One of the most common reasons identified by our clients in creating their micro captives is to provide a vehicle for their operating companies to finance higher deductibles. These deductibles are identified so that the company doesn’t “trade dollars” with a third-party insurer but instead retains that risk or those claim events which they can reasonably predict will occur. Through this approach, our clients help minimize their insurance premiums, lowering the cost of their existing insurance, and to retain the profits that would otherwise be ceded to an outside organization.
A Deductible Reimbursement Program (“DRP”) will smooth the peaks and valleys of traditional market insurance expense. The DRP offers the opportunity to reduce third-party insurance costs by capturing investment and underwriting income. Without a DRP in your captive, losses are not expensed until after a claim is paid.
How Could Your Business Benefit?
DRPs are often used with captive solutions in which the captive insurer issues a policy directly to the insured. The policy terms typically mirror the large deductible policy terms. The benefits of a DRP include:
- Reducing third-party insurance expenses;
- Providing for smooth cyclical insurance premiums;
- Accelerating premium expense deduction for losses within deducible;
- Exerting control over claims services and proactive risk-management practices;
- Realizing underwriting and investment income; and
- Leveraging captive assets to insurers for other lines within business.
Assumption of a $10,000 deductible can often save as much as 20%-30% on your traditional commercial insurance premiums.
How MCS Protects Your Business
A risk audit of your claim experience will help identify loss activity that is predictable in both frequency and severity. This, along with the financial size and risk appetite of the organization can help to identify an appropriate deductible or retention level. Your captive can help you finance those losses in a meaningful way so that your Cost of Risk is ultimately lower.
A policy is developed that identifies all of the deductibles identified within other insurance policies. Once a claim is settled, a payment is rendered by the insurance company reducing the recovery by the deductible amount. This prompts the captive to pay its obligation to the company’s owner for that deducted amount.