Joseph A. Herbers

Captive Feasibility Study

When a regional physicians group, with a moderate deductible program realized they were not getting due credit for more than a decade of exceptional loss experience, they decided to explore other options.

They chose Pinnacle specifically due to our expertise in captive and self-insurance programs.

Initially, Pinnacle discussed options including segregated cell captives, single parent captives, and even risk retention groups once they began to consider marketing the program to other similar regional physician groups.

While the customer was considering the structural alternatives, Pinnacle pursued a funding analysis. Credibility weighting the customer’s experience with industry benchmark data, produced estimates of expected losses and loss variability in several different loss layers. This not only showed the additional risk associated with higher limits of self-insurance, but was also tremendously valuable in negotiations with fronting carriers and reinsurers.

The client decided to increase the deductible on the coverage provided by their insurer, which offered more responsive pricing due to Pinnacle’s funding analysis and to form an off-shore captive providing deductible buyback coverage.  The comfort level our client had with the insured’s services also influenced the decision.

Pinnacle also worked with the captive manager to develop the feasibility study and pro forma financial statements that become the foundation of the captive application. The application was approved as submitted and the captive is running quite successfully.

Formation

In an effort to attract and retain quality physicians, a large integrated healthcare system operating in the Midwest decided to create a physician’s professional liability insurance (PPLI) alternative to the commercial markets. After a comprehensive feasibility analysis, an offshore captive insurance company (CIC) was capitalized and formed. Pinnacle actuaries were engaged to assist in the feasibility analysis and implementation of this strategy. Pinnacle’s involvement began by assisting the captive manager to develop appropriate assumptions that were incorporated into the CIC’s proposed business plan and filed with regulators. Initially, Pinnacle performed a comprehensive analysis of the current PPLI market to develop base rates, rating factors and underwriting guidelines. On an annual basis, Pinnacle re-evaluates the base rates and rating factors and recommends adjustments to reflect current trends in the market as well as credible indications borne out of the CIC’s experience. In addition to maintaining adequate rates for the program, Pinnacle has also been retained to perform the annual analysis of unpaid loss and expense reserves. The CIC’s annual reserve analysis includes a review of policies written, premium collected and claims incurred by the CIC at the close of each fiscal reporting period. Management relies on Pinnacle’s analyses to ensure the financial health of this strategic venture.

Retention Analysis

Pinnacle was asked by a large self-insured regional transportation authority to assess the impact of increasing their self-insured retentions for both workers compensation and automobile liability. We developed a stochastic simulation analysis, based on the program’s historical claims experience and industry benchmarks, that examined not only the increase in expected losses but the program’s additional potential loss variability. Finally, we discussed with the customer the relationship between their current capital position, as well as the current reinsurance market, to ensure the retention they selected for their program was appropriate for them. The authority ultimately increased their retentions, put some of their excess capital to work, and realized substantial savings in their reinsurance costs.