a statutory guaranteed cost workers' compensation policy to each account of the Agency Rental Captive program. Each client pays in their workers' compensation premium over the course of the policy period. The fixed expenses of the Agency plan are deducted from the premium. Through a Reinsurance Agreement, the balance of premium is ceded to the Rental Captive to establish a fund from which losses of the Agency clients will be paid. Any surplus remaining in the Rental Captive loss fund, after all losses have been paid, is considered underwriting profit and returned to the Agency through a Program Partnership agreement. In addition, any investment income accumulated from unearned premium reserves and outstanding loss reserves will be returned to the Agency. (See Program Partnership diagram below.)
PDQ points out that they have underwritten the initial book of business and have developed a model from which all other accounts must follow before entering into INNOVATIVE's Agency Rental Captive. If a potential client for the Agency program does not fall within the underwriting guidelines established, then they are not eligible to participate unless PDQ is informed and gives approval. INNOVATIVE now has the ability to underwrite each account and has authority to bind coverage if the individual account fits the criteria. Since INNOVATIVE is already prepared to issue policies and handle the billing and collections, PDQ will allow them to act as a General Agency giving them service advantages to keep their clients satisfied.
This sample workers' compensation Association Rental Captive scenario
was designed to provide an example of how a program is structured. Taxes
and Residual Market Loads will vary state to state thus affecting the total
expense component of each program. There are many options and alternatives
available to best address the needs and requirements of each association's
objectives. Your KRM representative is available to explain all of the options
and your inquiries are welcome.
All names and situations contained within this KRM Rental Captive scenario are fictitious.