GROUP/ASSOCIATIONS PROGRAMS
We can help you build an alternative to traditional guaranteed cost or dividend programs for
groups E-Associations. Artex has a broad market application for program business designed to withstand traditional
insurance market cycles. Our sample proposal below will introduce you to the concept. For more information, just click on
contact us.
Innovative Risk Services (INRS), a risk management organization, and DEF Brokers have prepared this proposal for ABC Association to provide an insurance program to its members.
The members of ABC Association have been experiencing pricing fluctuations in their
insurance premiums and the Board of the Association are being asked by the membership
to improve the Associations current insurance program or find a program more suitable
to the market conditions. The Board recognizes the need to take control of the insurance
program through an unbundled product that provides the following ADVANTAGES:
- Unbundling of claims and loss control services.
- The ability to earn underwriting profit and investment income for good loss experience.
- A rated policy issuance carrier.
- Access to secure and stable reinsurance.
- Highly tax efficient.
HOW THE PROGRAM WORKS
Step 1 – The Insurance Policies
The proposed “ARTEX” program for ABC will be structured around guaranteed cost policies
arranged by DEF Brokers. Favorable experience will be reflected in good experience returns to ABC
however, unlike ordinary dividend programs ABC will also receive the investment income
normally earned by the insurance companies.
Policy issued by: XYZ Insurance Company
Policy type: Guaranteed Cost
Good Experience returns will be determined by subtracting the insurance program’s expenses plus incurred
losses from earned premium and investment income.
Step 2 – Premium Calculation
The member’s premiums are actuarially determined based on the historical loss experience for the group. The group’s premium will therefore be:
Loss Projection $3,250,000
Program Expenses $1,750,000
Premium $5,000,000
Program expenses include the cost of policy issuance, claims handling and loss control, reinsurance premiums, broker commissions and all administrative and management expenses of “ARTREX”.
Step 3 – The Reinsurance Program with “ARTEX”
Upon receipt of the premiums, XYZ Insurance Company will pay the loss projection amount (loss fund) of $3,250,000 to “ARTEX” in installments.
The per occurrence loss limitation is $250,000, i.e. individual losses to “ARTEX” are limited to $250,000 each occurrence. In addition, “ARTEX” have purchased aggregate reinsurance on behalf of ABC to provide protection from adverse frequency of losses within the retention layer.
In this example, the aggregate reinsurance will attach at 90% of premium which means ABC’s losses will be stopped at 90% of $5,000,000 or $4,500,000.
Step 4 – Collateral
“ARTEX” is responsible for all losses within the chosen retention of $250,000, which are capped for the program year at $4,500,000 in the aggregate. The loss funding available to pay claims is $3,250,000 and therefore an additional funding amount is required for the difference between the aggregate cap of $4,500,000 and loss funding of $3,250,000. This $1,250,000 can be funded in cash or letter of credit or a combination of both. Collateral financing is available.
RELATIONSHIP OF PARTIES
Step 5 – Profit and Loss
Three years after the ploicy year end, Artex will make an actuarial determination of ultimate
losses for the program year and declare a profit or
loss for ABC's program.
The following assumptions are used to calculate ABC's profit based on losses of $2,500,000 (50% loss ratio):
| Subject Premium |
$5,000,000 |
| Payment Schedule |
20% down/8 monthly payments |
| *Loss Fund |
$1,300,00 |
| *Program Expenses |
$1,250,000 (35%) |
| *Program Maximum |
$2,500,000 |
| *Letter of Credit |
$6,250,000 |
Using NCCI payout patterns and an assumed investment rate of 5% over an 8-year period,
profit is calculated as:
| *Underwriting Profit |
$ 750,000 |
| *Investment Income |
$ 721,000 |
| *Total Profit |
$1,471,000 |
|
