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Structured vs. Off-the-shelf Insurance

The insurance Rubik's Cube

Whenever a Business buys an Insurance Policy directly from an Insurance Broker or from an Insurance Company, we deem the insurance to be ‘off-the-shelf’.  This is because the Insurance Policy was created by the Insurance Company and sold directly to the Business or through a Broker with very little meaningful alterations to such Policy, making it unsuitable to the risk profile of the Business (the odds of payout are against the Business and in favor of the Insurance Company).

When a loss happens, an Insurance Company can:

A- Pay out OR not pay out; and

B- If it does pay out then it will either pay out (1) a minor portion of the loss OR (2) a major or full portion of the loss.

Insurance companies want to maximize their profits so why would they choose to create an insurance policy that facilitates payout, or payout of a major or full portion, of a loss sustained by a business?

Structured Insurance on the other hand involves either (a) altering the Off-The-Shelf insurance policy; or (b) creating a new insurance policy (separately from the Insurance Company); and then having such Structured Insurance policy distributed directly to the Insurance Company or through a Broker – It’s basically the reverse process!

Well structured Insurance achieves the following for a Business:

1.  Flips the odds of payout against the insurance company and in favor of the business.

2.  Covers core Operational Risk* in addition to long-tail coverage.

3.  Lowers the net annual insurance cost.

Learn about the importance of operational risk.

Question: if the odds of payout are shifted in favor of the Business, would an Insurance Company still insure the Business based on a Structured Insurance policy?


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