Contingency Policy: In Brief

Status: Insurance policy issued by Castletown Insurance Limited or Ilex Global Reinsurance Company Limited.  Profit commission returns surplus underwriting results back to the insured.

Suitable for:  Companies with small insurance programmes: minimum premium £50,000 (or currency equivalent). See also captive insurance companies - features and benefits

Features and costs of a contingency policy

What is a contingency policy?
A contingency policy is literally what it says: an insurance policy that will protect an insured against an unforeseen event, by providing a contingency fund to meet the costs of such an event. It is derived from the concept of the Captive Insurance Company and is similar to the arrangement known as a "Rent-a-Captive", but with no requirement for capital injection.

Captives are not usually suitable for clients with small insurance programmes, because of the costs associated with forming and running them. The annual cost of a captive is approximately £50,000 per annum. It is usually not cost-effective to operate a captive with a premium income of less than £500,000 per annum.

A contingency policy offers many of the benefits of a captive at a much lower cost. The arrangement is "insurance contract orientated" and includes a mechanism to return surplus funds to the Insured.

How a contingency policy works

Assess the risk profile
A client first needs to identify the risks it wishes to cover. This may include deductibles/excesses or new (currently uninsured) risks. Once these risks have been identified, Castletown Insurance Company Limited will work with the client to tailor a policy or suite of policies that will match its needs as closely as possible. Premiums, limits and policy terms and conditions will be agreed.

Implement insurance programme
The premium will be paid by the insured to Castletown Insurance Company Limited as a single premium at outset or, if preferred, on an instalment basis. Premiums will be deposited in a segregated account. Claims arising under the programme will be paid out of this fund. Debit notes, cover notes and policy documentation etc. will be issued as normal.

Profit Commission
At the end of the policy period, plus an agreed period of run-off, if there are any funds still remaining, then these will be rebated back to the insured or to its nominated payee in the form of a profit commission. The profit commission will be calculated as follows:

If the policy fund should at any time fall into deficit, the policy provisions include additional premium and claims handling clauses, which may be triggered at certain agreed loss ratios.

Implementing a contingency insurance programme
As most companies considering forming a captive insurance company or participating in the underwriting of its own risks have well developed Risk Management disciplines, a captive or contingency project usually involves the risk manager and the company's broker or insurance adviser. The initiative is often driven by a combination of the Risk Manager and Finance Director as these programmes may have a significant bearing on the balance sheet, in protecting its assets and minimising the effects of adverse events.

We are able to work with brokers and advisers, as well as directly with client companies if required. We have a wealth of experience in structuring captive and contingency programmes.

Contingency programmes are tailored to suit each client. If the business is accepted as reinsurance, Castletown may offer a programme via its reinsurer, Ilex Global Reinsurance Company Limited.