risk solutions, inc

Artex RiskExchange (REX) is a program designed for businesses withlarge deductible or self-insured workers’ compensation (WC) plans.While retaining risk lowers the cost of WC insurance, the businesscannot reduce its expected loss volatility or take a loss reserve taxdeduction for its retained risk. REX can solve both problems.

Each business pays an amount equal to its estimated WC losses(up to $100,000 per occurrence) into the REX program. These risksand payments are pooled by REX and transferred pro-rata to therelated captive insurance companies. (See Diagram 1) Each captiveis owned by a business participating in REX (or the business ownersor related persons).

Through the pooling arrangement, REX can reduce the volatility ofannual WC losses for individual businesses, and can allow existingcaptives to diversify their risk portfolio. Participation in REX may alsoallow the business to take a tax deduction for the insurance premiumspaid to REX, because the pooled WC risks help to qualify each captiveas an insurance company for federal tax purposes.

COMPANYA

COMPANYB

COMPANYC

CAPTIVEA

CAPTIVEB

CAPTIVEC

Potential Advantages Of REX

Source of Unrelated RiskREX can provide unrelated insurance to the captive bytransforming risk retained by a business (in its largedeductible WC program) into unrelated risk. Unrelatedrisk is necessary for a captive to be considered aninsurance company for federal tax purposes.

Reduce the Variability of Loss CostsBy participating in REX, businesses may reduce theannual variability of retained WC losses, withoutincreasing the expected cost of risk. (This is similar tothe diversification benefits of a portfolio of many stocksversus owning one stock)

No change to large deductible orself insured programThe business keeps its large deductible or self insuredplan in place. REX does not change the carrier, TPA orany other aspects of the business’ existing WC program.REX is an overlay.

Repositioning of Letters of CreditMost large deductible programs require a letter of credit(LOC). REX may permit the business to reposition theLOC to the captive, thereby freeing up substantial after-tax cash for business use or shareholder distribution.

Additional PremiumsWith REX providing unrelated premiums to the captive,the business may be able to transfer additional directpremiums to the captive (outside of REX) for otherretained risks, such as GL/Auto/Property deductibles,prior year’s WC retentions, or other self-insured risks.This can result in a significant financial benefit to thebusiness. (See Diagram 2)

Captive Insurance Company BenefitsA captive insurance company may provide significantadditional benefits to the business or its owners,including risk management, estate planning, and wealthpreservation.

WC pools have existed for decades with municipalities and large corporations. The IRS has recognized pooling arrangements between captivesas insurance. See CCA 200844011 (IRS Chief Counsel Advisory Opinion, released October 31, 2008). In REX, the initial premiums to eachbusiness are actuarially determined based on historical losses and exposure data. Because the risk sharing occurs within the primary layer(0-$100,000 per occurrence), expected WC losses can be estimated with a degree of confidence.

Workers Compensation Pools

Artex RiskExchange

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D I A G R A M 1

PROGRAM YEARThe REX Program Year is a calendar year. Each year is a separate pool.Each business will have its ultimate expected WC losses (limited to$100,000 per occurrence) actuarially assessed for each REX ProgramYear. This assessment is done by Artex using a consistent methodologyfor each business, and the methodology is reviewed by an independentactuarial firm. Each business will enter into an Agreement wherebyit transfers 100% of its WC exposures (limited to $100,000/occurrence)to the REX pool, consisting of the participating captives. The considerationfor this risk transfer is the assessed premium.

RISK SHARINGEach captive receives a proportional percentage of all REX premiumsand share a percentage of all REX pool exposures. The premium paidby the business will equal the premium received by the affiliated captive.For example, if the business pays $1M in premiums into the REXprogram, its affiliated captive will receive $1M in premiums, representingits participation share.

SAFETYSeveral safety measures are built into REX to protect the captivesagainst large. unexpected losses of other participants:

• The captives participating in REX only share risks in the primary layerof risks (up to $100,000/occurrence). Any amount of loss in excessof $100,000 per occurance is retained by the business and is not partof REX.

• The REX pool has an aggregate loss limit of 1.25 times (125%)the expected losses. Any losses in excess of 125% are retainedby the business. This ensures that no catastrophic event can occur.

• Annual premium assessment for each business takes past lossexperience into account.

• Each business’ expected losses are retrospectively adjusted (atsettlement three years after policy end) to take into account actuallosses.

FLOW OF FUNDSPremiums are paid by the businesses to a Trust Account maintained byArtex. Artex will prepare all documentation and arrange for immediatetransfer of premiums to the captives. In this way, all investment incomeis earned by the captives, and the captives control all funds.

SETTLEMENTThe final settlement and adjustment of a REX Program Year will bethree years after the conclusion of the REX Program Year. This is whenthe retrospective adjustments take place (based on actual losses) andthe final sharing of losses is settled between the captives. The settlementwill be based on paid losses and open case reserves. IBNR will not betaken into account.

CANDIDATES FOR REXIn order to be considered for participation in REX, ideal candidates mustdemonstrate:

• Over $400,000 in retained losses within the first $100,000/ occurrenceof Workers’ Compensation and Employers’ Liability

• Financially healthy company• Commitment to risk management and loss management• Loss Data – paid and incurred loss amounts for the latest five years with

comparable exposure data• Willingness to form a captive (or captive cell), if the business does not

already have a captive.

Outline of Program

| W W W . A R T E X R I S K . C O M

CAPTIVE INSURANCE COMPANIES

Unrelated risk is an element considered by the IRS when determiningif a captive is an insurance company for tax purposes. The industrystandard is for the captive to write at least 30% unrelated risk.IRS Revenue Ruling 2002-89 outlines a safe harbor for captiveswriting at least 50% unrelated risk (among other factors). Byaccepting other participants’ risks through REX, the captives andprotected cells receive unrelated risk. This may permit the companyto pay additional premiums directly to its captive.

UNRELATEDPREMIUMS

DIRECTPREMIUMS

COMPANY CAPTIVE

D I A G R A M 2

RISK EXCHANGE

D I S C O V E R T H E A R T E X A D V A N T A G E

P R I M A RY L O C AT I O N S : | A R I Z O N A | AT L A N TA | B E R M U D A | C H I C A G O | G R A N D C AY M A N | H A W A I I | V E R M O N T | W W W . A R T E X R I S K . C O M

Risk Solutions, Inc

Artex Risk Solutions is recognized as one of the world's largest captive

management and alternative risk services firms. We are experts in the

full spectrum of risk transfer alternatives and deliver collaborative

expertise from specialists who design and manage effective risk

solutions. Our in-depth knowledge, unparalleled responsiveness and

turnkey solutions help stabilize the cost of risk over time. Artex is a

wholly owned subsidiary of one of the world's largest insurance and

risk management services firms. The institutional strength and proven

financial stability of our ownership, and our market pedigree mean

we're here to stay.

For additional information, please contact:Karl [email protected]

www.artexrisk.com

Artex Risk Solutions, IncTwo Pierce PlaceItasca, IL 60143630.694.5050 or [email protected]

risk solutions, inc

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