Self-Insureds Taught ABCs Of Reinsurance
Chicago
Captive insurance operations can work well to provide coverage for both high and low-risk situations given the proper reinsurance support, an expert in the field told self-insureds here.
Captives exist to assume insurance risk and in some cases reinsurance risk, noted Mark Hinkley, executive vice-president of Odyssey Reinsurance in Stamford, Conn.
However, the big question becomes, "is it preferred risk or surplus lines risk," according to Mr. Hinkley, who explained that "both are possible in a captive" in his remarks here during a workshop, "Risk Assumption Through Captives for Managing General Underwriters and Third-Party Administrators" at the Self-Insurance Institute of Americas annual meeting.
Mr. Hinkley also advised his audience that "non-risk income, a phrase heard over the last 10 years, probably should have been erased." There is no income or business that doesnt have associated risk, Mr. Hinkley added. "Those of you who are in the fee-for-service business know that unless you pay attention to the details and the continuity of the business, you risk the loss of your business and ultimately your franchise," he said.
A key component of success in self-insurance is keeping loss costs low, he said. "If you cant make the loss costs go down, you might as well send [the business] to a large insurer," he said. "Everybody is being tested to lower costs and still provide quality."
Another key is securing the proper reinsurance, he said, noting that this can be difficult because reinsurance "is a relatively small business compared to insurance," noting that there are only about 50 reinsurance companies in the United States and some 150 internationally. "Its a business that is 80 percent treaty business and 20 percent facultative business," he explained.
He described facultative reinsurance as "the business of dealing with risks one at a time. Its like buying crash parts on a car–if you bought all the parts from a dealer, you would pay four or five times as much as the car costs."
On the other hand, treaty reinsurance, he said, involves a comprehensive look at a self-insured firms portfolio, "and trying to estimate, using what I would call basic underwriting curiosity or common sense and math. Almost nothing more is required. Its determining the profitability of the business that has an experience and a history to it."
He continued that, "this is a time when you need to locate good, instinctive underwriters that have the authority to deal or make decisions, that are not bound to pure mathematical models of what happened from 1993 to 2000."
Mr. Hinkley commented that the three "C's" of captive success are: capability to underwrite the risk you want to underwrite, control to make sure you can move the business where you want to at the right time, and "cool places to have business meetings."
He listed the ingredients for success in a captive as being risk, money, risk management, risk takers, reinsurers, places, and structures and computers.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 15, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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