Principles of Insurance (Part 2)
Page 6 of 8
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Self-insurance

Self-insurance is often referred to as the alternative insurance market. In the alternative insurance market, the insured will, in some way, participate in the funding of its losses. While the benefits may be considerable, there may be a substantial risk, as well.

Why even consider self-insurance when there are so many insurance products ready and available on the market as a means of transferring risk? Well, self-insurance can help the insured to:
  • Reduce administrative costs
  • Realize investment income
  • Improve administration and claims service

    These are pretty good reasons.

    Issues to consider for self-insurance:
  • Separate filings for federal and state
  • Contractual issues
  • Funding of claims
  • Time of tax deductibility
  • Balance sheet issues

    Captives
    A number of years ago, the terms "captive" and "offshore" were almost synonymous. Although Bermuda still has far more captives than any other location, there has been a movement to move captives onshore.

    Several U.S. jurisdictions have enacted laws that permit captives: Colorado, Delaware, Florida, Georgia, Hawaii, Illinois, Kansas, Rhode Island, Tennessee, Vermont, U.S. Virgin Islands, Virginia, and West Virginia. Vermont is the clear onshore leader with approximately 360 captives as of mid-1999.

    Sample numbers of captives (May 1999):
  • Bermuda (1470)
  • Cayman Islands (416)
  • Vermont (359)
  • Guernsey (335)

    As far as self-insurance is concerned, why is it beneficial to form a captive? Here are some of the key reasons:
  • Broader coverage
  • Lower cost
  • Better control of claims investigation and defense (freedom of choice)
  • Tax advantages
  • May be used to formalize a self-insurance program not permitted by state law
  • May provide a solution to some insurance market problems

    The types of captives include:
  • "Pure captive"
  • Association captive (multiple-owner captives)
  • Profit-making or profit center captives
  • Risk retention group (RRG)
  • Risk purchasing group (RPG)

    Companies have a choice of vehicles for utilizing a captive program. They can own a captive, rent a captive, or assemble a group captive.


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    Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.