Insurance Handbook - Alaska Department of Community and ...

Updates at www.iii.org/issues_updates Insurance Topics
Captives and Other Risk-Financing Options
IV. Risk Purchasing Groups
Like risk retention groups (RRGs), purchasing groups must be made up of persons
or entities with like exposures and in a common business. However, whereas
RRGs are liability insurance companies owned by their members, purchasing
groups purchase liability coverage for their members from admitted insurers,
surplus lines carriers or RRGs. Laws in some states prohibit insurers from giving
groups formed to purchase insurance advantages over individuals. However,
purchasing groups are not subject to so-called “fictitious group” laws, which
require a group to have been in existence for a certain period of time or require
a group to have a certain minimum number of members. The Risk Retention
Act of 1986 specifically provided for purchasing groups to be created to purchase
liability insurance for members of the sponsoring groups.
V. Catastrophe Bonds and other Alternative Risk Transfer (ART) Products
A number of alternative risk transfer (ART) products, such as insurance-linked
securities and weather derivatives have developed to meet the financial risk
transfer needs of businesses. One such product, catastrophe (cat) bonds, riskbased
securities sold via the capital markets, developed in the wake of hurricanes
Andrew and Iniki in 1992 and the Northridge earthquake in 1994—megacatastrophes
that resulted in a global shortage of reinsurance (insurance for
insurers) for such disasters. Tapping into the capital markets allowed insurers
to diversify their risk and expand the amount of insurance available in catastrophe-prone
areas. Zurich Financial’s Kamp Re was the first major catastrophe
bond to be triggered. The $190 million bond was triggered by 2005’s Hurricane
Katrina, and resulted in a total loss of principal. Catastrophe bonds are now a
multibillion dollar industry.
I.I.I. Insurance Handbook www.iii.org/insurancehandbook 31