Kieran O’Mahony explains United’s experience in meeting captives’ needs across property, casualty and marine lines.
Since its establishment in 1975, United Insurance Company has underwritten reinsurance risk from the Cayman Islands. When the insurance casualty crisis struck in the mid-1970s and traditional/ commercial capacity fled the US markets, United helped to fill that void. United partnered with its shareholder captives as well as with its extended client base to augment the available capacity of their captives and complete clients’ casualty programme placements. In addition to helping complete the placements, by combining the individual facultative placements that United underwrote and by placing reinsurance treaties behind its writings, United brought the purchasing power of ‘critical mass’ to the reinsurance market and thus, ultimately, greater control of their insurance destiny to its shareholders and clients.
Since that time United has remained committed to its captive base. As a reinsurance company that is owned by captive insurance companies that are the subsidiaries of large US, Canadian and European multinationals, United is focused solely on the captive and alternative risk transfer market. Because of this and the fact that it is managed by the world’s foremost captive manager, Aon Global Insurance Managers (part of Aon Global Risk Consultants), United has a unique insight into the captive universe.
Today, United provides solutions to captives’ needs across property, casualty and marine lines as well as through innovative and customised products.
Increased property programme deductibles
Companies that are forced to take increased property deductibles, either through the occurrence of fortuitous and ‘atypical’ losses on their own programme or because of market swings that are outside their control, can be left with corporate and/or captive balance sheets that have excessive net financial exposure.
These concerns are even more pronounced for clients that have superior experience, which meet Highly Protected Risk (HPR) standards and have a proven track record in both risk management and loss control techniques.
United, partnering with Aon Global Risk Consultants, has expertise and experience in designing captive programme structures that facilitate the transition to higher retentions by accessing United’s specialised captive property reinsurance capacity, which focuses on ‘buffer layer’ protection. This is the risk area immediately above the captive retention and/or corporate deductible(s) and below the attachment point of the traditional market. United’s goal is to present solutions that are tailored to an insured’s unique needs, providing exclusive reinsurance remedies to Aon managed captive clients worldwide.
In its systematic approach to creating a solution, United works with the risk manager to:
• (Re)structure a new insurance/reinsurance programme
• Form a captive or cell, where none exists, to absorb the increased risk
• Provide reinsurance for the captive’s retention, and
• Issue the insurance policy and/or reinsurance agreement(s).
In structuring these types of captive buffer layer protections, United seeks to partner with clients whose risk is superior, whose philosophy is long term and that are committed to the captive/alternative risk transfer market. United reinsures captives from virtually every leading captive domicile, and clients benefit from United’s many years of experience in providing effective captive solutions.
United not only has the ability to underwrite property deductible ‘buy-down’ layers but also captive buffer layers of up to $7.5 million on a per occurrence basis with global territorial limits.
The buffer area is a critical area for programme restructuring and an area in which commercial/traditional markets often have difficulty underwriting as reinsurers seek to extract themselves from the area of attritional or ‘working’ losses. In the appropriate circumstances, Aon Global Risk Consultants can facilitate additional reinsurance capacity and, at the same time, enable the captive to provide a more cost-effective, alternative risk transfer lead programme.
United’s captive property buffer layer capacity focuses on risks that meet HPR standards and have a proven track record in both loss prevention and risk management techniques. It is this risk selection that has enabled United to successfully underwrite what has historically been a difficult area for the traditional markets.
Lack of deductibility for federal tax purposes on premiums paid to a captive subsidiary
Companies that place business into their captive subsidiaries are often unable to treat the premiums paid as being an expense for US federal income tax purposes. That can have a significant impact on the benefit that use of a captive may bring to any organisation.
For deductibility on premium to occur, the captive must be treated as being an ‘insurance company’ with both risk shifting and risk distribution taking place. There are a number of methods that can be employed that will enable the treatment of a captive as an insurance company; underwriting unrelated or non-parental business is one such avenue that may be pursued.
Writing unrelated party business by pooling captive risk
United, through its wholly owned subsidiary company Nexus Re, has unrivalled expertise and experience in designing captive programmestructures that facilitate the underwriting of unrelated party business. United has actively and successfully underwritten this niche business for more than 30 years. Nexus Re, which was established in 1998, made a 953 (d) election under the Internal Revenue Service Code and is thus treated as a US taxpayer, and took over the underwriting of captive pooling business from United in 1999.
"As a reinsurance company that is owned by captive insurance companies that are the subsidiaries of large US, Canadian and European multinationals, United is focused solely on the captive and alternative risk transfer market."
By working closely with captives on primary casualty business— workers’ compensation, auto liability, general liability (including products), Nexus Re and Aon Global Risk Consultants can present a captive with a treaty book of unrelated reinsurance (reinsurance of Nexus Re) in exchange for a portion of that captive’s own facultative primary casualty risk. In essence, a given captive will have ceded its own first-party/parental risk to Nexus Re and, in exchange, it will receive a quota share of a portfolio (treaty) of diversified risks reinsured from Nexus Re. This process, of risk transfer and risk distribution, and the assumption of unrelated risk, can have many benefits for a captive, including risk smoothing, greater stability of underwriting result as well as possibly having the captive treated as a bona fide insurance company with all the attenuating benefits from a tax point of view.
Captives who seek to underwrite unrelated business must have valid and consistent historical loss and exposure data, and the financial strength necessary to support the underwriting of unrelated risk.
While Nexus Re has the ability to work with clients on their primary casualty reinsurance needs, United can also provide buffer layer excess casualty capacity above the primary involvement and before the attachment of the umbrella layer. The result can be a robust and long-term strategy to help manage a captive’s primary area casualty exposures while, at the same time, providing a captive with a proven source of unrelated business.
Cell company solutions
United also has two ‘cell’ company subsidiaries—United SPC, in Grand Cayman, and United USA, domiciled in Vermont—to work with those that are in immediate need of a captive solution but perhaps without the lead time required to establish their own captive or those that are somewhat reticent about the time and commitment required of a wholly owned captive insurance company subsidiary. Both cell companies have provided tailor-made solutions to clients that were not part of the alternative risk transfer market. The following is but one example of the United approach.
A cell company case study
The client’s need
A large market loss not only resulted in an increase in a regulated entity’s insurance premium but also, for the first time, the imposition of meaningful policy deductibles on its programmes. Under its charter, the regulated entity was required to pass on the cost of its insurance programmes, as an expense, to its end customers.
The problem for the client was that if/when claims were to occur, the loss amounts associated with any of the (now significant) policy deductibles could not be passed on as an expense to the end consumers and were also not recoverable at the organisational level.
Though certainly an expense for the regulated entity, any claims payment under a policy deductible was not an insurance premium expense.
The United solution
United helped to construct a new insurance programme, whereby one of its subsidiary cell companies, United SPC, domiciled in Cayman, issued a multi-line deductible reimbursement policy, covering the deductibles of the separate lines of risk—property, crime, professional indemnity, directors’ and officers’ liability, general liability, auto liability, Internet liability, etc.
United developed a premium for the deductible reimbursement policy and also included an annual aggregate limit of $3.0 million on the policy. The retained net premium in the cell, coupled with the cell’s capital, enabled the cell to retain up to $500,000 in losses annually. United SPC, on behalf of the cell, reinsured an aggregate excess of loss layer with United Insurance Company for $2.5 million annual aggregate excess of $500,000 annual aggregate.
Over the following years, the profits built up in the cell meant that aggregate reinsurance limits purchased by the cell declined and finally the need for reinsurance fell away as the cell was financially capable of retaining all the risk.
The benefit to the client
The client’s deductible exposures were converted into insurance premiums, which in turn were passed on as an insurance premium expense to the entity’s customers. The entity was not left with an insurance exposure for which it wasn’t covered and thus the client was prevented from falling foul of its charter obligations.
Kieran O’Mahony is the general manager and chief underwriter of United Insurance Company. He can be contacted at: email@example.com. United Insurance Company’s website is: (www.uiccayman.com).