top of page
Search

Plus-Aggregate Deductible

David Price



Background

Historically, “Plus-Aggregate Deductibles” have been used in “Hard” market conditions where capacity is limited, and prices have increased. The Insured will take a primary share of their risk to encourage Insurers to provide capacity which will react to extreme loss events rather than smaller frequent claims.

Plus-Aggregate deductibles can also provide a good use of Insured’s funds to invest in their own risk, and for larger companies allow the opportunity to set up separate captive insurance vehicle’s.


How does the Plus Aggregate work

The plus aggregate deductible works in addition to the “working” policy deductibles, hence its title. It effectively becomes the primary layer of insurance up to an agreed fixed “aggregate” amount and once this has been exhausted, the primary insurer takes over to pay all losses subject to the “working” deductibles.

Example: If the Insured selects a USD 5m plus aggregate, they become the Insurer for the Primary USD 5m any one occurrence and in the aggregate, with all losses subject to the working policy deductibles before and after the exhaustion of the aggregate. All claims are reported to a loss adjuster who keeps a record of the erosion of the plus aggregate.


Utilization

When an Underwriter is offered a plus aggregate retention they are encouraged with a feeling of mutual association. Underwriters also prefer to be there for the large unforeseeable losses rather than providing maintenance type insurance for small losses.

When to use a Plus-Aggregate: -

a) Larger accounts say USD 400m plus in values


b) Attritional accounts, where there is loss frequency, probably due to poor capital expenditure on property maintenance. Introducing a plus aggregate will hopefully take away the attritional losses and sharpen the Insured’s attention to housekeeping as they are now responsible for paying the smaller maintenance type losses.


c) Large accounts with a significant fire exposure. By having a large plus aggregate, it keeps the insured’s mind on:


i) health and safety / housekeeping, and

ii)protecting the funds in the aggregate, as they are at risk too.



Premium Savings

A plus aggregate will provide a premium saving, the amount of saving being dependent on the size of risk, historical losses, size of the aggregate retention and the type of occupancy.


Funding the Aggregate

As previously mentioned, all claims are reported to a loss adjuster who keeps a record of all the claims before and after the exhaustion of the aggregate. Currently we can place cover in London on the following basis: -

a) Non-Collaterized

i) The Insured doesn’t have to post any funds with the loss adjuster for the aggregate amount and just pays the aggregate losses as they are incurred. We recommend that Insured’s reserve the whole amount of the aggregate into their accounts at the very start of the Policy.


b) Collaterized

i) The Insured could post funds with the loss adjuster by way of a letter of credit.

ii) Through a cell captive or captive either on shore or as is more popular offshore.



Benefits of utilising a Cell Captive or Captive for the Self-Insured aggregate component of a Plus Aggregate policy.


Background

At renewal of a Property Programme, the Insured has been given an option to introduce a “Plus aggregate deductible” as a way of reducing the premium and demonstrating to underwriters they are willing to share the risk. The Insured thereby provides the first layer of their insurance programme.

Having decided to share the risk the Insured can simply pay losses out of their profit and loss account as they are incurred. In some cases, a letter of credit may be set up directly with the loss adjuster so that funds can be drawn down to pay losses.

Another and perhaps more beneficial way is to consider setting up and funding an offshore rent a cell captive.



What is a rent cell captive?

Rent a cell captive is when an Insured rent a cell within an existing captive in an offshore territory. In effect paying a premium into their own offshore facility which is ringfenced solely for their business.

What are the benefits?

The benefits are 3-fold:

1. The Insured can take the funding of the captive straight off the balance sheet.

2. The funds go into a tax-free environment

3. Fund can be invested and once the Insurance year is completed any profit can build the captive so larger retentions can be made in the future.


How can Fenchurch / BGP help set the Rent a captive up?

Fenchurch and their parent company BGP are experienced in setting up “rent a captive” solutions in several offshore locations, having arranged a number of these in the past and work with local companies and lawyers to put these in place.

It is essential in view of the protection against losses and the opportunity for profits that the captive subsidiary is operated by an experienced project manager and the owner of the rent-a-captive charge participants a fee. Typically, an annual premium of as little as $250,000 is required to achieve the desired cost benefit.

The costs to rent a cell captive vary and can vary between a flat fee or a %age of premium income.

Timescales

It normally takes between 6 to 12 weeks to agree suitability and structure.


At what stage do we transfer from Rent a cell captive to a Captive?

An Insured would normally transfer to their own captive once the fund reaches circa USD 1million.


What other things do you need to consider:

1. Bank account in the cell captive territory to pay funds back.

2. Lawyers - we can recommend a firm.

3. Accountants, we can also recommend.

4. Compliance – the cell captive has a regulatory duty looked after by Cell manager



How do you unwind a cell captive and bring the money back onshore?

Because of the short-tail nature of the insurance being ceded it would be straight forward to close the cell or captive and return the funds to the original investors. The details for run-off and closure would be agreed with the cell provider or Captive manager at the time of set up. Taxation would need to be considered.

314 views0 comments

Recent Posts

See All

コメント


©2020 by Fenchurch Broking Ltd.

bottom of page