KRM Risk Management
& Insurance Services

Rental Captive: Agency

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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 stop loss.


INNOVATIVE INSURANCE AGENCY located in California, controls a large book of workers' compensation business. They are looking for a way to increase agency revenues by participating in underwriting profit, and are willing to assume a portion of risk. The Agency has the capability to handle the underwriting of individual accounts, issue policies, as well as provide billing and collections services to their clients. Innovative considered forming their own captive but have ruled it out due to the high capitalization requirements and administrative costs. The principals of INNOVATIVE have heard of Agency Rental Captive plans in the past and decide to contact KRM Risk Management Services to discuss the possibilities of structuring a program for their agency.

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:


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.)

The Agency's Rental Captive will assume responsibility for losses that fall within the first dollar of loss to a Specific retention level (or per occurrence stop loss) as well as an Aggregate retention (or frequency stop loss). All losses that fall within the Agency's Specific and Aggregate retention are paid from the Rental Captive loss fund. Excess reinsurance is provided to cover losses above each retention level or stop loss. (See Partnership Participation diagram on the next page, figure 2). If the premium paid, less program expenses, is not sufficient to cover the aggregate exposure of the Rental Captive, the Agency is required to provide security to eliminate the exposure. The security requirement / Potential Liability is listed in the sample quotation. An aggregate attachment is established to minimize the financial participation of the Agency. Therefore, the risk exposure of the Agency is determined by the difference between the ceded premium and the aggregate reinsurance attachment.

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.

All of the ceded premium that is not utilized to pay for losses is contractually guaranteed to be returned to the association as underwriting profit. In addition, the investment income that is accumulated from the Loss Fund is also contractually guaranteed and accrued to the benefit of the association. HTG would receive the underwriting profit and investment income and in turn distribute the profits to the association members based on some predetermined formula (See Program Partnership - left).

Haulers Trucking Group president and board members decide that the KRM Association Rental Captive Program is exactly what they have been looking for and decide to implement the plan effective at the beginning of the month. Prior to that time, with the help of Star Insurance Services, they choose a qualified Third Party Administrator for the handling of claims and also contract with a loss control consulting firm. The program is set in motion for a successful Association Rental Captive program for Haulers Trucking Group.

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.