The Management of Operational Risk Through Appropriate Insurance Schemes

Agency Captives These are captive insurance companies formed by brokers or agents to provide coverage for their insured. These types of captives increase the probability that brokers will have a market into which to place their insured and therefore may allow them to offer broader levels of coverage than that offered by risk retention groups or group captives. 3.3.3 Rent-a-Captive A highly specialized form of captive operation. These companies are designed for firms that do not want to own a captive but want to obtain some of its advantages. A rent-a-captive is formed by investors and is operated as an income producing business. An insured pays a premium and usually pays a deposit or posts a letter of credit to back up its business. The operators of rent-a-captives handled the operations and claims for the insured and place the reinsurance. .At the end of the policy period the insured is paid a dividend based on incurred losses, operating expenses, and cost of reinsurance. 3.4 Finite Risk Insurance - A Combined Approach It is a hybrid involving risk transfer through an insurance contract and internal financing of risk. Finite risk insurance and financial reinsurance both involve risks which are limited by an aggregate limit across the policy so that the insurer has a limited liability (hence the term "finite"). They both attempt to "smooth" the peaks and valleys of losses for the insured and the insurer by redistributing these losses over a period or a series of fiscal periods. Finite risk products are tailored for each bank and reflect its own unique risk transfer needs. Therefore, no two programs are alike. Indeed, even definitions of what constitutes "finite risk" differ based on the proposed use of the techniques involved. However, finite risk contracts do share several common features.