Rental Captive: Single
* The application of a Large Deductible to the insurance policy allows for credits to be applied to the insureds premium thus reducing the premium and expenses (taxes / RML's). A Large Deductible, typically $250,000, takes the place of the Specific stop loss. Through collateral and/or cash contributions, the client is responsible for all losses within the deductible layer and up to the aggregate attachment.
TOP Insurance Agency suggests to their client, ACE Manufacturing Company, that they would be an ideal candidate for a Rental Captive program since they are paying about $1,000,000 annually for their workers' compensation exposure. ACE has operations in four states and has had good loss history over the past few years as a result of taking a proactive approach to risk management. The client has considered developing an all encompassing insurance program that is loss sensitive and provides them with greater control of managing their own risk. A KRM Rental Captive plan does exactly that by providing a contractual guarantee for the return of underwriting profit (premium less expenses and losses) and investment income earned from unearned premium reserves and outstanding loss reserves directly to the insured. In addition, claims handling and loss control services can be unbundled to a third party administrator adding to the insured's hands on approach to risk management.
ACE Mfg. provides TOP Insurance Agency the necessary information pertaining to their workers' compensation exposure including historical loss runs, payrolls and premiums. TOP Agency puts together an application and forwards the submission to KRM Risk Management Services. KRM then markets the account to several licensed and admitted insurance companies to provide a competitively priced statutory workers' compensation policy.
KRM receives a quotation from MACRO Insurance Company and informs TOP Agency that the workers' compensation Rental Captive proposal is ready to be presented to the insured. TOP Agency asks that a KRM professional be available for the meeting to assist with the presentation to the client. The premium and expenses quoted by MACRO Insurance Company are as follows:
*Specific Stop Loss: $ 250,000.
**Taxes, Boards, Bureaus & Residuals are determined by each individual state and are adjusted to actual.
ACE Mfg. understands that while participating in a Rental Captive plan, they should be willing to assume some risk. They in turn ask what is their exposure to risk. It is explained that each participant of a KRM Rental Captive program assumes a specific and aggregate loss retention. The specific retention addresses any one single loss while the aggregate retention is for the accumulation or frequency of all losses within the policy period. Ceded premium to the rental captive will serve as a loss fund to pay for the insured's workers' compensation losses. If the ceded premium is not sufficient to fund the entire aggregate position, the client must then secure the difference between the ceded premium and aggregate reinsurance attachment. The risk to the insured is thus determined by a specific and aggregate retention and the additional amount needed to secure the aggregate reinsurance attachment. See the Partnership Participation diagram below. Security for the unfunded portion of the aggregate is provided by the client in the form of cash contributions and/or a letter of credit.
Upon entering into a KRM Rental Captive plan, the insured interacts with a non-affiliated rental captive through a Program Partnership Agreement. The Program Partnership Agreement defines the responsibilities of the insured and Rental Captive including the terms for which underwriting profit and investment income will be returned.
KRM also provides ACE Mfg. with the following pro-forma of the final net cost of the program based on the insureds annual average workers' compensation losses of $500,000:
Net Cost Formula: Losses + Expenses - Investment Income = Net Cost
ACE Manufacturing Company decides that a KRM Rental Captive program is a perfect fit to handle their workers' compensation exposure. ACE's account is easily implemented into a Rental Captive as MACRO Insurance Company binds coverage and their Program Partnership Agreement is prepared and signed.
This sample workers' compensation Rental Captive scenario
was designed to provide an example of how most programs are structured.
Taxes and Residual Market Loads will vary from state to state thus affecting
the total expense component of each program. A large deductible policy and/or
the use of take-out credits can be utilized in states where permitted to
help reduce the overall net expense of the Rental Captive plan. In addition,
claims handling and loss control services can be quoted net of the total
expense load allowing the client to pay the TPA directly. There are many
options and alternatives under a KRM Rental Captive program to best address
each participant's objectives and circumstances. Your KRM representative
is available to explain all the options.
All names and situations contained within this KRM Rental Captive scenario are fictitious.