Alternative markets are available for many types of insurance risks faced by various types of businesses and certain types of industry. This typically includes the nursing home industry and contractors in the building industry. Industry groups such as these that are difficult or expensive to insure can become their own insurer to save money. As a result businesses may use various captive and non-captive options for insuring risk.
- Captive options, such as reinsurance, for the alternative risk market include purchasing group programs and self-insurance groups. Purchasing group programs typically requires no minimum size for an insured, are not involved in risk sharing and have no other loyalty to the group other than price buying power and receiving any dividends that are distributed. Self-insurance groups include insureds who share in the underwriting profit, are state-regulated, operate in only one state and share loss control services.
- Guaranteeing risk can be accomplished by a business using non-captive options such as a deductible plan of qualified self insurance. Deductible plans can include reducing insurance expenses, requiring paying a per loss or yearly deductible and may require a minimum size or amount by an insurer. Qualified self insurance can also include being state regulated for certain coverages, requiring collateral filings that can vary by state and having losses deducted from a company's operating income.
- Captives that use a direct writing option typically issue a policy to a company. Direct writing is used by single-owner captives that can include a premium tax being assessed and possible penalties for insurance activities that are illegal. Insureds must also qualify in their state to purchase non-admitted coverage. Direct writing may also not satisfy statutory and business requirements of the state in which a company or business is based.
- Reinsurance risk is when a "front company" is used to satisfy any statutory and business requirements from a particular state. This means that a commercial insurer or issuing carrier issues the policy but the captive will hold the premium and any loss reserves that are necessary. If a captive is a non-admitted reinsurer in a state collateral will need to be provided to the front company. When a commercial insurer takes on any risk, fees will be charged to the insured for regulatory expenses and services that are provided.
- Captives may also reinsure risk that has been ceded. This means that a company's risk has been transferred or "ceded" to a reinsurer. The captive may be a direct writer as well as act as a front company or commercial insurer. This means that risk can be retained or fronted from a captive that is non-admitted. Companies utilizing this type of reinsurance, however, are not always guaranteed to reduce their costs.
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