Making your large deductible workers’ compensation program

Making your large deductible workers’

compensation programsignificantly better

High Deductible Retained Layer

StatutoryWorkers’ Comp

Business

ExcessInsurance

$250,001 $250,000

$0

$1,000,000$999,999

3 Disadvantages

1. No tax deduction for retained risk

2. LoC with after-tax dollars

3. Volatility

Risk Management

Tax Savings

Cash Flow

93%

91%

93%

83%

92%

$3M - $7MOver 10 years

AEX

Captive

Unrelated Risk

Direct Premiums

Captive

Operating Company AEXCaptive

Invest Assets

Captive Owner

DividendsLiquidation

RiskPay losses

Stocks Bonds Other

A valid captive requires

“Risk Distribution”

Risk distribution is a spreading of risk that allows the insurer to reduce the possibility that a single costly claim will exceed the amount available to the insurer for the payment of such a claim.

Multiple Subsidiaries Unrelated Risk

Sub

Sub

Sub Sub

Sub

Sub

Sub

Sub

Sub

Sub Sub Sub

Business

CaptiveUnrelated risk

High DeductibleRetained Layer

Business

ExcessInsurance

$250,001 $250,000

$0

$1,000,000$999,999

AEX Pooling

$100,001 $100,000

StatutoryWorkers’ Comp

AEX

(Trust Account)

Total Premium =

$18

$9

$6

Premium

$3 x $18 = $18

$6 x $18 = $18

$9 x $18 = $18

QuotaShare %X Premium

Quota Shared Premium

Unrelated Premium

$1.00

$1.50

$1.00

$2.00

$3.00

$1.50

$3.00

$4.50

$9

$6

$3$3

$0.50

Captive

Captive

Captive

Captive

Captive

Captive

AEX

AEX

Captive

Captive

Captive

Captive

Captive

Captive

Virtual Pool

Criteria

1. Minimum $400,000 Loss Pick

2. Cash Flow

Frequency layer = predictable

125% cap

Retrospective adjustment

Protections

Expected Bad Year Good Year0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Expected: $1m Losses in Pool AEX

2012

2013

2014

2015

2016

Settlement

Policy year

Claims

Administrator

AEX Captive

Solutions

1. Tax deduction for retained risk

2. LoC with pre-tax dollars

3. Reduced Volatility

Expected Bad Year Good Year0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Expected: $1m Losses in Pool AEX

Captive

LOC Collateral LOC Collateral

Funded with after tax dollars

Funded with pre-tax dollars

AEX

Captive

Unrelated Risk

Direct Premiums

• Prior year’s retained risk (any line)

• Load charge for captive

• Other types of insurance (GL, auto, E&S)

• Excess work comp layer (e.g., 150 x/s 100)

Safe Harbor Industry

AEX

50%Direct50%(Unrelated)

Di-rect 70%

AEX

30%(Unrelated)

• Already take tax deduction • Need a captive

• Don’t disrupt existing high deductible program

• AEX is an “overlay”

• Share risks with others? • Sharing is in frequency layer

• Black Swan event? • Excludes risks >125% expected loss pick

• IRS approval? • IRS has approved similar arrangements

Objections? Answers

Cost

• AEX Service Cost• 0 -$2M: 6% of AEX premiums

• $2M-$4M: 3%

• Above $4M: 1%

• Minimum annual service fee of $30,000

• Captive Management

Participation Criteria

Large Deductible or SIR Program

Minimum $400,000 Loss Pick in AEX Layer

Cash Flow

Submission Criteria

5 Years Loss/Exposure Data

Next Step

Karl Huish Zeb Holt

karl_huish@artexrisk.com zeb_holt@artexrisk.com

(480) 553-6227 (630) 285-3796

Section 831(b) Captive Solution

$1.2M annual premium

Taxed only on investment income (C corp rates)

Shareholders

CaptiveBusiness

Basic Captive Diagram

Insurance Premiums

Insurance Coverage

Insured Risk Workers Comp ● Property ● Auto ● General Liability

Uninsured Risk

Deductibles

Exclusions

Operating Risks

A/R Concentration

Construction Defect

Credit Default

Disability

Administrative Actions

D & O / E & O

Legal Defense Reimburse

Mold and Pollution

Product Warranty

Hidden Risks

1. Insurance Risk

2. Operate as an insurance company

3. Risk shifting and risk distribution

Tax Law and Captives

Ownership Options

Captive

Shareholders FamilyKey Employees

Estate Plan Trust

ParentCompany