What is the difference between Risk Participation agreement and an Insurance Contract?
There is a WORLD of difference. An insurance contract is, well, an insurance policy! The company issuing the policy, theoretically, has money behind them to pay claims, and is subject to insurance and banking laws in their state. If they are admitted to do business in your state, then your state actually has a guarantee fund, in case they go bankrupt, to pay your claims. A “risk participation” agreement, is just a pool of people who don’t have insurance, who agree to SHARE CLAIMS PAYMENTS. There is no guarantee that there will actually be any money at the time your claim needs to get paid. Also, not only do you pay in your share, but if claims are abnormally high, you ALSO pay in again. And again, and again. They are NOT subject to governmental, banking, or insurance regulation. It’s highly speculative.
