Risk Transfer Underwriting
CIT talks to Paul Dassenko of Risk Transfer Underwriting about
potential exit strategies, collateral stacking and forgetting the past
How does RTU help captive insurers?
We offer a product that allows captives to exit some of the old lines of business that they might have on their books. Almost every insurance company, including captives, has written long-tail business that will be around for many years to come and sometimes captives may be looking to do something else with the vehicle. For example, when there are mergers or acquisitions, sometimes a company can have more captives than it needs so we give companies a chance to achieve finality on a portfolio of legacy liabilities. Companies might want to shut a captive down, or want its captive to do something else, and there are always a host of reasons why a company might not want to be troubled by the past.
How do captives accrue long-tail liability exposures, and what solutions does RTU offer?
A company will have decided at some point to write third-party liability through its captive and as a result of that will have these liabilities.
Most frequently, RTU is asked to cover legacy workers’ compensation liability. Many companies hold workers’ compensation on a self-insured basis, directly on balance sheet, through their own captive, a group captive, a shared captive, a rented captive or some other vehicle, and we can help with any of these approaches. But at some point after 10 or 15 years, a company may not want to be bothered with the administrative burdens of legacy and their potential deterioration. The collateral may be a troubling issue or for any number of other reasons a company may wish to forget about its past.
Is exiting these lines a very difficult process? Or could a captive do it on its own?
It isn’t a difficult process, and most captives I know are perfectly capable of looking after these liabilities themselves. In fact, some of the entities that own captives are frankly much more capable and knowledgeable about their own book of business than the insurance carriers offering first dollar coverage out there. But at some point, a company may want to restructure, achieve finality, shut the captive down or even re-launch the captive to do something else, and in all of those instances, it’s sometimes the objective to get beyond what was done years ago.
What other classes/lines of business can RTU transfer for captives?
We can take anything that has certain a number of years for it to play out, so if the assets supporting a captive are there and available to pay them out over several years’ time, then we could help with that.
We can help with general liability, auto liability and workers’ compensation. We are also happy to look at hospital, medical and nursing home malpractice, and we’ve even priced a few companies that deal with builders’ risk, including construction defects. Anything that has duration—a longer period of time over which the liabilities are expected to pay out—that would be of interest to us. First party doesn’t really suit us.
How does RTU work with a captive insurer to transfer liabilities?
If a captive approaches us, either directly or through its captive management company, we then ask them to send us underwriting information, which would frequently include an actuarial report and current loss runs. We will then offer an indicative quote and if that quote is interesting, if the price that we’re offering looks like something at which they would be willing to transact and move on, then we will go into due diligence where we will do a thorough review of the claims that are in the portfolio. Following due diligence, if our price is within a very limited range of our indicative quote, we would expect to transact.
Ultimately, our interests are completely aligned with the buyer. We want to do the transaction, so we understand that it is going to have to be a value add transaction at the right price, offering the right solution. We will be striving for a suitable price that will make the transaction go.
The difference in RTU’s product, as opposed to prospective insurance or reinsurance, is that we are looking to cover loss history that already exists.
If a company is looking at prospective insurance, insurance for future exposures, then that’s very different from pricing our product. When pricing a prospective product an underwriter could often say that he or she could do it for 10 or 15 percent less if necessary to meet a self-insured’s’ objectives. Such an approach is possible on prospective business because the prices are within a reasonable range of expected future outcomes.
But with legacy, those losses have already been incurred and we can make projections on a more narrow range based on what’s already in the legacy portfolio. We have a pretty good idea of where a portfolio of legacy workers’ compensation business is going to end up.
So the only pricing discussion with RTU will revolve around inflation factors, for example, in workers’ compensation for medical inflation, as well as a discussion about the amount of time we think we will have these assets to invest and use to pay the claims. Those are the factors that might be negotiable and might be subject to back and forth. But the actual claims are locked in, especially when they are three years old and older.
RTU’s services also prevent ‘collateral stacking’. How can this affect a captives performance?
Sometimes captives are required to hold collateral for reserves so that they can meet their obligations and this is particularly true with workers’ compensation. The regulatory authorities will require collateral whether it’s held in a captive or on a self-insured basis without a captive vehicle.
Collateral stacking—especially when we first started coming up with the idea for RTU—was very hard to get in the aftermath of the financial crisis. Collateral is now much easier for companies to acquire. But if captives have collateral that is backed by cash then we can take that pressure away. To the extent that the collateral is greater than the expected reserve position or the expected ultimate reserves needed, then there may be an immediate benefit and an immediate drop of profit to the bottom line if they transact with RTU.
What other services does RTU offer to captive insurers?
RTU offers a strictly financial product. We’re a little agnostic about where the claims are managed. We’re perfectly happy to have the claims managed with the same third-party administrators as always. Many captives or self-insurance vehicles prefer to have no change in the way claims are handled. We’re offering a way to clean up the balance sheet and not seeking to sell claim services.
We have quickly built up a reputation for being very flexible. We initially started out focusing almost entirely on workers’ compensation, but because we are flexible and because we are able to take a new look at any number of other liability lines, we’ve started to see a lot of requests for lines of business other than workers’ compensation and have therefore expanded our brief considerably.
