Agent-owned captive insurance company reinsurance

The insurance agent has received very little exposure and education in the world of reinsurance. Most agents only become aware of reinsurance when an insurance company underwriter tells the agent that he cannot write that risk because our insurance company’s treaty reinsurance agreements prevent us from writing that type of business.

As reinsurers over the years have been the traditional risk taker, their influence in determining underwriting philosophy for primary insurers has grown significantly. Many reinsurers today, because they are taking a greater amount of individual risk exposure from a particular insurance company, now dictate the principal price, the amount of the deductible, the amount of the credit or debit. Reinsurers now have to know much more about the primary insurance business.

The agent should consider purchasing a reinsurance program for his agent-owned captive insurance company. Many of the approaches to buying reinsurance are similar to those used by a traditional insurance company. The agent must be familiar with the different types of reinsurance:

1. Share quota reinsurance

2. Excess of Loss Reinsurance

3. Catastrophic Reinsurance

4. Aggregate Excess of Loss Reinsurance

5. Reinsurance Stop Loss

6. Finite risk reinsurance

While the capital requirements for starting agent-owned captive insurance companies, particularly those with foreign domiciles, are comparatively small, special attention should be paid to the structure of a comprehensive reinsurance program. Gone are the days when aggregate stop-loss reinsurance could be easily determined to guarantee underwriting earnings for the agent-owned captive.

With this in mind, the net retention of a broker-owned captive should be weighed against its financial structure and the broker-owner’s risk-taking philosophy. Most agent-owned captive insurance companies operating today have too large a new hold compared to traditional insurance companies, and also considering their financial structure.

Whether the agent-owned captive purchases only quota share reinsurance or uses a combination of various types of treaty reinsurance arrangements, the reinsurance program must be consistently monitored and evaluated. The degree of difficulty increases dramatically when designing a reinsurance program for a newly formed agent-owned captive insurance company.

Reinsuring the Policy Issuing Company

with his captive owned by an agent

An underwriting agreement at your agency, whether it is a retail agency, wholesale agency, or general managing agency, is when a licensed property/casualty insurance company writes a policy, whether admitted or not. It is then reinsured up to 100% by the traditional reinsurance company market which would include the agent-owned captive insurance company. This type of arrangement is sometimes called “fronting” and is almost always used when the agent has formed a captive owned by the agent.

The company issuing the policy is paid an “initial fee” and reinsured 100%. Some property/casualty insurance companies have modeled franchising by offering their “A” rated insurer as “frontier”, thus transferring underwriting risk for financial risk. Front companies must consider state premium takeovers, residual modifications, government schemes and assessments, and this is why the agent must be skilled in negotiating a front fee. Experience with this type of fee shows that the pure markup of a coverage fee can vary from 3% to 7.5% depending on the coverage insurer.

For example: a captive insurance company owned by an agent operating in the Florida restaurant insurance market reinsures the first $75,000 of underwriting losses behind the policy issuing company. In addition, the reinsurer, also owned by the same financial group as the policy issuer, underwrites excess loss reinsurance above $75,000 up to $500,000, at a rate of 17.5% of GNP. The excess of $500,000 up to $1,000,000 limit for the restaurant program has another rate, as a percentage of the gross net income of written premiums. The reinsurer is a direct underwriting reinsurer and negotiates its excess-loss treaty reinsurance arrangement directly with the policy-issuing insurance company, as they also have other treaty reinsurance arrangements with each other, none of which It has to do with the agent. captive property insurance company.

In order to have a successful agent-owned captive insurance company, the agent must understand the negotiation process when purchasing reinsurance, either on the direct reinsurance market or through the reinsurance intermediary market. The agent will also gain a better understanding of why underwriting cycles exist in the property/casualty insurance industry, and will be able to take advantage of these underwriting cycles. When the insurance companies issuing policies assume very little underwriting risk, and the actual underwriting risk is transferred to the traditional reinsurance market (as well as to the agent-owned captive insurance company), the agent will begin to need to negotiate with the reinsurers.

Use of provided quota share reinsurance

Only for the captive property of the agent

Here’s another example: The captive insurance company owned by a Cayman Islands agent originally began writing horse mortality insurance and was substantially capitalized by a bank, using the agency’s guarantee. Based on this substantial capitalization, the agent-owned captive was able to underwrite 100% of the quota reinsurance part of the policy-issuing insurance company. Policies originally written at the agency were issued at the policy-issuing insurance company, 100% reinsured to the captive owned by the agent, who in turn purchased an outgoing reinsurance program, consisting of a combination of quota reinsurance part and reinsurance of excess loss.

Proceeds accumulated in the captive insurance company owned by a Cayman Islands agent were used to purchase a “shell” property/casualty insurance company that became an “A” rated specialty niche program insurance company after several stock offerings.

Conclusion

The owner of a retail insurance agency (i.e., the program administrator), the owner of a wholesale, surplus lines and surplus insurance agency, and/or the owner of a general administering agency should explore the feasibility of implementing a carrier captive insurance owned by an agent. . Recovering investment income and underwriting earnings gives the agent-owner a significant return on investment.