Benefiting

from Risk Sharing

Delivering ART solutions to a greater number of businesses.

Over the years, increasingly more small and mid-size companies have turned to captives to gain the potential economic benefits and risk management strategies of these structures. Artex uses risk pooling as a risk management tool to protect against severe or catastrophic risks, diversify the underwriting portfolio of participants and provide unrelated risk to captives. Artex’s Group Captives are a form of risk pooling.

We have established several specific niche risk pooling solutions to address different coverage lines and needs.

Copper Mountain Assurance

Copper Mountain Assurance, Inc. is a Utah-domiciled captive insurance company designed as a risk pooling facility for Artex’s clients. We have three risks pools with Copper Mountain:

  • Enterprise Risk Program (ERP): For middle-market businesses, insures low-frequency, high-severity exposures.
  • Deductible Reimbursement Program (DRP): Serves clients looking for alternative solutions to insure their deductibles and self-insured retentions of $50,000 or less in their commercial lines insurance programs. The program pools various deductibles in property, management liability (D&O, EPLI), general liability, auto liability, inland marine, cyber liability, pollution liability, professional liability and crime.
  • Management Liability Program (MLP): Insures a broad range of management lines through captive participation in our program – from D&O to cyber, fiduciary, EPLI and miscellaneous professional liability. The maximum limit offered to any insured is $500,000 in the aggregate for each line of coverage.

Artex Exchange (AEX)

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.

Medical Stop Loss

Artex also has a program that allows participating employers in an Employee Benefit Captive to self-fund their benefit plan by assuming the first layer of healthcare risks, and purchasing medical stop-loss coverage to cover any single large loss or aggregate loss that exceeds 125% of expected losses. A Group Captive insurer absorbs claims above the self-funded layer. Participants can determine the appropriate level of risk retention, offer a customized benefits plan and tailor a health risk management program. Employer participants use their combined purchasing power to leverage discounts from service providers such as stop-loss carriers, Third Party Administrators (TPAs), provider networks, and population health risk management vendors.

Public Entity Pools

Public entities, such as government agencies, school districts, county governments and municipalities, often participate in risk pools as a way to share losses and expenses. These pools extend coverage through underwriting and claim activities, and provide several advantages to participants. Artex offers full-service treasury, accounting and finance functions for public entity risk pools. We provide these services both as part of Risk Pool Administrators (RPA) and on a stand-alone basis. We keep the risk pool running smoothly, and provide timely, readily available and clear financial information.

Copper Mountain Assurance

Innovative Pooling Facilities

The traditional captive insurance industry has evolved its thinking about Enterprise Risk Captives that choose to take the 831(b) tax election. (Known as a Micro-Captive under IRS tax code section 831(b), a captive with $2.2 million or less in premiums pays federal income taxes only on investment income.) In 2014, in fact, it is estimated that 60% to 70% of the captives formed that year made the 831(b) tax election. While there are some 831(b) captives that may not meet all the standards of an insurance company for federal tax purposes, the vast majority are following the same risk management principles and are subject to the same regulatory requirements as their larger counterparts.  

These new, smaller entrants into the industry are innovative examples of alternative risk transfer (ART) structures and are by far the biggest change in the industry in the last 10 years, which is truly driving the majority of the growth. Artex is experienced in the full spectrum of risk management alternatives and believes our risk pooling facility is an example of innovation at its best. 

In 2014, Artex formed Copper Mountain Assurance, Inc., a Utah-domiciled captive insurance company designed as a risk pooling facility to make the benefits of captive solutions available to smaller and mid-size businesses. One of the most innovative risk pools of its kind, Copper Mountain is currently comprised of three programs totaling $81 million in premium: Enterprise Risk Program (ERP), Deductible Reimbursement Program (DRP) and Management Liability Program (MLP). Copper Mountain uses independent actuary standards for each of its three programs, and is currently approved for use by captives in several US and offshore domiciles with the goal to continue to expand into others.  

Enterprise Risk Program 

We manage one of the largest enterprise risk pools for middle-market businesses, putting our expertise into monitoring participation, both in the types of clients and policies insured by the pool. The type of policies typically covered includes litigation expense, general liability DIC and administrative actions.

Participation in the ERP is established in a reinsurance agreement between the proposed captive and Copper Mountain. The ERP insures low-frequency, high-severity exposures, with all captives participating in the ERP and paying their proportionate share of each claim within the ERP. The captive/insured pays 100% of all claims up to the first 25% of the policy limit; the pool pays 100% of the loss above 25% up to policy limit.  The maximum policy limit is $1 million. If policy limits are lower, the captive is responsible for the first 25% of that limit.

Deductible Reimbursement Program

Artex offers a Deductible Reimbursement Program for clients seeking to insure deductibles and self-insured retentions of $25,000 or less in their commercial lines insurance programs. The program pools various deductibles in property, management liability (D&O, EPLI), general liability, auto liability, inland marine, cyber liability, pollution liability, professional liability and crime. The insured’s captive will participate on a pro-rata basis with other captive participants. Limits and premiums above this amount will be shared by the captive and the DRP, with the captive paying 40% of each dollar and the DRP paying the other 60%. By insuring these deductibles within a captive, a business can improve its risk management through increased focus and data. Additionally, the business can set aside funding so that expenses are better managed throughout the year.

Management Liability Program

Businesses may choose to insure a variety of management liability lines through their captive’s participation in our program, including directors and officers, small cyber, fiduciary, employment practices liability, employee dishonesty and miscellaneous professional liability. Policy forms offer coverage typical of similar commercial programs and, in some areas, coverage may be broader than what can be purchased through traditional markets. The maximum limit offered to any insured will be $500,000 in the aggregate for all coverage. Policies contain a $5,000 self-insured retention that is paid by the insured business. Limits and premiums above this amount will be shared by the captive and the MLP, with the captive paying 40% of each dollar and the MLP paying the remaining 60%. The captive’s pro-rata share is determined by the amount of the captive’s premium relative to the full premium of all participants in the program. All participants are underwritten and managed by Artex, and acceptance into the program is selective based on perceived risks and loss history

 

 

 

AEX

Optimize large deductible and self-insurance workers compensation 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.

Public Entity Pools

Responding to the evolving needs of public entities

During the late 1970s and early 1980s, public entities including government organizations, school districts, county governments and municipalities faced looming liability claims, increased budgetary constraints and a hard market. As a result, they starting searching for alternative risk transfer solutions, with many forming self-insurance pools to spread and mitigate risk and procure affordable reinsurance. Today, public entities often participate in risk pools as a way to share losses and expenses. In fact, according to the Association of Governmental Risk Pools (AGRIP), there are more than 500 risk-sharing pools serving municipalities, school districts and other public entities in the U.S. and Canada, with new pools emerging around the world frequently. AGRIP estimates that least 80% of all local public entities in the U.S. participate in one or more risk pools.

Public entity risk pools typically share common values and core purposes, with each pool having unique features that reflect both its members’ priorities and its states’ traditions, laws and regulations. Some pools offer only certain kinds of coverage, such as workers compensation, liability or health benefits; others offer multiple lines of coverage. Some pools serve only certain kinds of public entities, such as school districts. All of these pools extend coverage through underwriting and claim activities and provide several advantages to the participants, including lower insurance costs and stronger risk management and loss control to reduce both the incidence and cost of risk. Pools work to improve each member’s risk profile.

Artex offers full-service treasury, accounting and finance functions for public entity risk pools. We provide these services both as part of Risk Pool Administrators (RPA), which provides administrative and consultative services for public sector risk pools, and on a stand-alone basis.  Artex’s objective is to keep the risk pool operating smoothly. We also provide financial information that is timely, readily available and understandable. We offer:

  • Full general ledger service, including accounts payable and accounts receivable functions, treasury and cash flow management, and reporting
  • Quarterly or monthly financial statements that present the financial condition of the pool
  • Reports for our stakeholders so they can stay informed of the pool’s financial activities 

The Artex staff includes certified public accountants and other professionals with self-insurance, insurance and risk pool experience. Our staff will work with the outside actuaries, auditors, third- party claim administrators (TPAs), investment advisors and the program administrator to keep the risk pool in regulatory compliance. 

Artex can help place business in RPA for insurance agencies, and is available to discuss creating additional public entity pool/treasury services with other agencies as well.

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