Complex Alternative Funding

Contingent Premium

  • Contingent premium is an alternative FI arrangement with an annual settlement using group-specific premium and claims.
  • Employer pays discounted premium (e.g., 95% of full premium).
  • The annual settlement compares the discounted premiums to  claims plus all expenses including administration, commissions, profit, and taxes to determine the underwriting gain or loss. 
  • An underwriting gain indicates an excess of premiums over claims plus expenses. An underwriting loss indicates that there was excess of claims plus expenses over premiums.  
  • If there is a gain, the employer keeps the contingent premium (e.g. 5% of full premium) discounted amount.
  • There is usually an upside risk cost (e.g. 3% of full premium). The needed portion of the upside risk cost is callable if expense is over 100% of expected cost.
  • Examples:
    • Example 1: Claims come in at under 95% of expected cost, the employer saves 5% (the 5% contingent premium). 
    • Example 2: Claims come in at 98% of expected cost, the employer saves 2%.
    • Example 3: If claims came in at 101% of expected, the employer would pay 101% of expected cost.  (100% cost plus 1% of the upside risk cost).
    • Example 4:  If claims came in >103% of expected, the employer would pay 103% of expected cost.  (100% cost plus the full 3% upside risk cost).

Dividend-eligible Funding or Refunding

  • Dividend eligible is an alternative FI arrangement and includes an annual settlement using group-specific premium and claims.
  • The annual settlement compares premiums paid to incurred claims plus all expenses including administrative expense, commissions, profit, and taxes to determine the underwriting gain or loss.
  • An underwriting gain indicates an excess of premiums over claims plus expenses. An underwriting loss indicates that there was excess of claims plus expenses over premiums.  
  • The employer receives a portion (e.g. 75%) of underwriting gains.
  • A risk charge is typically included. 
  • Any underwriting losses are carried forward to the next settlement period and must be recouped before refund payments on future underwriting gains are made.