The Artex Exchange – AEX – is a contractual agreement among participating captives to share the primary layer of workers compensation risk with each other. Each business pays an amount equal to its estimated workers compensation losses (limited to $100,000 per occurrence) into the AEX program. These risks and payments are pooled and transferred pro rata to the related captives. Through AEX’s pooling arrangement, the volatility in workers compensation losses on an annual basis for individual businesses can be reduced without increasing the expected cost of risk, and the captives are able to diversify their risks. Additionally, through AEX, captives may obtain sufficient unrelated risk, enabling the captive to qualify for federal tax status as an insurance company. This can open the door to significant financial benefits.
Optimize large deductible and self-insurance workers comp plans
Large and mid-size businesses have been using captives for decades to manage risk, reduce insurance costs and increase profits – particularly in workers compensation where companies have retained risk using large deductible or self-insured programs. Either way, companies need to address certain challenges that come with retaining workers compensation risk: Passing the risk distribution test which, under federal tax laws, enables a captive to qualify as an insurance company in order to benefit from the allowable tax benefits and annual loss volatility increases.
We established the Artex Exchange (AEX) to address the challenges that arise with large deducible and self-insured workers compensation plans. AEX is a pooling arrangement whereby each business pays an amount equal to its estimated workers compensation losses into the program. These risks and payments are pooled and transferred pro rata to the related captives. Each captive is owned by a business (or a related person) participating in AEX. The initial premiums paid by each business are actuarially determined based on historical losses and exposure data. Expected workers compensation losses can be estimated because the risk sharing occurs within the primary layer (0 – $100,000 per occurrence).
AEX through its pooling arrangement can provide unrelated insurance premiums to the captive by exchanging risk retained by a business (in its large deductible workers compensation program) for unrelated risk (such as general liability, auto, property deductibles, prior years’ workers compensation retentions or other self-insured risks). This helps the captive meet the risk distribution test to be considered an insurance company for federal tax purposes. Unrelated risk is an element considered by the IRS when determining if a captive is an insurance company. Additionally, by participating in AEX, businesses are able to reduce the volatility of annual workers compensation losses without increasing the expected cost of risk – similar to the benefits gained from having a diverse stock portfolio.
Benefits of AEX
- Ten-year net benefit of $3-7 million
- Removes retained risk from the company’s balance sheet
- No change to existing workers compensation carrier or Third Party Administrator (TPA)
- Captive can be domestic or foreign
- Company can use existing captive (with existing manager) or Artex can form the captive
- No requirement to change the company’s corporate structure
- IRS-approved concept of captives sharing risk
- Sharing of risk is quantifiable and contained within a maximum formula
- Adds predictability and budget stability to the company’s risk management program
- Participants are rewarded for better-than-expected claims performance and penalized for worse-than-expected loss performance
- Defined close out time period
- A vetted protection mechanism for potential captive or business insolvency
- Letter of credit collateral may be effectively reduced by using captive surplus as collateral
Candidates for AEX
To participate in AEX, a business must:
- Participate in a large deductible or self-insured workers compensation program
- Have on average at least $500,000 in annual workers compensation losses
- Be financially strong
- Commit to instituting robust risk and loss management programs
- Provide loss data – paid and incurred loss amounts for the last five years with comparable exposure data
- Form a captive (or captive cell), if it does not already have a captive
AEX also provides insurance brokers with a solution to expand their value proposition and enhance the sophistication of a client’s risk management program. AEX participation does not have to coincide with the client’s workers compensation renewal date and can serve as a wedge tool in prospecting for new business, as the AEX captive solution can be provided without the agency being the broker of record. Brokers also receive additional compensation.