making your large deductible workers’ compensation program significantly better
TRANSCRIPT
Making your large deductible workers’
compensation programsignificantly better
High Deductible Retained Layer
StatutoryWorkers’ Comp
Business
ExcessInsurance
$250,001 $250,000
$0
$1,000,000$999,999
3 Disadvantages
1. No tax deduction for retained risk
2. LoC with after-tax dollars
3. Volatility
Risk Management
Tax Savings
Cash Flow
93%
91%
93%
83%
92%
$3M - $7MOver 10 years
AEX
Captive
Unrelated Risk
Direct Premiums
Captive
Operating Company AEXCaptive
Invest Assets
Captive Owner
DividendsLiquidation
RiskPay losses
Stocks Bonds Other
A valid captive requires
“Risk Distribution”
Risk distribution is a spreading of risk that allows the insurer to reduce the possibility that a single costly claim will exceed the amount available to the insurer for the payment of such a claim.
Multiple Subsidiaries Unrelated Risk
Sub
Sub
Sub Sub
Sub
Sub
Sub
Sub
Sub
Sub Sub Sub
Business
CaptiveUnrelated risk
High DeductibleRetained Layer
Business
ExcessInsurance
$250,001
$250,000
$0
$1,000,000$999,999
AEX Pooling
$100,001 $100,000
StatutoryWorkers’ Comp
AEX
(Trust Account)
Total Premium =
$18
$9
$6
Premium
$3 x $18 = $18
$6 x $18 = $18
$9 x $18 = $18
QuotaShare %X Premium
Quota Shared Premium
Unrelated Premium
$1.00
$1.50
$1.00
$2.00
$3.00
$1.50
$3.00
$4.50
$9
$6
$3$3
$0.50
Captive
Captive
Captive
Captive
Captive
Captive
AEX
AEX
Captive
Captive
Captive
Captive
Captive
Captive
Virtual Pool
Criteria
1. Minimum $400,000 Loss Pick
2. Cash Flow
Frequency layer = predictable
125% cap
Retrospective adjustment
Protections
Expected Bad Year Good Year0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
Expected: $1m Losses in Pool AEX
2012
2013
2014
2015
2016
Settlement
Policy year
Claims Administrator
AEX Captive
Solutions
1. Tax deduction for retained risk
2. LoC with pre-tax dollars
3. Reduced Volatility
Expected Bad Year Good Year0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
Expected: $1m Losses in Pool AEX
Captive
LOC Collateral LOC Collateral
Funded with after tax dollars
Funded with pre-tax dollars
AEX
Captive
Unrelated Risk
Direct Premiums
• Prior year’s retained risk (any line)
• Load charge for captive
• Other types of insurance (GL, auto, E&S)
• Excess work comp layer (e.g., 150 x/s 100)
Safe Harbor Industry
AEX
50%Direct50%(Unrelated)
Di-rect 70%
AEX
30%(Unrelated)
• Already take tax deduction • Need a captive
• Don’t disrupt existing high deductible program
• AEX is an “overlay”
• Share risks with others? • Sharing is in frequency layer
• Black Swan event? • Excludes risks >125% expected loss pick
• IRS approval? • IRS has approved similar arrangements
Objections? Answers
Cost
• AEX Service Cost• 0 -$2M: 6% of AEX premiums
• $2M-$4M: 3%
• Above $4M: 1%
• Minimum annual service fee of $30,000
• Captive Management
Participation Criteria
Large Deductible or SIR Program
Minimum $400,000 Loss Pick in AEX Layer
Cash Flow
Submission Criteria
5 Years Loss/Exposure Data
Section 831(b) Captive Solution
$1.2M annual premium
Taxed only on investment income (C corp rates)
Shareholders
CaptiveBusiness
Basic Captive Diagram
Insurance Premiums
Insurance Coverage
Insured Risk Workers Comp ● Property ● Auto ● General Liability
Uninsured Risk
Deductibles
Exclusions
Operating Risks
A/R Concentration
Construction Defect
Credit Default
Disability
Administrative Actions
D & O / E & O
Legal Defense Reimburse
Mold and Pollution
Product Warranty
Hidden Risks
1. Insurance Risk
2. Operate as an insurance company
3. Risk shifting and risk distribution
Tax Law and Captives
Ownership Options
Captive
Shareholders FamilyKey Employees
Estate Plan Trust
ParentCompany
