Self Insurance for Physicians and Private Hospitals
By Melvin J. Howard
Captives
A Captive is an insurance company established (generally in a tax neutral jurisdiction) which is owned by one or more non-insurance organizations to underwrite the risks of those particular owners. A variant is an 'Agency Captive’, which is owned by independent agents who wish to participate in the underwriting results of the business they produce. A Captive can also be owned by a number of unrelated companies from within a particular industry , by a number of unrelated companies from different industries or by a trade or industry association (an Association Captive) i.e. Physician group to insure the risks of the group owners or association.
Rent-a-Captives
For this proposes you can use a Rent-a-Captive program. A Rent-a-Captive is an independently owned and operated insurance company that allows unrelated companies to use or "rent" its capital, surplus and corporate structure to enable those companies to participate in the underwriting results of the risks they insure into the Rent-a-Captive. Companies interested in utilizing a Rent-a-Captive include associations and independent agents. The Rent-a-Captive performs on a "turn-key" basis the same functions and achieves the same goals as a Captive insurance company, but the association or group ("lessee") does not own, control or capitalize the Rent-a-Captive.
The costs of capitalizing and operating a Captive insurance company (usually on an after tax basis) are typically higher than utilizing a Rent-a-Captive. Operating a Captive also requires more management time than participating in a Rent-a-Captive. Furthermore, programs in a Rent-a-Captive are much easier to exit than a Captive which requires formal liquidation or sale. In summary, participation in a Rent-a-Captive eliminates the substantial organizational requirements and the need to commit funds for capitalization.
Advantages
The advantages of using this program include the following:
i) the ability to participate in underwriting profits as a individual basis;
ii) the ability to purchase insurance related services on an unbundled basis;
iii) the ability to determine levels of risk assumption;
iv) the ability to reduce and control costs;
v) the ability to carry less administrative and legal costs than those passed on by the insurer;
vi) the ability to earn investment income on premiums paid; and
vii) To accumulate investment income on premiums received.
viii) The elimination of the reimbursement agreement between the bank and obligor (SPE).
ix) Tailor made policies for a particular coverage that is unavailable or in this case unacceptable priced in the commercial market
x) no feasibility study
xi) proof of coverage
xii) flexible operating covenants
xiii) easily can be incorporated into the preliminary official statement
Features of Rent-a-Captive
The primary cost reduction factor is the element of risk retention held by the group. Under a Rent-a-Captive structure, the association or group retains a portion of its own risk at a level mutually acceptable to both the association or group and the Rent-a-Captive. In the event of a loss or in this case default on the principal and interest payments due the note holders the association or group is responsible to pay claims up to that retention level. However, by "self-insuring" to this retained limit, the association or the group reduces its premium costs because the cost of obtaining coverage for limits of insurance above the retention is less than purchasing insurance that attaches at the first dollar of loss., i.e. without any retention. These reductions in costs take place over time and are generally not applicable to the association or group.
Risk Management
Risk management, or loss control, plays a major role in the Rent-a-Captive structure and provides a means for further cost reduction for the association or group. Good loss experience is reflected in the rates to participate in the Rent-a-Captive. By employing effective loss control measures at the association or group, you can reduce your insurance exposure thereby potentially increasing underwriting profits available to the association or group and, at the same time, keeping premium costs down. You can also benefit from risk management by improving loss control. A reduction in loss costs should result in increased funds available for investment to offset future claims.
Participation in Rent-a-Captives
There is no specific formula for determining who should participate in a rent-a-Captive program. However, the program is generally suitable to organizations having total annual premium costs in excess of $1,500,000, for agents who can direct a book of business in excess of $5,000,000 and for groups or associations having total annual premium costs in excess of $1,500,000.
Under a typical rent-a-Captive program, an insured or agent obtains primary insurance coverage from a direct insurer. The primary insurer will then cede, or transfer, to the rent-a-Captive a portion of the primary insurance coverage in an amount equal to the limit that the insured wishes to retain itself. The net premium received by the rent-a- Captive from the primary insurer for the risk transferred is tracked in a "separate account" maintained by the rent-a-Captive on behalf of the insured. Each entity in the rent-a Captive Program purchases an account certificate (the "Certificate") for a specified sum ("Purchase Price").
Distributions to your association or group
In the event a the association or group cell produces a profit (i.e. premiums plus investment income exceed losses and program expenses), distributions to the association or group are made pursuant to an Accountholder Agreement entered into between the association or group and the rent-a-Captive. The association is entitled to a portion of the undistributed underwriting profit and investment income earned, to be paid at specific intervals as set forth in the Accountholder Agreement. Timing for distribution payments is typically agreed in advance between the association or the group and the rent-a-Captive, and the first such payment is not expected to be made prior to 24 months following the effective date of the Agreement. If you would like to know more about the Rent a Captive program feel free to contact the writer.
