CAPTIVE INSIGHT
IS AN ACTUARY INVOLVED – AND IF SO,
ARE ALL PARTICIPANTS BEING EVALUATED
ON AN EQUAL BASIS?
Similar to underwriting risks on an individual basis is the issue of consistency. In this case,
for instance, is the same actuary involved for all of the participants. In this situation, while
individual underwriting data needs to be evaluated, the overall process should be the same
for all.
IS THERE A DIVIDEND OR DISTRIBUTION
OR ASSESSMENT POLICY ESTABLISHED?
A truly successful risk pool should have a dividend, distribution, and / or assessment policy
established, as well as offer documented criteria for both success and failure. This can
provide participants with more detail on what to expect in either scenario.
With such policies, specific benchmarks should be addressed, such as:
How long funds will be held
When participants can expect a share of their pooled profit back
What the benchmarks are for determining how much participants will receive
Likewise, the loss ratio of the pool should be clearly outlined, as this alone could make or
break the feasibility of joining the pool.
Without any assessments in place, it could be challenging at best to know whether or not
there is enough funding in place and / or enough risk to handle. Similarly, while some risk
pools tend to focus more heavily on what determines success, the reality is that both success
and failure determinants should be given equal weighting. All of this should be documented
and analysed up front. So, the key here is to know the policy before joining any risk pool.
WHAT IS THE EXPENSE RATIO?
Knowing the pool’s expense ratio can also be an essential component to consider. In this
case, low expenses can be profitable for the pool’s promoter, but what about the individual
participants? In this case, the more often a high expense ratio is seen, the more often it
should be asked who is truly benefitting from the pool?
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TYING IT ALL TOGETHER
While the benefits of participating in a risk pool can certainly outweigh the costs – even with
a healthy dose of claims - prior to diving in, it is essential to determine whether or not doing
so truly makes sense.
Some areas where risk pooling can make sense – and that are currently thriving in the
captive marketplace – are medical and workers’ comp. Given that, there is a great deal of
opportunity in these areas.
In any case, though, potential participants need to closely examine what it means to succeed
and fail – and what it can ultimately mean to them.