The World’s Largest, Privately-Held Insurance Brokerage Firm
Alternative Insurance Structures
Presented by Greg Cushard
Lockton Insurance Brokers, LLC
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Gregory Cushard
Partner – Global Petroleum and Convenience Store Group
Professional Profile
Current Positions
Expertise:


Environmental

Petroleum

Convenience Stores

Rail

Terminals

Transportation

Refineries

Private Equity
Lockton Insurance Brokers, LLC—
Partner and Vice President
Education

University of Southern California,
Bachelor of Science—Entrepreneurship
Professional Affiliations


Society of Independent Gasoline Marketers
of America, Committee Member
Turnaround Management Association,
Committee Member
Property and Casualty Insurance

PMAA
Employee Benefits

NACS
Captive Consulting

ILTA

IPAA
gcushard@lockton.com | O: 415.568.4115 | M: 916.730.4849
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Table of Contents
1. Insurance Overview
2. Fronted Programs
3. Corridor Deductible
4. Integrated Risk Program
5. Traditional Aggregate Stop Loss
6. Captives
a) Group Captive
b) Private Insurance (831b)
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Insurance Overview
Insurance Overview
Small
Deductible
with
Aggregate
Risk Transfer
Large
Deductible
with
Aggregate
Retro
with Low
Maximum
Small
Deductible
without
Aggregate
Retro
with
High
Maximum
Group
Captive
SingleParent
Captive
Large
Deductible
without
Aggregate
Segregated
Cell Captive
Qualified
Self Insured
UNINSURED
GUARANTEED
COST
Risk Finance Spectrum
Pure Self-Insurance
High Premium
Low Premium
Low Volatility
High Volatility
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Fronted Programs
Fronted Programs
 “Fronts” are programs where a carrier issues a policy to meet insurance
requirements for contractual or statutory requirements, but the client retains most,
if not all, of the risk on the back end. There are many ways to structure a fronted
program to allow for:
a) Maximum use to meet insurance objective
b) Minimize cost (fronting fees)
c) Minimize collateral.
Example:
A company is interested in self-insuring their storage tank liability and replacing their current UST
policy covering 650 tanks. The company pays the insurer 20% of their current policy premium and in
return the insurer agrees to put up a new insurance policy to satisfy Federal Financial Responsibility
Laws. All claims become 100% the responsibility of the insured.
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Corridor Deductible
Corridor Deductible
 In addition to the retained losses within a deductible, the client can also retain
a limited portion of the excess losses in its primary excess layer. Excess
coverage will attach above the retained layer only after the client’s corridor
deductible aggregate is exhausted. Premiums for the excess layer are,
therefore, reduced by this risk-sharing approach by the client.
Example:
As an example, ABC Corp had annual Auto losses equal to $125k at a $100K deductible. Loss history
included 2 large losses. ABC Corp subsequently took a 2nd deductible of $100k on their 2nd excess
layer and added a $200k aggregate limit on losses in the 2nd layer. This equaled substantial premium
reductions.
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Integrated Risk Program
Integrated Risk Program
 Integrated risk solutions can take many different forms. “Integrated” simply
means there is a single block of insurance spread across at least two lines of
business. An integrated program could be 100 percent risk transfer, or have
large components of risk retention. In some instances, we see clients’ captives
participate in this alternative risk program.
Example:
As an example, MNO Corp has several policies of excess coverage, covering their Property, D&O, Cyber,
Employment Practices Liability, and Workers’ Compensation. Each layer has attachment and limits that
vary from one another. Total combined insurance spend is in excess of $1M. By combining these
multiple towers into one policy/program, there can be a potential cost savings greater than 5% (this can
vary). In addition to the potential cost savings, integrated programs provide the flexibility to have a
longer policy term (i.e. 3 years), thus eliminating the annual renewal of each and every coverage.
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Traditional Aggregate
Stop Loss
Traditional Aggregate Stop Loss
 Underwriter provides limited coverage in the retained frequency layer that
attaches at or above a chosen loss threshold for multiple lines of coverage.
This is also called a Basket Aggregate.
Example:
As an example, XYZ Corp has varying deductibles across multiple lines at $5,000, $25,000, and
$50,000. Carrier offers a single deductible across all lines at an acceptable reduction in premium.
Claims volatility would increase leaving the client uncomfortable. Carrier then offers an aggregate stop
loss attaching at $250,000, which is the clients maximum tolerance for loss.
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Captives
Captives
 Captives have become a very large part of the alternative risk market, with more than
6,000 captives worldwide and hundreds of billions in captive premiums written annually.
Types of Captives:
Private Insurance
Captive
Group
Captive
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Captives: Group
 A group captive is an insurance company that provides insurance to and is controlled by
its multiple owners. Participants join a group captive to pool premiums and share risk
amongst each other.
 Captive premiums are actuarially based on your individual loss experience. This means
your past losses determine your premium not state rates, experience mods, or market
conditions
 Lines of coverage in the captive include: Workers Compensation, General Liability, and
Auto Liability (Separate Property and Employee Benefits Captive are available).
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Captives: Private Insurance
“Pure captive”
 Closely held insurance company owned and controlled by its owner. Generally, a
captive works in conjunction with traditional insurance.
Direct Captive Program
 A traditional captive arrangement is one in which a company (Parent) sets up its
own insurance company to insure the risk under its deductible policies or those
risks currently self- insuring. The captive issues a direct policy to the parent to
reimburse the parent for the risk under its deductibles/SIR.
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Captives: Private Insurance
Potential Benefits
Program Design
a)
Funding for uninsured exposures
Financial Benefits
a)
b) Fund for cost-prohibitive coverage
c)
Manuscript coverage
insurance premiums
b) Creates up to $1.2m annually in
d) Offer subsidiaries a deductible
corporate tax deductions for C-Corp,
buy-down option
e)
Insure joint ventures or
development projects
Effective in lowering traditional
LLC, or S-Corp
c)
Investment strategy with pre tax dollars
versus post tax dollars
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The World’s Largest, Privately-Held Insurance Brokerage Firm
Private Insurance Companies
Study Groups—December 8, 2015
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Private Insurance Company Growth
A Captive Insurance Company provides insurance for its owner
With the continued awareness and recognition of opportunity, the captive insurance company concept is
now entering the middle market through the use of Private Insurance Companies.
Continued Growth of Captives
Enterprise Risk Strategies
ERS does not provide legal or tax advice
www.eriskstrategies.com
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Private Insurance Company Benefits
Protect
Assets
Business
Expense
Protects
Assets
Investment
Income
Investment
Income
Reduces
Reduces Insurance
Insurance Cost
Costs
Versatility
Unmatched
Business
Expense
Risk
Financing
Risk
FinancingCustom
Coverage
Custom
Coverage
Dynamic
Program
Underwriting
Underwriting
Profit
Profit
Owner
Involvement
Owner
Involvement
Dynamic
Program
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Who Should Consider a PIC?

Companies with significant uninsured risk

Private/closely held organizations

Companies with minimum gross revenue of $5 million

Companies that are consistently profitable

Entrepreneurs

Businesses with strong cash flow
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Example Coverage Descriptions
Governmental Actions Protection
Reimbursement for costs/expenses paid by the Insured resulting from a Governmental Action, which
includes hearings, review boards, or appeals resulting in assessments, penalties, fines, sanctions or
any costs to ensure compliance with the rules, regulations and standards of any local, county, state or
federal government agency. In addition, reimbursement for costs/expenses paid by the Insured for
professional licenses mandated by any local, state or federal government as well as local, state or
Federal Department of Health or Health Care Finance Administration and Medicare are covered.
Products & Services Reimbursement
Reimbursement for covered costs and expenses the Insured has paid resulting from loss of use,
withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal due to the Insured’s
product or the Insured’s work.
Supply Chain Interruption
Reimbursement for covered costs and expenses the Insured has paid and / or loss of business income
resulting from the loss the Insured sustained due to the loss of a Critical Customer, Critical Employee,
Critical Contract and/or Critical Supplier. The Insured will have the option under Supply Chain Interruption
to take any or all of the Critical Coverages.
Health Care Employers Deductible Reimbursement
Reimbursement to the Insured for the employer health care retention or deductible of the medical costs
associated with work related employer sponsored health care plans.
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Real Estate Developer
Prefunding Losses within a Large Deductible
Client Concern/Issue:
A midsized, privately held real estate developer, is required to carry both an environmental liability policy
and a condemnation policy in order to enter into certain contractual agreements with local governmental
bodies and general contractors. Each coverage contains a $250,000 deductible. The insured is concerned
about the potential negative impact of a $250,000 expenditure to their operating income should they
incur a loss under either policy.
ERS Solution:
ERS created a captive insurance company exclusively owned by the partners of the developer to issue a
deductible reimbursement policy for expected losses. The captive provides a mechanism to prefund for
potential deductible obligations for any insurance policies which contain deductibles.
Results/Benefits:
The partners now own a captive insurance company and any underwriting profit generated in their
insurance program. Even though the captive is in its first year of operation, the developer has successfully
transferred the risk from their balance sheet to a captive
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Construction Industry
Financing Difficult to Place Risks
Client Concern/Issue:
A concrete construction contractor owns and operates several batch plants in the region. The concrete is
manufactured to customer specifications at the batch plants and must be delivered within a specified
time frame. The insured approached his insurance broker to obtain quotes for a boiler and machinery
policy to provide coverage in the event of a mechanical breakdown of their manufacturing equipment.
The coverage provided by the traditional insurance market was restrictive and expensive.
ERS Solution:
ERS worked with the contractor to form a captive and provide coverage for mechanical breakdown, and
also their exposure to Governmental Action ,Loss of a Key Supplier and Loss of a Key Customer.
Results/Benefits:
The two owners of the concrete construction company each own 50% of the shares of the captive. ERS
Insurance, a Utah based insurance company, issues the three policies that are filed in the state of Utah
and the insured’s captive reinsures ERSI. The captive is in its third year of operation and is generating
an underwriting profit. The insured has used a risk financing strategy to turn a necessary business
expense into a potential profit center.
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Oil and Gas
International Business Contractual Exposure
Client Concern/Issue:
A U.S. manufacturer builds trucks specially fitted with oil riggs that are sold to oil and gas companies to drill
for oil. Not only does the insured enter into a number of contracts with international customers, their
business is subject to the oil and gas cyclical economy. The loss of one or more of their international
contracts would be detrimental to the financial strength of the manufacturer.
ERS Solution:
ERS worked with the manufacturer to create a captive to insure their Contractual exposure, Loss of a Key
Customer, Mechanical Breakdown and Governmental Action coverage. Given the manufacturer’s focus on
minimizing expenses and capital, the customer utilizes ERS’ Utah cell facility instead of forming a pure
captive. This solution provides the same risk financing benefits but at a lower cost to the owners.
Results/Benefits:
The manufacturer has financed risk successfully each year for four years and has generated an
underwriting profit. In the current year the insured is anticipating a significant decrease in operating
income due to the downturn in the oil and gas market. The risk associated with their manufacturing
operation has decreased along with the decrease in production.
Consequently the insured has decided not to buy coverages through their captive and has placed the
captive in dormancy. This is an effective strategy to keep the captive operating and available for use in
the future without dissolving the captive.
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Multiple Subsidiaries
Crop Hail Coverage for Farming Operations
Client Concern/Issue:
A doctor on the west coast owns 15 separate farming operations, each producing different crops each
year. The traditional approach for insuring damage to crops is through the Federal Crop Hail Program.
Although this is a good alternative, the perils offered are limited, as there is usually a large deductible
and the coverage offered is restrictive.
ERS Solution:
ERS manuscripted a policy which not only offered better terms than the traditional Crop Hail Policy; but
the coverage offered was expanded to include other causes of loss such as damage due to pesticides.
Results/Benefits:
ERS worked with the owner of the farms to create a Crop Hail policy providing broader coverage than
provided in the traditional insurance market place while also giving the owner an opportunity to generate
underwriting profit within the captives. The risk is distributed amongst his own 15 farming operations.
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Who Can Own the PIC?

Individuals

Trusts / FLPs

LLCs

Partnerships

Corporations
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PIC Basic Concept
Business
Premiums may be a business expense
ERS Insurance
PIC
Premiums may not be taxable income for the PIC
PIC Owner
1. Surplus may build on tax deferred basis
2. Liquidation at long-term capital gains rate
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Premium to Assets
This is what it looks like...
An example of a Private Insurance Company’s net financial performance with annual premiums of $1.2 million
PIC Structure
Distribution
Premium
$1,200,000
Claims:
Planned Distribution
Rate
Mean Claims Amount
$50,000
Start Date (first year of distribution, must be>2)
Standard Deviation
$10,000
Frequency (every N years)
Custom Claims Loss:
Year % of Premium
Years Inside PIC
Yes
5.0%
3
1
10
Custom Claims Loss 1
3
$250,000
Business Structure
LLC
Custom Claims Loss 2
7
$750,000
Planned Liquidation
Yes
Maximum Distribution Percentage
3.0%
$7,780,418PIC = Net Premiums + Investment Returns (after tax)
Using PIC
$8,066,462
NOT Using PIC
$6,365,845
Net Benefit
$1,700,617
Net Benefit of PIC
26.7%
ROI on Gross Premiums
14.2%
Actual setup fees will vary depending on domicile chosen
and whether captive type is a Pure, Sponsored Cell or
Delaware Series Business Unit.
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To Qualify as an Insurance Contract:

Business Purpose (resemble insurance in its commonly accepted sense)

Insurance risk (fortuitous, not investment risk)

Risk Transfer

Risk Distribution
On December 30, 2002 the IRS issued three revenue rulings regarding the deductibility of
insurance premiums. The IRS provides safe harbor if a PIC’s operations fall under one of the
following three revenue rulings:
IRS “Safe Harbors” for Private Insurance Companies

Pool (2002-89)

Multiple Subsidiaries (2002-90)

Group Private Insurance Company (2002-91)
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Disclaimer
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the U.S. Internal
Revenue Service, we inform you that any U.S. federal tax advice contained in this PowerPoint is not
intended or written to be used, and cannot be used, for the purpose of (a) avoiding penalties under the
U.S. Internal Revenue Code or (b) promoting, marketing or recommending to another party any
transaction or matter addressed herein.
The views and statements expressed in this presentation are for general information only. ERS, LLC is
not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or
other professional advice or services. This presentation provides general information about certain legal
and accounting issues and should not be regarded as rendering legal or accounting advice to any person
or entity. As such, the information is not privileged and does not create a client relationship with the
companies, or any of its employees. This presentation does not constitute an offer to represent you, and
you should not act, or refrain from acting, based upon any information so provided. In addition, the
information contained in this presentation is not specific to any particular case or situation and may not
reflect the most current developments.
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Contact Us
Robert Nizzi, President
t: 913-220-0442
e: rnizzi@eriskstrategies.com
Dana Marino, Business Development/East Coast
t: 610-353-4820
e: dmarino@eriskstrategies.com
www.eriskstrategies.com
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Our Mission
To be the worldwide value and service leader in insurance brokerage, employee benefits, and risk management
Our Goal
To be the best place to do business and to work
www.lockton.com
© 2015 Lockton, Inc. All rights reserved.
Images © 2015 Thinkstock. All rights reserved.
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