The Concept of the Gap

Specific coverage is purchased to limit the captive's maximum exposure to any single loss leaving a self-insured retention which is in turn protected by aggregate coverage in order that the capital of the captive is not put at risk from an attrition of poor losses.

The amount at risk to the captive against net premiums is known as the captive's gap and can be defined as the difference between the captive's net premium (defined as Gross Premium Income less returns and cancellations, commissions, underwriting expenses, issuing carrier and reinsurance costs) and the aggregate attachment point.

Therefore the gap, which represents the true financial risk to the captive, is a variable of three essential component parts as follows:

• The level of specific individual loss deductible
• The aggregate attachment point
• The amount of quota share purchased

Using these three tools a level of risk can be imposed commensurate with the captive's financial resources and appetite for risk. For group captives and rent-a-captives operating with a limited capital base the gap is normally required to be collateralized in order that the capital base of the captive is completely protected.