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  1. 1. Large Deductible Captive (“DRP”)
  2. 2. Large Deductible CaptiveLarge Deductible Captive A “DRP” is a “Deductible Reimbursement Policy” issued by a captive insurer whereby the captive issues coverage to fund losses within a large deductible policy. 2
  3. 3. Large Deductible CaptiveDRP Benefits • Reduce third party insurance expenses • Smooth cyclical insurance premiums • Accelerate premium expense deduction for losses within deductible • Exert control over claim services and proactive risk management practices • Realize underwriting and investment income • Leverage captive assets to insurer other lines within business 3
  4. 4. Deductible Captive DRP Cash Flow U/W Profit and Investment Returns Insured Large Deductible Policy DRP Premium and Premium Collateral Insurance Carrier Captive Facility Loss ReimbursementsClaim Payments Claimants 4
  5. 5. Large Deductible CaptivePremium & CapitalHow are the insured’s deductible obligations funded? The insured’s deductible obligations are funded by captive premiums established by analyzing historical losses within the deductible.How much capital is required to fund the captive? The lesser of 20% of the captive’s annual premium or the solvency standard of the captive’s domicile. 5
  6. 6. Large Deductible CaptiveLimit & CoverageWhat is the typical limit offered by a DRP? The insured’s deductible can range from 50k to several million depending on the size of the insured’s operation. Different limits can be issued for different coverages.What coverage can be issued by the DRP? Any coverage where the insured chooses to self insure through its captive. Some coverage we have worked with include Property, Professional Liability, Medical Stop Loss, General Liability. 6
  7. 7. Large Deductible CaptiveThe PolicyDoes the Large Deductible Captive issue a policy? Yes, the captive issues a policy directly to the insured. The policy terms typically mirror the large deductible policy terms. More than one policy and/or coverage may be issued.Is spread of risk required? Yes, for the premiums to be tax deductible, there must be risk transfer and distribution. 7
  8. 8. Large Deductible CaptiveCCollateralIs the Captive’s premium and capital available tosupport the collateral requirements of the insurerand/or the self insurance requirements of a State? Yes, that is a benefit of the DRP captive structure. Premium and capital funds may be pledged to support State self insurance requirements and/or the insurer issuing the large deductible policy. 8
  9. 9. Large Deductible CaptiveCollateral Terms & 831What is acceptable Collateral for the DeductibleObligations? The amount, type and any terms related to the collateral requirements of the Large Deductible Insurer are controlled by the insurer. Roundstone prefers a Trust and works to establish a turnkey relationship with a Large Deductible Insurer.Can a Large Deductible Captive make a small insurancecompany election under 831 (b) of the IRC? Yes 9
  10. 10. How It Works – Case Study • In 2002, paid $1.2M- M in premium for $1/3MM GL & PL coverage with no deductible. • In 2003, formed captive and remitted 800k to captive for deductible reimbursement policy premium and capital. • In 2003, Purchased Large Deductible Policy with $1/3mm limits and $200k deductible for $650k cost. • In 2007, added 50k medical stop loss retention to captive coverages and increased DRP premium by $200k representing premium savings from MSL coverage change. • In 2008, added 10k property deductible to captive coverages and increased DRP premium by $50k representing property coverage change. • In 2010, reduced DRP premium to 500k and purchased Large Deductible Policy of $1MM with $4MM deductible for 60k. • By 2010, realized annual third party insurance premium savings of $1.5MM 2010 Captive Financials reflect over $4MM in assets with investment earnings outpacing captive and third party insurance expenses. 10
  11. 11. Large Deductible CaptiveContact: Roundstone Management, Ltd. 826 Westpoint Parkway, Suite 1250 Westlake, Ohio 44116 440.617.0333 info@roundstoneinsurance.com www.roundstoneinsurance.com 11