mtpilot wrote: ↑Mon Nov 20, 2017 6:08 pm
Mark, I have spoken with you privately but still have concerns. Like whose insurance company is it, and why does it
have to make a profit if ushpa is a non profit? You say dues need to be 150$ to break even? To pay premiums to a policy
we supposedly own?? The RRG is fully funded? To me this all ads up to turning hang gliding over to a few actuaries. No
disrespect intended but I probably don't buy into that idea. I do not believe we even need actuaries in our situation.
1) Recreation RRG is owned by its insureds; that's USHPA, the Foundation, PASA and various individual flight schools. Their ownership shares are proportional to the capital investment each one makes. USHPA owns the majority share of the stock, so its vote is the deciding one. Future profits (or more likely, premium reductions) will flow proportionate to ownership. The capital base of $3 million is not all that's needed, though; that's just the cash to back our bets. We still have to pay for annual expenses on top of that.
2) Recreation RRG is a for-profit insurance company, as required by federal law and the state of Vermont where it is incorporated. We've talked about becoming "self-insured" almost since the start of USHGA, back in the 70's. Until this crisis, there was not a sufficient reason to do it because it's a huge amount of work and money. But now we have no choice. It's a for-profit company, but it's not a for-UNREASONABLE-profit company. All it has to do is make a small profit and cover its expenses, long term. But right now, we have to live with our past history until we can prove things have changed for the better, with actual loss history to back up our argument.
3) Forming a captive insurance company (that's the legal term for it) is not as simple as just raising some money and putting it in the bank. We still have to satisfy the state regulators where we are incorporated, file a lot of paperwork in states all across the country, have annual audits, actuarial analysis and a lot of other stuff. We do not have the option of deciding what our premiums will be. Instead, a licensed actuary firm approved by the state of Vermont conducts an analysis of our risk and decides how much premium we have to charge. We can influence that somewhat by providing more information and detail, which is why I keep talking about accurate and complete accident reporting. Actuaries guess high when there's uncertainty and a lack of data. For 2016, the actuaries told us that we needed to bill about $950,000 in premiums to meet their estimate of our risk, based on our past history with our previous insurers.
4) Running an insurance company is not a zero-cost operation. We insure the first $250,000 of a claim internally, and we lay off the rest of the risk, up to the policy limit, through a reinsurance contract with several Lloyd's syndicates. Yes, the same people who no longer wanted to handle our base coverage. Reinsurance is a different animal with a different risk profile, and we were able to get a reinsurance agreement. We pay a significant chunk of the premium for that, but we are not allowed an operating license without it. We have other costs for management and professional services, audits, and broker fees to First Flight Insurance Group. Having a captive insurer doesn't relieve us of all the overhead costs, particularly in the early start-up phase of operations. As time passes we may be able to reduce some of these costs or find less expensive options. We did not have the luxury of shopping around for the best possible deal; we had to take what we could get on short notice, because we had so little time to put the RRG together. Usually this is a process that takes 2 to 3 years; we did it in under six months.
5) You can review the combined USHPA and RRG financial statements here:
https://old.ushpa.aero/member_financials.asp You'll need to log in as a member. In brief, the RRG made about $84,000 profit on earned premiums of $455,000 for the partial year. Expenses were $375,000, of which $141,000 was losses and loss reserves. Actual paid out claims expenses were only $4,350, and the rest is reserves for known incidents, and actuary-computed reserves for unknown incidents that may some day become known. (See where this uncertainty thing comes in?) 2016 was a partial year since we started operations in June. We actually wrote policies totaling $970,000 in gross premium, but then ceded a portion for reinsurance, resulting in net written premium of $815,000. Since revenue is recognized as earned and policies started mid-year, not all of the premium written was earned through the end of 2016. 2017 will be our first full year of operation.
6) Total claims losses for 2016 were $217,000. That's higher than the net of $141K, but the net value has an assumption about reinsurance coverage reimbursements. Of that $217,000 number, reserves for actual incidents that we know about were $40,850. Reserves held for incidents that we DO NOT know about, set by the actuaries based on their analysis of our risk history, were $176,500. These are numbers that flow right to the bottom line profit and loss results. We think the latter number (called IBNR, Incurred But Not Reported) is way too high. But we have to prove that with data in order to convince the actuaries to reduce it.
7) At present, Recreation RRG is capitalized with $3 million, of which $600,000 is in the form of loans called "surplus notes". These are unsecured loans from individual USHPA members, which can only be repaid when the RRG has accumulated enough capital to gain approval from the Vermont regulators. The loans earn interest, capped at 10% per year, proportionate to the RRG's profits. For 2016, the loans earned 3.5% and that amount is compounded annually. The sooner we book the capital, the sooner we can pay off those loans and eliminate that interest payment...as well as rewarding the members who took a huge chance on an unknown and highly speculative investment. They knew going in that they might never see their money again, and they wrote those $100,000-plus checks anyway. We made a good start toward that goal in 2016, and so far 2017 is looking good as well.
There's a lot more to this than just raising some cash and putting it in the bank. Under federal law, we're allowed to incorporate in one state (Vermont) and do business across the country without having to register in every state. We do have to file paperwork notifying the various states that we're doing business there, and there are some filing fees associated with that, but it's far less than what would be required of a commercial company like State Farm. But to be allowed to operate that way, we have to agree to be regulated by a state that has broad approval from other states, and the gold standard for that is Vermont. They specialize in captive insurance, and that's where many captive insurers are based. The Department of Financial Regulation (DFR) oversees captive insurers, conducts reviews and audits of them, and provides approvals for our operation. We have to comply with their requirements, which include the use of Vermont-approved auditors, actuaries and management company.
There's even more info in the board meeting minutes, which are now posted on the USHPA website in the members only section.
https://old.ushpa.aero/member_bodminutes.asp
MGF