CAPTIVE INSIGHT
IS THERE A TRUE BUSINESS REASON
FOR THE POOL?
In determining whether or not there is a true business reason for the risk pool, there are
several key questions that need to be addressed, such as:
Why exactly is the pool being formed in the first place?
What is driving the formation of the risk pool?
Why would anyone want to join the pool?
Ideally, the pool is being formed for the purpose of attaining a greater predictability of risk
by sharing it with other like-minded individuals or entities. In addition, if there is in fact a
business reason for ultimately forming the pool, this should be well-documented.
IS IT INSURANCE – NOT BUSINESS RISKS –
THAT ARE BEING COVERED VIA THE POOL?
Evaluation should also consider whether the risks that are being covered are commercially
available, or rather a clear fit for the definition of an insurance risk as versus a business risk.
Similarly, the policies that are designed through the risk pool should be covering fortuitous
risk and should only provide coverage that will make the insured “whole” again (i.e., returning
them to where they were before the claim takes place) as versus improving them from a
financial and / or similar standpoint.
WHAT IS THE PROBABILITY
OF A CLAIM?
Another key consideration is the probability of a claim occurring. As an example, if there is
just one single captive, it is conceivable that it could go many years without a claim. However,
if the pool consists of 50, or even 100 participants, and several years go by without incurring
a claim, the question arises of what exactly is being “pooled” in this case? With this in mind,
pooled risks should actually be a concern in a successful pool. Otherwise, if the risks are
extremely remote, then there is not likely a need for insurance.
ARE RISKS IN THE POOL UNDERWRITTEN
ON AN INDIVIDUAL BASIS?
In the most successful risk pools, each risk should be evaluated individually, as versus
underwriting via a “cookie cutter” template. Rather, there should be as much detail as
possible present in the determination of the premium pricing.
Here, for instance, a participant’s risk exposure, location, and frequency of past claims
should all be factored in. Then, coverage should be crafted that makes the most sense for
the individual risk that is being pooled. The bottom line here is that underwriting should be
customised for each participant, then coverage should then be priced accordingly.
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