Rent-A-Captives For Workers Compensation

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Rent-A-Captives Types

Rent-A-Captives are becoming more popular in Workers Comp as a method of risk transfer. Rent-A-Captives used to be viewed as hybrid arrangements that were too complicated to be considered by most employers. That landscape has changed in the current economy.

Paying Rent-A-Captives credits
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Individual Accounts
Rent-a-captives can benefit individual corporate accounts currently paying as little as $750,000 annually in casualty premiums. The rent-a-captive may serve as a reinsurer of the policy-issuing carrier or issue policies directly to the insured. The fronted structure can be guarantee cost or a retrospective rating plan. Some additional structures for a corporate rent-a-captive program include: Large Deductible Plans Coupled with a Deductible Reimbursement Policy. The insurance company issues a policy in which the insured takes a sizable deductible and the rent-a-captive issues a policy directly to the insured for the deductible layer. The insured then funds the deductible layer with a combination of premium and collateral.

Fully-Funded Arrangements
A company may encounter difficulty in obtaining coverage for a particular insurance exposure or may only be able to obtain coverage at an exorbitant premium that is out of line with the exposure. In such cases, the company may seek to fund the aggregate limit of its policy with a combination of cash and letter of credit. A rent-a-captive often serves as the funding mechanism for this. This product is well suited for an insured who is required to demonstrate evidence of insurance.

Self-Insurance Wraparounds
A company may be unable to qualify as a self-insurer in all states in which it has exposure. A rent-a-captive enables the company to remain self-insured in those states in which it qualifies, while consolidating its exposure in other states into a coordinated, seamless overall insurance program. Of course there are groups of individuals and brokers who find rent-a-captive structures appealing for similar reasons to the corporate buyer.

Graphic Picture Hardworking Businessman Rent-A-Captives Concept
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Associations or Industry Groups
Associations, industries or groups of buyers with similar risk management styles can share risk in a rent-a-captive program to achieve economies of scale or solve an insurance problem. The actual structures, coverages, risk sharing, ownership, and management can differ depending on the need of the group. A strong business plan and a clear understanding of the legal ramifications by each member is critical in this structure. A limited group of small companies that don’t meet the premium threshold on an individual basis can get together, pool their assets and liabilities and structure a rent-a-captive. This enables companies that are too small for their own rent-a-captive to realize the benefits enjoyed by larger companies.

Insurance Agencies and Brokers
An agency-rent-a captive can be formed in which the agent or broker shares in the insurance risk of their clients insurance programs. A portion of the insurance risk is typically reinsured to the captive in which the agent has contractual ownership of the results.

Picture House with Hand Rent-A-Captives Gesture
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Protected Cell (Segregated Account) Structure
Before the development of cell companies, multiple entities operating within one rent-a-captive had separate accounting for their assets and liabilities but no legal separation. Therefore, if one entity had losses exceeding its assets, the other entities made up the difference. While many captives still operate this way today, and very successfully so, the advent of the cell company has piqued the interest of many potential captive participants due to the brick walls that are created between the owners’ assets by the cell structure.

I will add more tomorrow on the Protected Cell Structures. This post is long and boring enough for now.

 

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James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications

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