Tag Archives: captives

Community Catastrophe Insurance: Four Models to Boost Resilience

Many households and small businesses don’t have sufficient savings to repair and rebuild after a natural disaster. Insurance is a vital source of recovery funds, but many are uninsured or insufficiently insured. This insurance gap doesn’t just reduce their resilience; its impact can slow the recovery of entire communities.

Community-based catastrophe insurance (CBCI) – arranged by a local government, quasigovernmental body, or a community group to cover individual properties in the community – may help close the coverage gap. A recent Marsh & McLennan report looks at such arrangements and how they can promote community resilience.

In addition to improving financial recovery for communities, CBCI can provide more affordable disaster insurance coverage and could be linked directly to financing for community-level hazard mitigation. It offers multiple delivery models so officials and risk managers can explore and implement CBCI as part of an integrated risk management strategy.

Four broad institutional structures for CBCI illustrate the different roles and responsibilities of the community and other partners:

• A facilitator model

• A group policy model

• An aggregator model

• Purchase through a community captive.

In these frameworks, the community’s role and responsibility increase from lowest to highest. In the first, the community is more of a facilitator and a negotiator. In the second, it takes on a role in distribution, choosing insurance options and collecting premiums. In the third, the community plays a dual role: as the insured on a contract with a reinsurer and as the disburser of claims funds.

The fourth model harnesses an existing structure — an insurance captive — that enables the community to provide disaster policies.

“In all cases, the community could offer the coverage for a property owner to voluntarily decide to purchase, or there may be a few instances where a community would compel residents to purchase coverage,” the Marsh report says. “When coverage is voluntary, however, a community would likely need to offer purchase incentives to achieve goals of widespread take-up of the coverage.”

The report describes the four models in detail and provides a five-part roadmap for implementation.

Butler University Inspires With Student-Run Captive Insurer

If you’re looking for inspiration to join the insurance sector, look no further than this story of student innovation and enterprise out of Indiana’s Butler University.

The University’s live mascot bulldog Trip, rare books, fine art, and observatory telescope are just some of the items that will be insured by MJ Student-Run Insurance Company, the brainchild of risk management and insurance majors at Butler’s Davey Risk Management and Insurance Program.

MJ Student-Run Insurance Company, a captive insurer, just received licensing approval from the Bermuda Monetary Authority and will officially open for business August 1.

Note: A captive a special type of insurance company set up by a parent company, trade association or group of companies to insure the risks of its owner or owners.

Butler newsroom blog reports that the insurance company was created as a way to give students hands-on experience to prepare them for an industry that anticipates needing 400,000 new employees by 2020.

While 1,900 American universities have accounting programs, and 900 have finance programs, only 82 offer insurance and risk programs, noted Zach Finn, clinical professor & director of Butler’s Davey Risk Management and Insurance Program.

Finn drove the creation of the Butler program back in 2012 to promote his search for a mix of textbook and experiential learning.’

Bernews.com reports:

“This is entrepreneurship at its best. MJ Student-Run Insurance Company Ltd is believed to be the first such captive created, paving the way for future innovation.”

Butler’s captive insurance company was funded by a gift from MJ Insurance and Michael M. Bill.

Check out I.I.I. information on captive insurers and other risk-financing options here.

Captive Insurance Gathering

This week marks the Vermont Captive Insurance Association’s 24th Annual Conference where the economic downturn is likely to be the focus of discussions. Recent research from ratings agency A.M. Best noted that U.S. captive insurers’ net income declined by around 66 percent in 2008 for a composite of 186 captive companies. This reflects realized losses of $1.2 billion for the year, a large percentage of which resulted from one company’s investment losses. On the bright side, net underwriting income actually increased over the prior year – evidence of the captive industry’s typical underwriting discipline and its inclination not to rely on investment income, according to A.M. Best. Captive formations continue amid a softening commercial insurance market, but new captive domiciles are finding it challenging to establish a presence. A.M. Best reports that the outlook for the captive industry is stable as participants exercise their financial flexibility in a softening market. Check out I.I.I. information on captive and other risk financing options.

 

Convergence: Insurance and Capital Markets

Alternative risk financing and risk transfer has proven increasingly attractive to our industry over the years. Insurers and reinsurers have looked to the capital markets more and more to diversify their risks and expand capacity. So it’s not surprising that Allianz, Deloitte, State Farm, Swiss Re and Zurich Financial Services are among the co-sponsors of a new report published today by the World Economic Forum, titled Convergence of Insurance and Capital Markets. The report explores the growth of the market for insurance linked securities (ILS) and highlights potential next steps needed to continue its development and to further encourage investors’ strong appetite for catastrophe bonds and other forms of ILS products.

According to the report, the ILS market has seen strong growth since its inception in the mid 1990s. Issuance of ILS totaled $14.4 billion in 2007, up 40 percent from $10.3 billion in 2006. At the end of 2007, the notional value of outstanding ILS stood at $39 billion, a 50 percent increase from $26 billion at the end of 2006. Certain experts predict robust growth over the next several years. The report also notes that to accelerate the convergence of insurance with the capital markets, risk instruments must be made simpler and more attractive, and a wider investor audience must be courted. Check out background I.I.I. information on Captives and Other Risk Financing Options.  Ã‚  Ã‚