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Rent-A-Captive Structures

Client

Income (U/W profit + investments)

Stock (preferred non-voting) Claims

Client

Fronting insurer

Premium fronting fee

Rent-a-Captive

Reinsurance premium

Third Party Reinsurer

Note: This figure shows the structure for a rent-a-captive programme that uses a fronting company and purchases

excess of loss or stop loss reinsurance.

A Rent-a-captive; is a multi-tied captive insurer which underwrites the risks of a number of unrelated companies. It

is the objective of these companies to provide insurance cover to the various organisations which are members of the scheme, and to return the underwriting profit and investment income to these multiple subscribers. The objective is to offer the company, the same independence as incorporating a dedicated captive, without the cost of capitalisation. Often companies who start with a rent-a-captive and find the concept beneficial, usually then set up their own dedicated captives. Rent-a-captives usually underwrite reinsurance; however it is also possible to have a direct writing ­ rent-a-captive.

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The following charts are examples of the way in which Rent-A-Captive programs may be structured. A. Direct program (Example)

ABC Company

Premium

Losses

Retrospective Premium Adjustments (Profits)

RENT-A-CAPTIVE LTD

Stop Loss

Losses

Letter of Credit Alternative

ABC Company's exposure of $4M is insured by RAC for a premium of $2M. The premium is subject to retrospective rating based upon loss experience. RAC purchases stop loss reinsurance for the layer $3M excess $1M, for a premium $1M. OR ALTERNATIVELY.... ABC Company provides RAC with $2M premium and a letter of credit for $2M. The premium held by RAC is invested in accordance with ABC Company's instructions. At the end of the program RAC returns underwriting profits plus investment income, less operating costs, to ABC Company.

REINSURANCE MARKET

Letter of Credit Credit $2M

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B. Fronted worker's Compensation Program (Example)

INSURED

Premiums Letter of Credit Amount determined difference between net ceded premium and aggregate attachment point Claim Payments Supplemental Agreement Underwriting and investment profits returned to the insured by

FRONTING COMPANY

Example: Fronting Company cedes first $250,000 per Claim Payments Premiums occurrence and provides aggregate coverage attaching at 70% of Gross Premium.

RENT-A-CAPTIVE LTD

Funds held in segregated accounts invested in accordance with Insured's instructions.

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