Self Insured Workers Comp vs Group Captives

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1 You Say SIG, I Say Captive Self Insured Workers Comp vs Group Captives Keith Fawcett Brent Re Duke Niedringhaus J.W. Terrill-Marsh & McLennan Agency

2 Similarities of Captives & SIGs Provide a mechanism for an entity to Retain risk Reduce expenses Share in underwriting gains Place an emphasis on risk management Longer term stability over traditional markets

3 Self Insured Groups (SIG) Typically sponsored by an association which gave them another service to sell to members Most popular in states where WC was a distressed line of business or for industries that had a tough time finding affordable insurance Provided a cost efficient alternative to the traditional market and were often the dominant market in a State

4 Captive Alternatives

5 Alternatives SIG Coverage Workers Compensation May Facilitate Out of State Coverage Group Captive Coverage Workers Compensation All States General Liability Automobile Property Captive

6 Self Insurance Advantages 1990 s: Low Self Insured Retentions $250,000 Aggressive Aggregate Stop-Loss (80-100%) No Residual Market Loads (Assigned Risk Taxes) Group Captive Alternative Had Limited Use and High Expenses No National Headlines of SIG Insolvencies

7 Billion $1,072 Billion $1,252 Billion $1,515 Billion $1, Months

8 Heterogeneous Captive Growth

9 Group Captive Example Manufacturing Company $200,000 Workers Compensation Premium 0.80 Experience Modifier Workers Compensation is 150k Tennessee/$50k-5 Other States General Liability $ 25,000 Automobile Liability $ 25,000 Property $ 50,000 Sales $40,000,000 Profits $ 3,000,000 Employees $ 150 (Self Funded Medical Plan)

10 Reinsurance Structure Specific Excess Auto $1,000,000 Limit Umbrella Workers Compensation Statutory $400,000 Retention General Liability $1,000,000 Limit Aggregate A Fund A Fund B Fund Unlimited Aggregate

11 Captive Fixed Costs Captive Management 5% Front Fee (Taxes/Aggregate) 11% Claims 4% Risk Control 1% Reinsurance ($400,000 Retention) 8% Subtotal 29% Assigned Risk Taxes Broker Fee

12 Manufacturing Company $200,000 Workers Compensation (All States) $25,000 General Liability $25,000 Automobile $250,000 Subtotal

13 Manufacturing Company II. Five Year Loss History Workers Compensation- 40% General Liability- No Losses Automobile- 50%

14 Manufacturing Company III. Captive Loss Projection $125,000 A Fund (0-100,000 Frequency Layer) $25,000 B Fund (100, ,000 Severity Layer) $150,000 Total Loss Fund

15 Manufacturing Company IV. Captive Premium $125,000 A Fund $ 25,000 B Fund $ 61,000 Fixed Costs $ 15,000 Broker Fee $ 0 Assigned Risk Taxes $226,000 Total

16 Manufacturing Company V. Captive Premium Formula $150,000 Loss Fund 0.71 ( Expense) $211,000 ($150,000 Loss Fund/$61,000 Expense)

17 Manufacturing Company VI. Comparison to $250,000 Premium Minimum (No Losses) $56,000 22% Maximum ($275,000 Losses) (2XA+B) $331, % Assume: $20,000 Investment Income $15,000 Broker Fee No Assigned Risk Taxes

18 Group Captive Benefits Multistate Capability 3 Lines of Coverage No Joint and Several Liability Family Trust Can Receive Distributions No Handcuffs on Surplus Distribution Greater Engagement of Business Owners and TPA Additional Investment Income Better Reinsurance Alternatives Than Excess Workers Compensation Internal Loss Portfolio Transfer Tail Fund Property Captive

19 SIG Benefits No Capitalization and Collateral No Offshore Board Meetings Potential Lower Fixed Costs Without Front Fee Premiums Under $100,000 No Exposure to Front Carrier Insolvency (Reliance) Better Local Claims??? State Lobbying???

20 Warehouse/Logistics Group Captive Success 32% Net Expenses Workers Compensation Funding $130,000 (was $120,000 with 27% Potential Dividend) Auto Liability $1,200 (was $3,100) Auto Liability $2MM Limit Contingent Automobile Liability $2MM Limit Umbrella Group Purchasing Program No Joint & Several Liability Enterprise Risk (831B) Captive Created

21 Premium Growth Drives Expense Reductions Loss Projection $400,000 $400,000 Captive Expense Factor 43.4% (.567) 29.2% (.708) Premium $705,000 $565,000 Expense $305,000 $165,000 $140,000 of Expense Savings Using the Same Loss Projection

22 Individual Self Insurance $1,500,000 Tennessee Premium- Manufacturing No Out of State Payroll Self-Insurers Bond typically $500,000 or more Collateral may be required to support bond Excess Insurance $500,000 Specific Retention Aggregate Excess Typically Required Program Comparison TPA Selection Excess Coverage Tail Liability

23 The TN WC Captive Alternative Employers with TN operations may now insure workers compensation risk in a TN captive Must meet the same standards as a qualified self-insurer to do so Required to purchase reinsurance and provide sufficient capital to support the estimated premium Limited to TN exposure but the captive could be utilized within fronted captive program

24 You Say SIG, I Say Captive Questions Keith Fawcett Brent Re Duke Niedringhaus J.W. Terrill-Marsh & McLennan Agency