ALP: Different Flavors of Insurance

Do a little homework before choosing coverage for your business.

March 2007

In today’s insurance market, companies, both large and small, should consider the various forms of insurance coverage available, from admitted carrier coverage (premiums with small deductible); admitted carrier coverage (premiums with large deductible); group self-insurer; self-insured with stop loss/excess reimbursement coverage; to captive/Risk Retention Group; and other alternative risk transfer forms.  Insurance is better addressed when there is control and understanding of the risk. Issues with skyrocketing premiums, lack of adequate coverage, unavailability of coverage and/or carrier financial issues, require companies to understand and consider the various forms of insurance and their regulatory and practical differences.

Admitted carriers, for instance, can take the form of a stock insurer, a mutual insurer, a reciprocal insurer, among others, and come with guaranty fund protection up to a “covered claim” limit (typically $300,000/claim) in the event the insurer is declared insolvent. Companies with a net-worth in excess of $25 million (Kentucky - other states may have a different limit) will be required to reimburse the guaranty fund for payments made on the liability obligation. Additionally, some forms of admitted carriers are subject to assessment which would require payment to fund liabilities in the event of a financial issue.

Captive insurers and/or Risk Retention Groups (RRGs) may offer viable alternatives, but neither have guaranty fund protection. Thus, policyholders will have to look solely to the assets of the captive/RRG for payment on the policies, including available reinsurance and/or stop loss coverage, in the event of financial difficulty.

The captive insurer comes in a variety of flavors: A pure captive is owned or controlled by a single parent company solely to directly insure its owner. A consortium captive insures the risks of the member organizations and their affiliated companies. A sponsored captive provides coverage to participants through protected cells. Finally, an industrial captive is owned and controlled by its insureds, which may also consist of a group created as an "RRG."

A captive structure can provide significant cost savings, as well as tailored/flexible coverage and defined risk retention, increased access to reinsures, improved control over claims administration, and focused risk management and loss control. Captives can also provide financial advantages by creating an investment out of the premium expense and earnings from underwriting and investment income.  However, the greatest advantage of a captive is the high degree of control gained by the active management of coverage.

An RRG created under the federal Product Liability Risk Retention Act also creates a viable alternative, especially when coupled with the industrial captive. This form of captive provides additional benefits in premium and other tax savings.  However, in a pure form RRG, the types of coverage permitted to be offered is limited.

Group self-insurers, on the other hand, will depend upon the regulatory framework and structure of each entity. Group self-insurers authorized to write workers compensation insurance for instance, require a minimal level of surplus and are permitted to discount reserves.  Guaranty fund protection is available but adequacy of assessment availability is uncertain.

Self-insurance can be very beneficial but requires hands-on review and adequate forms of stop loss/excess loss coverage both as to specific and aggregate loss exposure.

As with anything, each flavor of insurer has its advantages and disadvantages depending upon your particular situation. Gaining a general understanding of these issues will prove invaluable when determining the proper amount and type of coverage that may be right for your business.

Greg Mitchell chairs the Insurance Industry Group at Frost Brown Todd and regularly advises clients on these and other insurance/risk management issues.  He can be reached at gmitchell@fbtlaw.com

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