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Glossary of Alternative Market Terms

Scroll down the page to find the term you need. All defined terms are displayed in bold for easy location. You might prefer to use the "find" feature of your browser. Use the "Edit" pulldown menu, or hit "ctrl-f", then enter the term you want in the box.

Agency Captive - Also known as a Broker-Sponsored Captive, the Agency Captive is organized by brokers or agencies that retain partial or predominant ownership of the Captive and offer it as a facility for coverage to their clients. (Captive.com thanks Zurich for sharing this definition)

Association Captive Insurance Company - Any company that insures risks of the member organizations of the association, and their affiliated companies.

Broker-Sponsored Captive - Also known as an Agency Captive, the Broker-Sponsored Captive is organized by brokers or agencies that retain partial or predominant ownership of the Captive and offer it as a facility for coverage to their clients. (Captive.com thanks Zurich for sharing this definition)

Captive Insurance Company  Generally speaking, a captive is an insurance company whose primary purpose is to finance the risk of its owners or participants. This includes any pure captive insurance company, association captive insurance company, industrial insured captive insurance company, or agency-owned captive insurance company. Simply put, a captive insurance company is an insurance company which is wholly-owned by another organization (generally non-insurance), the main purpose of which is to insure the risks of the parent organization.

Commutation  In the event of the termination of this contract, the Reinsurer shall be released from all further liability to the company for all loss and allocated loss expense not finally settled by the company as of the date of termination. In consideration of that release, the Reinsurer shall pay to the Company all amounts of loss and allocated loss expense due for losses finally settled.

Federal Liability Risk Retention Act  Preempts some state functions. For example, the act does not allow a state insurance regulator to prohibit risk retention groups domiciled in other states from operating within the regulator's state, thus eliminating the need for a fronting company.

Fronting  Most commonly refers to the practice of a non-admitted insurer (or an insured with a captive insurance company) contracting with a licensed insurer to issue an insurance policy for regulatory or certification purposes.

Industrial Insured  An insured which procures the insurance of any risk or risks by use of the services of a full-time employee acting as an insurance manager or buyer and whose aggregate annual premiums for insurance on all risks total at least $25,000 and who has at least 25 full-time employees.

Industrial Insured Captive Insurance Company Any company that insures risks of the industrial insureds that comprise the industrial insured group, and their affiliated companies.

Loss Portfolio Transfer  Is retrospective in nature, as they involve the transfer of incurred losses. Such programs can utilize reserve discounting  on either a structured or an unstructured basis, and/or they can have adjustment provisions to take into account any future reserve deterioration.

Non-Admitted Insurers  Insurance companies not licensed in a state may engage in business in the state if an admitted, properly filed company issues the policy and reinsures losses to the non-admitted reinsurer.

Non-Subscriber Workers' Compensation Plan  A non-subscriber is an employee who elects, by filing appropriate notices required by state insurance authorities, to pay work-related injury loss through some method other than statutory workers' compensation. Three states Texas, South Carolina, and New Jersey allow such an election.

Pool Any joint underwriting operation of insurance or reinsurance in which the participants assume a predetermined and fixed interest in all business written.

Pure Premium  That portion of the premium which covers losses and related expenses, i.e. includes no loading for commissions, taxes, or other expenses.

Pure Captive Insurance Company  Any company that insures risks of its parent and affiliated companies. Single parent Captive.

Reciprocal or Reciprocal Risk Retention Group Some domiciles allow risk retention groups to be formed as reciprocals. A reciprocal risk retention group is an unincorporated association of individuals or entities that exchange contracts of insurance through an attorney-in-fact, which acts as an agent or manager. In a reciprocal, profits (including investment income) and losses are allocated back to each member's subscriber savings account. Essentially all income (and the related income tax) reverts back to the members. Thus, the reciprocal structure may provide a tax advantage to groups whose members are non-profit entities.

An attractive feature of reciprocals is that new policyholders can join in a way that is fair to both them and long-standing policyholders because of the way profits and surplus contributions are accounted for. Reciprocals can also be more flexible because each one is different, based on the membership agreements and bylaws. Reciprocals are governed by a few basic provisions, so management is free to be creative and draft agreements that fit its particular purpose. [Contributed by Ken Carlton, Milliman]

Rent-a-Captive Under these programs, the policyholder is insured by the Captive without owning, or at least, without voting control of the Captive. The Captive facility "rents" its capital, surplus, and license to the policyholder and usually provides administrative services, reinsurance, and/or an admitted fronting company. A Rent-a-Captive can be structured as a protected cell, which is the legal segregation of the accounts of each program from the liabilities of every other program and those of the Rent-a-Captive itself.

Retrospective Rating Plan One in which the final premium is based on the insured's actual loss experience during the policy term, subject to a minimum and maximum premium, with the final premium determined by a formula.

Risk Retention Group Any corporation or other limited liability association whose activities do not include the provision of insurance other than reinsurance with respect to the similar or related liability exposure of any other risk retention group which is engaged in business or activities.

Self-Insurance The planned assumption of risk.

Series Business Unit (SBU) - An SBU is a self-governing and protected company formed under the umbrella of a Series LLC, currently permitted in Delaware. The SBU is an independent insurance company capable of issuing policies directly or policies fronted by a commercial carrier to your company and third parties. Each SBU has a unique business purpose and an independent tax ID number. You specify your SBU’s business purpose, taxpayer election, and coverage offerings. Unlike the protected cells or segregated accounts of Rent-a-Captives, SBUs have greater flexibility offered by self-governance. A Series Business Unit (SBU) is protected from the financial obligations of other SBUs by Delaware Statute. See Amplitude Re for more information.

Sponsored Captive -- A sponsored captive is created by a legal entity that is not an insured of the sponsored captive. A sponsored captive is not created by its insureds.

The insureds of a sponsored captive have no ownership interest in or control of the sponsored captive. The insureds whose risks are underwritten by the captive are called the participants. Sponsored captives are referred to as "rent-a-captives" in some domiciles. Sponsored captives may be required to pay an access fee but do not require insureds to pay in capital in return for ownership of the captive.

A sponsored captive may be structured to have legally separate underwriting accounts. These are called segregated cells. In a segregated cell captive the participant is usually only exposed to the risk of its own undrewriting performance.

In Vermont, the sponsor has to be a licensed insurance company, reinsurance company or captive insurance company, and RRG's cannot be sponsors or participants in a sponsored captive.

Sponsor - the legal entity that contributes capital to form a sponsored or association captive.

Participant - the insured whose risks are underwritten by a sponsored captive.

Tax Reform Act of 1984 Included two sections that increased the tax bill of an offshore captive insurer defined as a controlled foreign corporation. One section redefined income related to the insurance of US-based risks as US-source income instead of foreign-source income. Another section made income from the insurance of related risks in foreign countries taxable in the current year. The net effect of these two changes was to eliminate most tax advantages for an offshore single parent captive.

Tax Reform Act of 1988 The major change imposed by this act affected offshore group captives in that the definition of a U.S. shareholder was changed from an ownership interest of 10 percent or more to any shareholding interest.

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