In an effort to proactively address any questions or concerns regarding the new Risk Retention Group, Home Construction Insurance Company has provided the following answers to “Frequently asked questions” in order to assist builders and brokers in their communications with the respective municipalities and lenders.

Why would we want to place our client’s insurance with an unrated carrier?

Traditional rating agencies such as AM BEST do not rate start up captive insurers. While Home Construction Insurance Company is not rated, the Company has obtained reinsurance to limit its exposure. In the first year the Company will retain only the first $100,000 of each and every loss, with the balance (up to $1,000,000 each and every loss), being reinsured with an ‘A’ rated (AM Best) carrier.

The Self Insured Retention (SIR) levels of this program average $25,000, fairly low for homebuilders. In many cases, the combined SIR and current $100K attachment level for reinsurance is lower than the SIR’s that homebuilders are required to carry in the traditional market.

How are our E & O Carriers going to accept us placing our client’s business with an unrated carrier?

We suggest you share the information with regard to how HCIC is structured and the fact that reinsurance has been obtained at a low level with “A” rated carriers. If your carrier still will not accept this, most E & O markets will cover you if you arrange for your client (the builder) to sign off on your use of HCIC for their coverage.

As a start up Company how will the Risk Retention Group be adequately capitalized?

HCIC is well capitalized, as the program requires all participants to provide one-third of the first year’s premium up front as a capital contribution, separate and apart from the traditional premium payment.

This 33.3% Capital contribution is significantly higher than most Risk Retention Groups with others only requiring a 10% Capital contribution.

Are Risk Retention Groups new?

A Risk Retention Group (RRG) is a federally created insurance company, typically formed in a captive friendly domicile. A RRG is a form of group captive and is a specialty class of insurance company owned and capitalized by its policyholders, which insures the risks of its owners. Insurance industry analysts estimate that up to 40% of annual commercial property and casualty premiums (totalling in the aggregate many billions of dollars annually) are written through captives and other similar alternative insurance market mechanisms.

RRG’s are entities created under the Liability Risk Retention Act, which was enacted into law by Congress in 1981 and expanded in 1986 to respond to the unavailability and unaffordability of commercial liability insurance.

There are currently 146 RRG’s and Forty-Two Percent of RRGs eligible for Ratings are Rated by A.M. Best.

What is the criterion for Builders who want to join the Group and how is it anticipated that the Group will be profitable?

The target market for the risk retention group will be builders with annual sales revenue between $2.5 million - $400 million dollars. A well-respected administrator with extensive experience in construction risks in California will carefully underwrite the builders participating in the risk retention group. The program requires policyholders to commit to aggressive risk management, quality control and a high level of customer service. Since Home Construction Insurance Company is a group policyholder-owned carrier, attention to loss experience and risk management tends to be elevated by the members, as they are shareholders in the insurance company. The coverages offered are broadly similar to those offered by traditional insurance carriers.

The program was established after the completion of an exhaustive feasibility study completed by an actuarial firm and a captive manager earlier this year.

We believe the risk retention group will offer our members insurance protection at a reasonable cost while providing the appropriate level of protection to municipalities and lenders.

The policies will be distributed via a select group of retail brokers who are current CBIA member brokers, and their wholesalers, experienced in residential construction insurance issues.