State of the Market: The property insurance market for habitation real estate is extremely limited. Loss experience in this sector has been high as a result of storms, fires and construction related issues. As insurers seek to use their capital wisely, rates for habitation risks have risen considerably – more so for those risks located in areas susceptible to catastrophic perils. This includes earthquake, tornados, flood, hurricanes and hail/wind related damage. Further, wood frame or other combustible material construction has been particularly hard hit, narrowing the market options further.

Property premium rates for frame partially protected non-catastrophic habitation exposures with low deductibles range from $0.20 per $100 of value to over $0.30 per $100 of value – these rates can vary widely based on loss experience, extent of protective safeguards or whether the location is in Catastrophe Zones (Flood, Wind, Named Storm and Hail). 

Alternatives to traditional fully insured programs include:

Higher Deductible
• Higher deductible (i.e. $250,000-$1 million each occurrence) and fund for potential claims.

Considerations:
• Define “Occurrence” such that it includes all losses resulting from the same event (i.e. one deductible for a storm). Many insurers are now adapting deductibles to apply per occurrence per location. Naturally, if an insured were to consider a substantially higher deductible option, it would need to be limited to an each occurrence basis, not per location.

• Lender Requirements: If you are comfortable with a higher retention, but have lender requirements to maintain a lower deductible, an option would be to utilize a deductible indemnity agreement attached to the policy. This could potentially allow you to show a lower deductible on the certificates of insurance for lender purposes.

Property Captive 

Insurance Options
The considerations provided in the deductible option are similar to those arising when using a captive.

When considering the use of captive there are additional issues that are critical including:

• Potential for loss

• Ownership

• Tax considerations

• Long term relationship

• Operating costs

• Domicile

• Timing

Captives are Insurance Companies set up to insure the risks of a Parent Company, or a company typically within the same economic family. They are most effective when insuring Actuarially Predictable losses and less so at more severe exposures that generate random hazard losses (Wind Storm/Flood). There are several types of captives:

1. Single Parent – formed to insure the risks of the parent (usually). You pay premiums, and the captive issues you an insurance policy and covers any losses under that policy you incur Captive insurance companies are insurance companies that are owned and controlled by their insureds. A captive insurance company is described as single parent captive if it is owned and controlled by one company and insures that company and/or its subsidiaries. 

2. Group Captive – is an insurance company owned and controlled by two or more non-affiliated organizations the captive insures. A group captive can be either homogeneous and insure similar types of businesses risks or non-homogeneous and insure risks of several types of organizations. In the U.S., group captives are licensed by a domiciliary state and use a fronting carrier, or they operate under the Federal Liability Risk Retention Act of 1986. The companies may be either stock, reciprocal or mutual in organizational form.

There are multiple shareholders and it insures the risk of all the shareholders’ companies. Examples of these captives include captives formed to insure a specific risk that was either uninsurable or not effectively insurable in the traditional insurance market.

3. Segregated Cell Captives – establishes legally segregated cells or underwriting accounts. The objective is to ensure that assets in one underwriting account may not be used to satisfy liabilities in another underwriting account, nor the general (noncellular) liabilities of the SCC. Noncellular assets may or may not be available to satisfy cellular liabilities. May also be called a segregated portfolio company (SPC), protected cell company, or a separate account company (SAC). The idea here would be to set up separate accounts for each company – and would probably be quite unruly.

4. Risk Retention Group - A group self-insurance plan or group captive insurer operating under the auspices of the Risk Retention Act (RRA) of 1986 that can cover all the liability exposures, other than workers compensation exposures, of its owners. RRGs are not subject to the individual state laws that would otherwise prohibit the formation of group captives or make it difficult to form or operate them. Generally, once licensed in one state, they are able to operate in all states.

Conclusion: As with the deducible option, the program hinges on the availability of coverage and the potential for premium savings for taking the higher deductible. 

In addition, the captive adds operating costs to the program. Any savings generated by reduced loss experience would be kept within the captive and used to either A) off set future premiums (lower premium costs) or B) provide dividends back to the policy holders or owners. The captive would allow for a more formal premium payment process as opposed to using accruals on an insured balance sheet. This is more efficient from both an income tax and allocation stand point. In short, the additional cost of the captive should be offset by its functionality.

Spencer Macalaster is the executive vice president at Risk Strategies Co., Boston, Mass.