Working with Brokers to Minimize a Client’s Total Cost of Risk
Consider:
1. Premiums & Pure Claims Costs
a. Commercial Insurers are inherently expensive to operate.
b. Typically, 45 to 60% of premium available for payment of claims. Remainder are costs and expenses.
c. Cost of adding a policy to a commercial insurer maintains the expense ratio.
d. Captive Insurance is more efficient in terms of premium available for payment of claims at approx. 70 to 80%.
e. Reduced marginal cost to add additional risks to the captive.
2. Risk Distribution
a. Commercial insurers have inherent risk distribution to mitigate for adverse losses because of the number of independent risks that they insure.
b. Captive insurers typically have less risk distribution because of limited independent risks but may be sufficient to mitigate for adverse losses when handled correctly.
3. Cost of Capital
a. Spread of risk within a large risk portfolio can reduce cost of capital. For example a $10m umbrella for $10,000 premium.
b. Reduced spread of risk for a captive lessens the commerciality of writing a $10m limit for $10,000 premium.
c. Cost of expected losses within a commercial policy can be high because of the cost base of the commercial insurer. An expected loss of $1 may mean a premium cost of $2.
d. Cost of expected losses within a captive insurer is lower because of the cost base of the captive insurer and is likely to reduce f further because of the marginal cost of risk.
Our Proposal:
By working with brokers to evaluate commercial and captive insurance options we reduce a client’s total cost of risk.
Reduced Cost Base + Evaluated Cost of Capital + Enhanced Risk Distribution
=
Reduced Total Cost of Risk
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If you would like to know more about captives and how they can complement and be a part of an enterprise risk framework, engage Fenix to carry out a feasibility study.
The feasibility study will provide a specific program relating to your company’s individual needs. We would do this by undertaking an in-depth review of your business and the risks faced. The process will involve an initial data request, followed by a risk interview, and then any follow-up data required. This will culminate in a risk assessment review that our actuary will use to determine insurance premiums and initial capital requirements for your captive.
Should the feasibility be acceptable to you we would then work with you to establish your captive insurance company, implement the captive insurance program and provide ongoing management of your company.
