Small Business Participation Growing In Alternative Risk-Transfer Market

New financing arrangements make it possible for small businesses to participate in the alternative risk-transfer business and even run a captive insurer as a profit center, according to an article in the July property/casualty edition of Best's Review.

Alternative risk transfer was once the exclusive domain of Fortune 1,000 companies because they had the funds needed to form their own captive insurance companies. The Best's article explains that these mechanisms became popular during the mid-1980s, when commercial coverage—particularly workers' compensation and product, general and professional liability coverage—became difficult to obtain. Alternative programs gave companies a cost-effective way to cover predictable, high frequency risks without paying premiums in the standard market. Today, small to mid-sized businesses that pay up to $50,000 in annual premium are being wooed into group captives and risk-retention groups by the prospect of saving money or even making a profit when their losses are low. This has been facilitated by the increased ability to finance the programs using irrevocable letters of credit.

In addition the article explains, "program business"—an approach to underwriting that gathers together commercial insurers representing large blocks of premium volume—can create profit opportunities for the owners of the books of business. For-profit program business in the alternative market includes risk-purchasing groups, producer-owned rent-a-captives, association-owned profit-center captives, producer-owned profit-center captives and domestic captives insuring third-party business.

According to Best's Review, the market is estimated at between $40 billion and $70 billion in premiums. There is a caveat, however: Sound underwriting and marketing are essential for a for-profit program to succeed. Low loss ratios of 10% to 20% are necessary to make the numbers work.