In a soft market, one might think that alternative risk solutions such as captives and rent-a-captives completely lose their value in light of the attractive pricing of traditional insurance products, but this would be an incorrect assumption. History has shown that alternative risk transfer (ART) products have proven their worth in all market cycles, and yes, that includes the current soft market. While Alternative Market insurance products may not be as sought after in a soft market, their fundamental core benefits continue to reward insureds with consistent profits by offering them greater control over their exposure to risk.
The same applies to situations where an insured desires to self-fund certain exposures, especially general, products and/or professional liability. While attractive pricing may be available in the competitively-priced traditional insurance marketplace, many insureds continue to seek out and/or stay committed to their self-funded general liability program. And in many situations a quality fronting carrier plays a critical role in order to achieve the optimal program structure and desired result.
Background
The cyclical nature of the property-casualty insurance marketplace is well documented, with varying reasons behind the coverage restrictions and high premiums associated with hard markets, and intense carrier competition and declining premiums during soft markets. The hard market of the 1980s was perhaps when ART products came of age, with both captives, rent-a-captives and self-insurance gaining a strong foothold in the property-casualty marketplace. However, insureds still required partners to implement their alternative risk solutions, be it reinsurers, claims administrators and most importantly, fronting carriers to issue the policy.
One popular approach for insureds over this time has been the desire to self-insure and self-fund their general liability exposures. To do so, many established a wholly-owned captive insurance company, and selected their own service providers rather than purchase an "all-services-included" bundled traditional policy. Others chose self-insurance, with both approaches giving them the ability to craft a tailored general liability policy form that truly met their individual needs. Either way, third-party service providers were needed to make it work.
Troubled Times
Captives and self-insurance continued to be popular and effective risk financing approaches during the extended soft market in the 1990s, the relatively brief hard market in the 2000s, and the ensuing and current soft one. Although some insureds opted for low-priced traditional insurance products during soft cycles, many stayed committed to their existing alternative risk structure. Interestingly, others went against the grain and abandoned their traditional approaches and established self-funded general liability programs that gave them more control over their risk exposures.
This ebb and flow continued during market cycles until a perhaps unforeseen event occurred that upset the normal order of things: the worldwide financial crisis that first struck in 2008. Without chronicling all of the reasons behind this crisis, the result was and continues to be more difficulty in obtaining financing from banks and more scrutiny of existing ART structures.
Many insureds with captives and those which pursued self-insurance soon found out that third parties felt more secure receiving general liability certificates of insurance from an "A" rated carrier. In fact, financial institutions often demanded that an "A" rated carrier serve as a front for a general liability captive. Despite their strong balance sheets and years of operational success, a "flee-to-safety" mentality prevailed and surplus lines fronting carriers began to play an even more important role.
Nursing homes with captives are a prime example of this; to obtain HUD financing they needed to provide evidence that a top-rated carrier was providing general and professional liability coverage for them. Home builders and contractors may also require a fronting carrier for their general liability and products/completed operations exposures to satisfy loan covenants or lease agreements
Many types of fronted general liability programs are now available to captives and self-insureds that enable them to maintain their existing program structure on the back-end while alleviating any front-end issues through a partnership with an "A" rated surplus lines carrier.
Potential Fronting Options
Flexibility in program structure is a key advantage of alternative risk transfer vehicles. Under one type of fronted self-funded approach for general liability, an insured may obtain a claims-made and paid policy from an "A" rated surplus lines carrier which reimburses them for losses that arise and are paid within the policy period. The insured typically collateralizes the policy's aggregate limit by providing the carrier with cash and/or a letter of credit, with collateral either being rolled into the next policy term if renewed or returned at expiration. Occurrence policies are also available but often require the insured to post collateral until the statute of limitations or statute of repose expires.
Some of these general liability programs are "working" ones, where the insured intends to seek reimbursement for paid losses from the collateral that the carrier is holding. Others are "non-working" and the carrier serves only as a surplus lines fronting solution, with no paid loss reimbursements being sought. Both approaches offer one important benefit: the insured maintains significant control over its program structure, which is the whole idea behind alternative risk solutions in the first place. It can select the policy limits and sub-limits it desires, coverages can be added, deleted or modified as necessary, and service providers such as a claims administrator and preferred legal counsel are chosen by the insured.
Ideal Candidates
Obviously, insureds that have their own general liability captive or are self-insured are prospects for this type of fronted approach. Ideally, the insured wants to have greater control over their general liability program and is willing to actively participate in establishing loss control procedures, selecting a claims administrator and providing active oversight. The insured should be financially sound and be able to fund not only the aggregate limit of its policy, but also to absorb any losses that may occur along the way. Coverage considerations can range from the typical (general liability, professional liability, products/completed operations) to the unique (products recall, errors & omissions, environmental impairment).
Summary
Self-funded general and professional liability policies continue to provide significant benefits to insureds through their flexibility: customized policies, claims made or occurrence form, choice of service providers, ability to issue "A" rated certificates when and where required and flexible collateral options to name just a few. Despite the current soft market, self-funding of general liability exposures remains a viable option for many insureds. And when signs appear that a hardening of the market is on the horizon, interest is sure to increase.
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