Captive 101. Presenter Names. Robert J. Schuhriemen Alliant Insurance Services, Inc

Transcription

1 Captive 101 Presenter Names Robert J. Schuhriemen Alliant Insurance Services, Inc Mark Cain, FCAS, MAAA IRMS Actuarial Services 262) , 111 William Sherwood General Counsel Southern Illinois Healthcare Bill.Sherwood.sih.net , Ext Image Source: <a href='

2 What is a Captive Insurance Company Captive Insurance Company - a closely held limited purpose regulated insurance company established to insure the risks of the owner(s) and related entities.

3 Captive Insurance Company Closely Held the captive is owned by a single entity or related entities. Limited Purpose the insurance offered is only for the owner(s) and/or related risks, not the general public Insured Entities typically the captive will insure the risks of the parent and its subsidiaries. It may also insure related risks such as joint ventures or 3 rd party physicians on staff Regulated like any corporation, the captive insurance company is subject to the regulatory requirements of the domicile. Regulations vary significantly by domicile. Domicile Captive Insurance Companies may be domiciled in the country where the owner is domiciled (onshore) or outside that country (offshore).

4 Financial Benefit of a Capive Mr. Rex Budde, CEO, Southern Illinois Healthcare The creation of the captive has really brought focus to our risk management process and has provided a significant financial benefit to SIH. The financial value of quality is no longer an amorphous concept as we see the direct financial impact in the performance of the captive. Ms. Mary Mannix, President & CEO, Augusta Health Through the development of the Captive model, there is a much higher sense of executive ownership of enterprise risk and that higher level of executive engagement drives much better performance. Just look at the graph of our individual loss runs before the Captive vs. after the Captive. The performance is remarkable. It s more than just the Hawthorne effect, it s the result of high levels of engagement and true ownership. Mr. Mark Merrill, President & CEO, Valley Health System The formation and operations of our captive have brought long-term stability to Valley Health's risk financing programs and created a heightened focus and improved discipline around patient safety and risk exposures. Equally significant and valuable have been the financial benefits and improved predictability of these expense categories over the past decade. Mr. Thomas M. Jones, PC, McDermott Will & Emery LLP Most common comment he hears: We should have done this 10 years ago!

5 Financial Benefits of a Captive Captive insurance companies provide structure around a healthcare organization s risk and insurance program that has proven to reduce the frequency and severity of patient losses in most instances.

6 Financial Benefits of a Captive Additional Examples

7 Financial Benefits of a Captive Southern Illinois Healthcare left a group insurance program in 2006 to form its own Captive SIH Cayman SPC, Ltd.

8 Operational Benefits of a Captive Captives afford flexibility and control over a healthcare s risk and insurance program that other risk financing models do not: Control of your own risk and insurance destiny Formal structure that better supports business strategies Offsite captive meetings facilitating more C-suite and Board involvement in claim and risk-related decisions including retentions, limits, litigation management, actuarial projections, pending claims, emerging risks, investment strategy, service providers, etc. Tailored policy terms & conditions that meet your particular risks and needs Support for patient safety initiatives/culture Risk financing structure that allows your organization to insure 3 rd parties and for-profit entities Alternative solutions for existing and emerging risks such as workers compensation, employee medical benefits, independent physician professional liability, and the like. I have not seen a healthcare organization who established a captive regret doing so or look back. Mr. Thomas M. Jones, PC, McDermott Will & Emery LLP

9 Captive Domicile Most non-profit healthcare captives are domiciled outside the US in order to better protect the tax free status of the owner. The preferred offshore captive domicile for healthcare is the Cayman Islands due to more favorable initial capitalization requirements, regulatory expertise, flexibility, business acuity, and ready access to captive managers, auditors, banking, and legal support.

10 Captive Structures Service Providers As the captive has no employers, the service providers work to implement and manage the offshore captive.

11 Captive Structures Segregated Portfolio Captive (SPC) a legal entity owned by a parent organization but which allows for segregation of risks between portfolios or cells; however, ownership and governance is not segregated. Cells within a Segregated Portfolio Captive are unable to invest or contract with other cells. Parent Organization Owns Segregated Portfolio Captive (SPC) In this example, Cell A is insuring Subsidiary #3 while Cell B is insuring the 3 rd Party Entities and Subsidiaries #1 and #2. The Board of Cell A oversees the governance of both Cells A and B. Subsidiary #1 Subsidiary # 2 Subsidiary #3 SPC 3 rd Party Entities Cell A Cell B

12 Captive Structures Single Parent Captive a legal entity owned by a parent organization to insure the risks of its owner along with related risks. This structure, however, does not allow for segregation of risk within the captive. Premiums flow from Parent Organization or Subsidiaries to Captive. Insurance flows from Captive to System

13 Captive Feasibility Study Purpose 1. Determine business objectives (short and long term) 2. Evaluate whether a captive is the best instrument to achieve objective(s) 3. Model the proposed captive s insurance program, including retentions and reinsurance, in conjunction with the Actuary 4. Complete an Actuarial Funding Study and a Five Year Pro-Forma 5. Select the captive structure best suited to meet objectives (Single Parent, SPC) 6. Review the System s organizational structure and financial strength with Legal to determine which entity within the organization should own the captive 7. Determine domicile (meet regulators as necessary) 8. Determine whether the captive should issue policies directly or whether a commercial insurer should issue the policies and shift the financial risk to the captive 9. Present findings of feasibility study to C-Suite along with recommendations 10. Present to the System s Finance Committee and/or Board as necessary 11. Move on to Implementation

14 Captive Implementation Service Providers As the captive has no employers, the service providers report to the Captive Board and work to implement and manage the captive.

15 Appendix Additional Information to help you better understand a captive

16 Legal Considerations One key legal consideration of an offshore captive is avoiding U.S. Business or Trade: Foreign companies operating offshore are generally not subject to direct U.S. taxation. Indirect U.S. taxation with rates up to 54% can occur if the captive engages in a business or trades in the U.S. Doing so would also violate State insurance law which prohibits the captive from conducting an unauthorized business of insurance. Avoiding U.S. business or trade, however, is accomplished by the following conduct: Hold board meetings outside the U.S. Execute contracts (including issuance of policies and investment management agreements) outside the U.S. Approve investment allocation policy outside the U.S. Use only independent agents in the U.S. Avoid appointing hands-on risk management employees as officers or board members of the captive they should be presenting claims and risk reports to the captive s board in the capacity of a consultant. Insure that all insurance policies issued by the captive are indemnity rather than pay on behalf of policies.

17 Implementation & Operational Costs Implementation costs charged by the captive manager range from $25,000 - $35,000. These fees are negotiable in order to retain the new business. Operational costs vary depending on the service providers selected, frequency of captive meetings, and whether quarterly or monthly reporting is required. The projections below are very realistic estimates. The operational costs are included in the captive premium calculation. Item Low High Actuarial $20,000 $30,000 Audit $15,000 $25,000 Domicile Manager $35,000 $75,000 Legal Fees $10,000 $25,000 Meeting Expense $5,000 $12,500 Miscellaneous $2,500 $10,000 Tax Support $5,000 $10,000 Licensing Fees $12,500 $15,000 Total $105,000 $202,500

18 Five Year Captive Pro Forma A five year pro forma projects the future performance of the captive to assure that moving forward makes financial sense.

19 Premium Calculation Under a captive, the premium for the HPL and GL policy(s) is calculated based on expected losses. A risk margin is added to provide added confidence that the funding will be adequate to cover losses. Required Additional Funding in Hospital and Physicians Professional Liability and General Liability Confidence Level 90% 85% 80% 75% Additional Required Funding 3,252,028 2,480,207 1,844,681 1,314,683 Operating costs of the captive and any excess or reinsurance premiums are then typically included in the premium.

20 Premium Calculation Maintaining a confidence level of 75% or greater reduces the capitalization requirement established by the Cayman Islands Monetary Authority (CIMA). Higher confidence levels are often adopted by newly established captives and it is something you may consider.

21 Fronted or Direct Written Policies A fronting company is typically an admitted commercial insurer who issues the policy(s) and then reinsurances with the captive. Insured $ Front $ Captive Insured $ Captive

22 Captive Structures Portfolio Insurance Company (PIC) Most recently, the Cayman Island Monetary Authority (CIMA) has permitted a SPC Cell to create legal subsidiaries which have independent governance. As separate legal entities, they can directly contract with other legal entities. Parent Organization Owns Segregated Portfolio Captive In this example, Cell A is insuring Subsidiary #3 while the PIC, a subsidiary of Cell B is insuring the 3 rd Party Entities and Subsidiaries #1 and #2. However, the PIC has a Board which is independent of Cell A. Subsidiary #1 Subsidiary # 2 Subsidiary #3 SPC 3 rd Party Entities Cell A Cell B PIC

23 Captive Structures The particular advantages of a PIC compared to a cell of a segregated portfolio company include: Ability to contract with other segregated portfolios or PICs within the same SPC to facilitate reinsurance, quota sharing, and pooling A separate board of directors, permitting its own governance A PIC can easily transition to a stand-alone captive. Since a PIC is a distinct legal entity, it will likely be recognized as a separate entity for US tax purposes, allowing it to make its own tax election. Source:

24 Captive Implementation Steps Required 1. Select US broker to implement the captive in conjunction with a captive manager in desired domicile. 2. Select a captive manager. 3. Complete and submit licensing application along with financial and supplemental documentation and fee to the captive manager who will coordinate the application process with the Cayman Island Monetary Authority (CIMA) or the appropriate regulators. 4. Select board members for the captive. 5. Complete board member applications. 6. Name the captive. 7. Select other service providers, including actuary, auditor, legal, and banking, custodian, and investment manager. 8. Establish an initial operating budget for the captive. 9. Write a business plan describing the classes of business the captive will insure, the retentions, reinsurance carriers, investment strategies, and service providers. 10. Once application for licensing is approved, send initial capitalization as required. 11. Instruct Legal Counsel to prepare Captive Articles of Incorporation and By-Laws.

25 Captive Implementation Steps Required 12. Determine the fiscal year of the captive. 13. Develop various captive procedural policies, including underwriting, claims, investment, travel, conflict of interest, and risk profile specific to those lines of insurance afforded by the captive. 14. Develop captive insurance policies and negotiate reinsurance or excess policies as applicable. 15. Finalize the actuarial funding and tentatively approve confidence level, investment return, and other actuarial assumptions. 16. Determine how claims will be administered onshore and establish reimbursement procedures. 17. Conduct the first captive meeting where ownership of the captive is transferred to the parent organization and policies, procedures, and budgets are approved. 18. Formerly appoint auditor and establish bank and investment accounts. 19. Review and approve funding, premiums, and policy forms to be issued. 20. Issue insurance policies. 21. Determine the US Federal tax status of captive, either at implementation or within the first 18 months.

26 Thank you Presenter Names Robert J. Schuhriemen Alliant Insurance Services, Inc Mark Cain, FCAS, MAAA IRMS Actuarial Services 262) , 111 William Sherwood General Counsel Southern Illinois Healthcare Bill.Sherwood.sih.net , Ext