Risk pools, to put it mildly, vary greatly. Costs of participating in pools varies. Many are licensed operating insurance companies, many are purely contractual pools. One form is not superior to the other when design and operated well. The most common captive risk pools are associated with group captive programs.

Many 3rd party risk pools have emerged in the last 10 years to accommodate the growth in captive managers offering enterprise risk captives (known largely as micro captives or enterprise risk captives), most often structured to qualify for the special 831(b) federal income tax incentive when such enterprise risk captives are insuring US based business risks. The following diagram shows one such risk pool structure with participating captives entering into reinsurance agreements with the risk pool:

Captive Risk Pooling - Captive Insurance Company Reinsurance Pool Structure Diagram - Thomas Tom Cifelli, Captive Experts

Risk pooling is perhaps the least understood area in the captive industry today, even by many captive professionals. Care must be taken before deciding to participate in a risk pool, whether participating in a group captive program or needing 3rd party risk pooling in connection with forming your own enterprise risk micro-captive to formalize coverage of previously self insured risks. Visit www.CaptiveRiskPool.com for more information.

Risk pooling is required in most cases for one of two simple reasons:

  1. To qualify as an insurance arrangement and get the benefit of favorable tax and accounting provisions afforded insurance companies
  2. To share risks with 3rd parties to improve risk management and reduce exposure to large unexpected losses

Only a few short years ago, new domiciles including most US states new to captive licensing did not request risk pool related information where new captive applications indicted risk pooling was part of the captive design but the domicile did not regulate the associated risk pool. Most regulatory staff now require risk pool documentation when pooling is part of the captive application under their review.

The types of coverage, the terms of coverage, the structure of risk sharing “buckets,” the underwriting process, risk pool operating policies and procedures, existence or lack of excess or reinsurance layer, the costs associated with risk pooling, historical and expected risk pool losses, risk pool claims and collateral procedures, etc., all vary between every captive manager program.

A word of caution – many risk pools may not withstand regulatory or tax audit review. Any and all US owned or US insured coverage captive designs relying on such risk pool participation to qualify for special tax elections should consider our strategic captive review service to determine if changes are indicated.