A large deductible captive, also known as a deductible reimbursement policy (DRP), allows a company to self-insure its losses within a large deductible on a third-party insurance policy. The captive issues a policy to the insured to reimburse losses within the deductible. This structure reduces insurance expenses, smooths premiums, and allows the insured more control over claims while generating underwriting profits and investment returns for the captive. The captive is capitalized through premiums set based on historical deductible losses and requires at least 20% of annual premium or the solvency standard as capital.

1. Large Deductible Captive
(“DRP”)

2. Large Deductible Captive
Large 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.
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3. Large Deductible Captive
DRP 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
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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 Reimbursements
Claim Payments
Claimants
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5. Large Deductible Captive
Premium & Capital
How 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.
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6. Large Deductible Captive
Limit & Coverage
What 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.
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7. Large Deductible Captive
The Policy
Does 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.
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8. Large Deductible Captive
C
Collateral
Is the Captive’s premium and capital available to
support the collateral requirements of the insurer
and/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.
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9. Large Deductible Captive
Collateral Terms & 831
What is acceptable Collateral for the Deductible
Obligations?
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 insurance
company election under 831 (b) of the IRC?
Yes
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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.
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11. Large Deductible Captive
Contact:
Roundstone Management, Ltd.
826 Westpoint Parkway, Suite 1250
Westlake, Ohio 44116
440.617.0333
info@roundstoneinsurance.com
www.roundstoneinsurance.com
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