Claim ProfessionalS Liability Insurance Company
(A Risk Retention Group)
Becoming an Insured and a Shareholder of Claims Professionals Liability Insurance Company (A Risk Retention Group) (“CPLIC” or the “Company”) is speculative in nature and involves a degree of risk. Each prospective Insured should consider carefully the following risk factors.
Availability of Insurance Coverage and Cost
There can be no assurance that any person who becomes an Insured of CPLIC will remain eligible to be an Insured and will continue to be able to obtain insurance from the Company. The Company’s underwriting guidelines and eligibility criteria are subject to change from time to time, with or without advance notice. If an Insured’s coverage is terminated, cancelled or non-renewed for any reason, all Shares must be surrendered to the Company for repurchase and the Insured will be required to seek insurance elsewhere.
CPLIC, in its sole discretion, will establish the Annual Premium for each Insured. The Company will engage outside professional actuaries to advise with respect to the evaluation of risks and the setting of annual premiums. While the annual premium charged by the Company is or will be competitive with premiums charged by other insurers for similar coverage. There is no guarantee on renewal that there will be no change in rates or limits.
CPLIC’s operating results are dependent upon the Company’s underwriting results and loss experience. The Company attempts to establish premiums to provide sufficient funds for the payment or discharge of expected claims liabilities and operating expenses. Expected claims liabilities are based upon estimates for reported losses, plus actuarially developed estimates for unreported and expected losses, and actual losses may differ from loss estimates. Expected claims liabilities are necessarily based upon estimates derived from the historical experience of the Company and the insurance claims industry. The ultimate cost of these liabilities may be significantly greater than such estimates and adversely impact CPLIC’s profitability and financial position.
CPLIC’s capital and surplus could be reduced by excessive losses below the minimum amount that the Vermont Insurance Code requires the Company to maintain in order to continue to do business. In such an event, the Company could be placed under the receivership of Vermont insurance authorities, and the members might sustain a total loss of the value of their Shares, as well as any benefit of the insurance coverage issued by the Company. In the event that CPLIC is unable to make payment on claims covered by the policies, the Insureds will not be entitled to the benefits of any state insurance insolvency guaranty fund.
The profitability of CPLIC has, to some extent, depended upon income earned on the investment of assets held by the Company to be used to pay operating expenses and claims under the Company’s policies. There can be no assurance that the Company will be able to earn an investment return sufficient to offset potential expenses and underwriting losses.
Although investment guidelines are established based on prudent investments permitted under the Vermont Insurance Code, and which stress diversification of risks and conservation of principal and liquidity, the investments of the Company are subject to the normal risks of the market, as well as risks inherent in the individual securities in which it invests from time to time. Any decline in the value of invested assets could significantly decrease the ability of CPLIC to pay claims or operating expenses.
The Company has entered into one or more reinsurance agreements to permit offering higher coverage limits or to cap the Company’s aggregate exposure. Under reinsurance agreements, CPLIC will retain legal responsibility for paying up to its retention on account of each and every insured loss, without regard to the reinsurance. Although reinsurance agreements would contractually obligate the Company’s reinsurers to reimburse the Company for their share of losses, they would not discharge the primary liability of the Company. If a reinsurer fails or otherwise becomes unable to fulfill its contractual obligations, CPLIC would likely incur an adverse financial impact as a result of having to pay claims for which reimbursement from a reinsurer would not be received.
Competition and Rating
The Company is competing with commercial insurance carriers that have extensive experience in the field of general and professional liability insurance and that offer directly competitive insurance coverage. Some of these companies may be rated by A.M. Best, Standard & Poor’s, or other national rating agencies. While CPLIC has yet to be rated it is competing effectively against other companies.
Exemption from Certain Regulations; Lack of State Insurance Insolvency Guaranty Funds
As a risk retention group under Vermont law, CPLIC will be exempt from many of the insurance laws and regulations of the State of Vermont. As a risk retention group under the LRRA, the Company is exempt from most of the insurance laws and regulations of other states in which it registers to do business. Accordingly, Insureds will not receive the benefits that such laws and regulations might provide, including the benefits of any state insurance insolvency guaranty fund established for the purpose of paying the claims of policyholders whose insurance companies become insolvent.
Fluctuating Value of Shares
Shares may be revalued from time to time by the Company’s Board of Directors based on accounting standards applicable to insurance companies. The value of the Shares is subject to significant fluctuation, depending upon many factors, including the Company’s loss experience, investment results, competitive pressures upon the Company’s premium structure, and other matters which may be beyond the control of the Company and cannot be predicted or foreseen at this time. The Shares could become worthless.
Restrictions on Transferability of Shares; Lack of Public Market
Other than upon termination of coverage and surrender to the Company, or pursuant to a sale or transfer approved by the Company, the Shares are not transferable to any other person or entity, nor may Shareholders directly or indirectly offer, sell, transfer, pledge, hypothecate or otherwise dispose of their Shares. None of the Shares have been registered under the Securities Act or under any state securities laws. The Shares will contain restrictive legends. Furthermore, there is no assurance that the restrictions on transfer will ever change or lapse. Accordingly, the Insureds should be prepared to bear the economic risk of retaining the Shares on a long-term basis.
Inability to Pay for Repurchase of Shares
The obligation of the Company to pay for surrendered Shares is subject to postponement and indefinite deferral in the sole judgment of the Board of Directors of the Company, and payments must be postponed whenever and for so long as provided by the Vermont Insurance Commissioner. Deferred payments remain at the risk of the Company’s business and are therefore subject to complete loss.
Limited Operating History
CPLIC is developing an operating history. Since it is not rated by any rating agency, Insureds must consider the risks and uncertainties related to investing in a business with only a limited operating history.
Dependence on Qualified Personnel
As a fairly new insurance company, the Company is highly dependent upon its ability to retain qualified management. The Company has internal management personnel and also relies on the expertise of various consultants and third-party service providers. There can be no assurance that outside service providers and consultants will be able to achieve any particular result for the Company. The Board of Directors and the executive committee play a large role in overseeing the operation of the company.