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1 DOWNLOAD THE VCIA 2016 CONFERENCE APP! (To access in an internet browser, go to In the app store, search for VCIA 2016 and download Create a profile using your address You re in!

2 HOW TO USE SOCIAL Q&A! (To access in an internet browser, go to vcia.cnf.io) 2 1 Click on the Polling Icon on the VCIA app Click on your session 1. Vote for a Question 2. Ask a Question

3 Captive Re-Feasibility Studies: Remake of a Classic Presenters: Karin Landry, Spring Consulting Group Mike Lubben, TempurSealy International August 09, VCIA; Speaker materials used by VCIA under license.

4 Do You Need a Review? Has the risk profile of the organization changed? Would you place the same risks in the captive if you started it up today? Is it possible to put employee benefits in our P&C captive? Has there been a significant change in claims? Have regulations changed? FATCA Dodd Frank Solvency II Evolving tax strategies 3

5 Do You Need a Review? (cont.) Could the captive be set-up to handle 3 rd party risks? How else could you use the captive to better serve your customers? How are other owners using their captive? Changing landscape Geo-Political instability Increased exposure due to business expansion Emerging risks (easy to forget/ignore) 4

6 TempurSealy International Products Tempur Sealy has the strongest brand portfolio Brands are complementary and cover key consumer needs Mattresses Foundations Adjustable Foundations Pillows Other Comfort Products 5

7 Sleep Insurance Executive Summary Workers Compensation retained exposure placement Cash flow benefit due to the acceleration of tax deductibility Smoothing of retained losses to mitigate the likelihood of unbudgeted accrual adjustments Funding mechanism for higher retentions P&L opportunities with employee benefit coverages Captive Mechanics Key Captive Estimates Captive Premium Metric Exposure in Captive Insurance premium Tempur Sealy WC policy Arch Insurance Current Structure Sleep Insurance Pays deductible losses Captive Structure Projected Losses Captive Premium 5 Year NPV Benefit Net of Opportunity Cost Captive Operating Cost $XX $XX $XX $XX Arch Insurance $500,000 retained by TSII Arch Insurance $500,000 retained by Captive Initial Capitalization Modeled Affiliate Loan (% of Assets) Cash: $XX LOC: $X 0% Talk With VT Regulator Captive Application Open Bank Account Regulator Approval Incorporate Captive Capitalize Captive Timeline to Formation Insurance License Execute Agreements Commence Operations 6

8 Captive Structure Workers Compensation Prospective and Loss Portfolio Transfer (LPT) Prospective policy premium only Tempur Sealy Arch Insurance and Historical insurers Workers Compensation policy pays claims over deductible Prospective and LPT premium Workers Compensation deductible reimbursement policy and pays claims less than deductible for both the prospective and historical periods Workers Compensation (Per Occurrence) Current Structure Sleep Insurance Captive Structure NOTE: The LPT assumes the deductible liabilities for historical periods. Therefore, the LPT is a one-time premium transaction whereas the prospective premium is paid annually. Various insurers Deductible retained By TSII Various insurers Deductibles retained By TSII Captive 7

9 Sleep Insurance Review Enhancement of risk portfolio Globalization of insurance programs Selling change to ROW operations Change in risk appetite Buying less insurance from external market tempering exposure through the captive Solving customer problems Smoothing historically volatile expenses Being a hero to other departments Employee benefits in the captive 8

10 Sleep Insurance Review (cont.) Align with strategy ERM engagement Consider BOD and Officer engagement Captive usage should change with the business Challenges within the company can be solved/mitigated with the captive 9

11 (Re)evaluating Emerging Risks Recognizing the unknown factors and inbuilt risks in organizational strategy Create robust and extreme worst case scenarios with risk sensitivity Revisit and assess operational risks and their management on an ongoing basis; Are they performing optimally? (Re)evaluate risk appetite and risk exposure at least every 5 years Examine risk shifting and distribution Review the need for diversification 10

12 Captive (Re)Assessment Goals Impact Strategies Structure Measurement (Re)evaluate Goals Confirm the goals and objectives new and old Captive financial performance review against benchmarks & original forecasts Impact Governance, operational and providers standards review Quantification of benefit/cost over life time Compliance audit assessment performance dashboard 11

13 Captive (Re)Assessment Review current and future insurance programs Strategies Determine captive use and philosophy Develop optimal structure and domicile for strategy Review of existing structure Structure Alignment to organization s overall strategy Review structure requirements in domicile Ownership changes Develop implementation plans for review recommendations and strategy Measurement Establish touchstones and benchmarks Ongoing process 12

14 Risk Hierarchy Strategic Business Risk Market/Business Environment Risk Trade Credit/ Financial Risk Benefits Auto/General Liability/ Workers Comp/ Property & Casualty Reputational Performance guarantees Product development International strategy People & culture New Technology Disruption of supply chain Capital structure Change in reporting requirements Life Disability 13

15 3 Risks to Consider for Your Captive Promising risks include: Medical Stop Loss Pensions Cyber 14

16 Medical Stop-Loss The company self-insures its medical coverage, purchasing a stop-loss policy from the captive The captive then purchases an excess reinsurance policy from an outside reinsurer, creating a layer of coverage o E.g. the captive covers all claims between $200,000 - $500,000 Medical stop-loss typically has large underwriting profits, which the captive will retain Improves data management and claim cost management Improves management reporting and understanding of risks 15

17 Pensions A Defined Benefit Pension Plan can purchase annuities from the captive covering all or a portion of the obligations o Annuities can be purchased at cost, eliminating the traditional carrier profit loads The Pension Plan s funded status remains level as its assets and liabilities move in tandem, while the captive can continue to invest in return-seeking assets o The asset from the Plan s perspective is an offsetting annuity If the captive earns excess returns and becomes overfunded, it can return its profits to the parent o An overfunded Pension Plan must pay excise taxes, effectively eliminating any benefit to being overfunded 16

18 Cyber Risk Ability to buy down your deductible Better pricing for that part of its coverage package Cyber insurance in a captive insulates organizations from the market becoming less competitive Opportunity to diversify existing captive risk portfolio The captive can also be used to provide coverage that might not be readily available in the market, such as future lost revenue or first-party loss of inventory due to technology failure Creating policies/coverage which is not available in the commercial market can be challenging 17

19 2 Risks to Think Twice About Including in Your Captive Is it an insurance risk or business risk? Reputational Risk o Difficult to measure o Not covered by Cyber o Captive can be used to provide tools to manage reputational risk such as crisis management as part of an insurance product Short-term risks like dental Guard your organization s reputation far more carefully than its money -Warren Buffet 18

20 QUESTIONS? PLEASE EVALUATE THIS SESSION Click on Evaluations Click on the session title Answer all the questions! Thank you!

21 Disclaimer This presentation contains general information only. VCIA and its guest speakers are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Neither VCIA nor its guest speakers shall be responsible for any loss sustained by any person who relies on this presentation. 20