James F. Mahoney, Attorney

May 2012

Insurance Premiums Too High? Consider Alternative Risk Financing

As drops in net income for property and casualty insurers puts upward pressure on premiums, some trucking companies are looking at other ways to cover their risk

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According to an analysis by the Property Casualty Insurers Assn. of America and the Insurance Services Office Inc., 2011 net income for U.S. property and casualty insurers fell to $19.1 billion from $35.2 billion the previous year.

Catastrophe losses were a major factor in the industry’s underwriting losses, but “Commercial auto liability continues to grow at a clip that is unprecedented in terms of large losses,” said Chris Kopser, executive VP of casualty risk management at Chartis Inc. “Especially if you have a large trucking or auto fleet, it's not unusual today to see auto losses penetrate the $30 million to $40 million range. There's nothing in the pricing that contemplates those kinds of losses.”

And underwriters aren't making money on bonds right now.

"We need to get back to the right base pricing," says Mr. Kopser.

I interpret this as a rate increase of significance. I suggest that Truckers and other transportation entities should watch their hip pocket for an upcoming extraction. Chartis had been very aggressive in marketing in the recent past - some say too aggressive by undercutting the competition to get cash flow - until recently, er, now, when they've seemed to develop some discipline. The PCIA / ISO report attributes the deterioration in underwriting results primarily to a spike in net losses and loss adjustment expenses. The industry’s combined ratio deteriorated in 2011, rising to 108.2% vs. 102.4% a year earlier, making 2011 the worst annual underwriting year for the industry since 2001.

If you think your premiums are headed north, consider tying a rocket to that thought. Also consider the single best alternative, a captive, either an 831(b) captive if your premiums are between $350,000 and $1,200,000 per year, or another variety of captive if you pay more in premium. Stay away from those insurer-run cell captives that tie up your money with unrelated companies who may be poor risks.

The use of alternative captive structures such as special-purpose vehicles and risk retention groups is growing, reflecting increased interest by smaller companies in alternative risk financing. Stay away from the rent-a-captives, though.

Bear in mind, but don't be scared away that the business of insurance is a highly regulated industry under such interested groups parties as the National Association of Insurance Commissioners, your domicile's Insurance Department, the Securities and Exchange Commission and not to forget, the Internal Revenue Service (IRS), which is interested to be certain that what you're doing meets the fundamental principles of an insurance transaction.

But the rewards of forming a captive can be many and realized in short order. You can decide what to cover under policies; you can insure remote or unlikely risks, you can control your claims exposures better, you can realize underwriting profits that should easily beat your slim operating ratio in your main trucking / transportation business. If you want a more detailed analysis and opinion on setting up a captive, write or call me.