Risk-Reward Model: The A/B Loss Fund

Overview

In the 1980s, Captive Resources built our member-owned group captive model based on a unique risk sharing methodology that uses an A/B loss fund to pay out losses. The model funds losses on a per-occurrence basis, and fundamentally benefits companies that are able to minimize the frequency of those losses. These benefits are highlighted by the potential for a member to receive any unused loss funds back in the form of a dividend, with each member’s individual financial outcome dependent on the effectiveness of their loss prevention efforts.

The A/B Fund Formula

The foundation of our captive model is the risk funding formula. It is an equitable, easily understood captive funding formula that incorporates risk sharing among the membership for severity losses, and ensures that members’ premiums are reflective of their risks and individual loss history. The funding formula helps the captive members to understand how premiums are determined and provides transparency with respect to the components of their insurance costs.

The formula we developed in the mid-1980s is now widely known as the A/B Fund formula and has become an industry standard for member-owned group captives:

Should a member’s actual losses exceed actuarial projections, a provision for assessment is built in to help ensure adequate funding and creates incentive for members to focus on loss prevention and claims management.

Reinsurance protects the captive against catastrophic losses exceeding the captive retention (e.g., $500,001-1 million), and aggregate excess coverage provides additional protection. Basket coverage (occurrences involving multiple lines of coverage) and clash coverage (two or more insureds suffer a loss from the same occurrence) are also typically provided.

Members earn investment income on their unused loss funds. The A/B Fund formula fulfills the major captive objectives of providing sufficient funding and protection for the captive and cost control for the member.

Provisions may vary by captive. Each captive’s program documents contain a complete statement of program terms that should be carefully reviewed.