What Is a Carpenter Plan?

The Carpenter plan is an insurance plan — more accurately, a reinsurance plan — named after Guy Carpenter, the insurance broker who introduced the idea in the United States. When the Carpenter plan is used, insurance companies increase their premiums based on excessive loss, perhaps from national disasters or a large string of automobile thefts. Both the insurance and reinsurance plans share liability to make the loss easier for both. If an insurance company were to increase its premiums to cover all the losses immediately, then customers would likely be unable to pay the premium; instead, the plan dictates that all premium increases last from three to five years. The legal rights of the insurance company to the insured do not change when the Carpenter plan is used.

Insurance companies lose money whenever they have to pay a policyholder to get a car fixed after an accident, clear a hospital bill, or settle a life insurance policy because the policyholder dies. These losses are commonplace and are planned for beforehand, though, so premiums are set accordingly and the insurance company still makes a profit. If there is excessive loss that goes beyond the estimates and threatens to bankrupt the company, then the insurance company uses the Carpenter plan. This means the premiums of all customers increase, based on the excess loss.

Typically, the Carpenter plan is used in a reinsurance plan. Reinsurance is when an insurance company is scared of losing too much money, so it commissions another insurance company to take claims, but under the original insurance company’s name and policy guidelines. When there is excessive loss but the plan is in effect, the loss typically affects many different companies at once, spreading the liability and making it easier for everyone.

If an insurance company loses an excessive amount of money, then it could push all those losses onto its customers and recoup the money in a month, if it wanted, but this would be unethical. If premiums were increased this much, the policyholder would be unable to pay the large premiums. When the Carpenter plan is used, all future losses are estimated, and a three- to five-year plan is created to get all the money back without hitting the customer too hard all at once.

Insurance companies have a legal responsibility to pay insured customers in the event of an accident, car theft or other claim. When this plan is used, the insurance company’s legal right to its customers does not change. The insurance company must still pay for anything its policy covers.