CAPTIVES December 1, 2015

Transcription

1 CAPTIVES December 1, 2015

2 Peter Jones Captive Management Initiatives, Ltd. Managing Director Sean Rider Willis North America, Inc. Managing Director Julie Robertson Honigman Miller Schwartz and Cohn LLP Partner

3 BACKGROUND What is a captive? A limited purpose, licensed insurance company Specifically established to insure or reinsure the risks of its parent or associated third parties An insurance or reinsurance company A risk assumption vehicle A facilitating mechanism for access to alternative risk transfer solutions 3

4 BACKGROUND History of Captives Captive concept dates back to when ship owners in London shared and transferred the cost of risk associated with their ships over 400 years ago The term captive was coined in the 1950s by Frederic M. Reiss, an insurance broker for Youngstown Sheet & Tube Company Youngstown was a steel manufacturer in Ohio that also operated mines The output of some of the mines was used solely by the company, so the company called them captive mines When Reiss helped the company incorporate its own insurance subsidiaries, they were called captive insurance companies because they wrote insurance exclusively for the captive mines The most significant growth in captives has occurred in the last 30 years Currently over 5,000 captives worldwide, compared to roughly 1,000 captives in 1980 Almost 3,000 captives domiciled in the Caribbean; 1,200 captives in Europe and Asia; and more than 1,000 captives in the U.S. 4

5 BACKGROUND Who forms captives Everybody Not-for profit Health Systems Public Entities Multinational corporates National corporate Family owned enterprise Groups of middle market commercial Associations Agencies Entrepreneurs 5

6 BACKGROUND Factors Driving Captive Growth The unwillingness/inability of insurers to provide cost effective insurance The need for new capacity for certain risks They drive control to frictional and non-loss costs Lack of confidence in the traditional markets ability to differentiate and provide stable protection The enhanced focus on loss prevention and intelligent claims handling The opportunity to take risk and profit positions in affiliate business The opportunity to see favorable risk management outcomes 6

7 Captive Utilization Retained Risk Finance Risk Transfer Rate Arbitrage Access to Capacity 3rd Party Utilizations Infrastructure for providing transparency, validation, and rationalization of retained risk positions Enhancing risk management efforts Accelerating tax treatment of deductible liabilities Reinsurance market cost of risk transfer is less than commercial retail cost of risk transfer Better use of capital to retain risk than transfer it Managing total cost of risk Federal programs (TRIA) Reinsurance capacity, which may not be otherwise accessible in commercial retail market Mutualization of risks across buyers Consumer facing insurance programs Affiliate business Agency captives 3rd party business Entrepreneurial initiatives 7

8 Captive Concepts Captive Program Types Single Parent Captive Group Captive Association Captive Reinsurance Pooling Agency Captive Scale >$3M in long tail retained risk loss pick Min $500k Max $2M in guaranteed cost premium, annually >$3M in portfolio guaranteed cost premium >$500,000 in captive premiums, up to unlimited >$3M in portfolio premium Features Larger account solutions Unilateral control of captive (subject to regulator) No risk sharing, unless pooling arrangement is deployed Sharing risk is required Access to profitability of insurance program Considerably greater control as compared to guaranteed cost insurance Lack of unilateral control of services and risk Communal risk management Small account solution Usually built to address a failure of commercial market to address specific industry needs Typically guaranteed cost or low deductible insurance programs Reinsurance facility which pools risks amongst participants Risk sharing Cede risk to pool and accept risk from pool May supports a single parent captive program tax strategies Insurance agent producing a portfolio of business gains access to underwriting profitability and investment income on portfolio Requires risk taking on the agent s part via ownership of the captive Captive typically reinsurers a commercial insurance company 8

9 Captive Concepts Utilization Matrix Single Parent Captive Group Captive Association Captive Reinsurance Pooling Agency Captive Retained Risk Finance Risk Transfer Rate Arbitrage Access to Capacity 3 rd Party Risks 9

10 Key Decisions in Formation Insurance Program Structure Direct Insurance vs non-insurance Fronted Services and security Reinsurance Cut through and credit 10

11 Key Decisions in Formation Structural Model Corporation LLC Cell Captive Incorporated or Unincorporated Cells Portfolio Insurance Company Risk Retention Group Reciprocal Mutual 11

12 Key Decisions in Formation Domicile: What to consider Regulatory environment Ability to cover third parties Available coverages Perception of domicile Infrastructure Operating costs Reputation of domicile Political stability Pre-existing relationship with domicile History/Stability of domicile Available structures/models Legislation in home state? Ease of travel Capital/surplus requirements Premium taxes Income taxes Expertise of domicile Local director/local meeting requirements 12

13 Key Decisions in Formation Ownership Legal Requirements in Domicile Tax Considerations Estate Planning Capital Support Dividends and Distributions Difference in Rights/Obligations Minority Rights Reserved Powers High Vote/Special Resolution 13

14 Key Decisions in Formation Governance Election of the Board Ex Officio Directors Terms, Staggering, Term Limits Size of Board Board Actions vs Shareholder Actions Quorum Alternate Directors/Proxies Local Directors 14

15 Key Decisions in Formation Tax: The Big Questions What is the entity classification / tax status of the captive? Foreign captives Cells How is the captive taxed? How are the owners of the captive taxed? Are premiums deductible to the insureds? What premium taxes apply? Process: Who needs to be involved in these questions and when? Living in a grey area... 15

16 Key Decisions in Formation Regulatory Environment Captives generally are unauthorized carriers in the states in which they re insureds are located Issue: can they write coverage directly or do they need a fronting relationship? Lines of coverage Legal requirements Contractual or other requirements State laws on insurance Regulatory environment in state Coverage for third parties Sales/solicitations 16

17 Key Decisions in Formation Fronting Structure of the arrangement Costs Security Legal documents Claims Handling 17

18 Key Decisions in Formation Selection of Captive Service Providers Captive Manager Auditors Actuaries Legal counsel Bankers/Investment managers Resident Directors (if required) 18

19 Key Decisions in Formation Actuarial Modeling Prospective Premium Determination / Funding Annual Reserve Certification Perspective on Risk and Reward 19

20 Key Decisions in Formation Practical Aspects/Timeline: Parent Decisions (timeline -?) Program structure, including premium levels and fronting/reinsurance, if any Governance structure, selection of initial Directors Selection of name Selection of service providers Initial meeting with CIMA Completion and submission of BP by insurance manager (timeline 4-6 weeks once decisions made) Description of proposed captive structure, including governance, program details and pro-forma financial statements Collation of required due diligence on shareholders/directors and consent to act Typical review of submission by CIMA (timeline 3-4 weeks) 20

21 FORMATION PROCESS Licensure: Receive approval in principle for insurance license, typically incorporation of company and evidence of required capitalization Proceed with legal incorporation and documents Hold first Directors meeting 21

22 FORMATION PROCESS Legal Documents Governing Documents (Memorandum/Articles of Association or Articles/Bylaws) Shareholders Agreement, if necessary Subscription Agreement Participation Agreement for third parties or cell participants Private Placement Memorandum/Offering Circular 22

23 INITIAL AND ONGOING OPERATIONS First Meeting: Ratification of various actions to date Incorporation of company Application for insurance license/business plan Appointment of service providers Appointment of bank, investment managers Education for Directors What it means to be a Director of a captive, particularly one offshore Roles of service providers Tax and regulatory status of the company 23

24 INITIAL AND ONGOING OPERATIONS Ongoing: Fiduciary responsibilities Review and/or approve budgets, actuarial reserves and projections and audited financial statements Review investment performance Insurance responsibilities Approve coverage, limits, premium, policies, reinsurance arrangements Legislative responsibilities Statutory filings, including meeting Cayman s Rule of Risk Management Regular meetings with CIMA Education 24

25 KEY FACTORS FOR SUCCESS/PITFALLS Factors that will promote a successful captive operation include: Senior management support of concept; participation in governance Long term commitment to insurance program Organizations that are willing to bear risk Financial resources to support captive Reliable processes to maximize efficiency Experienced service providers Stable domicile 25

26 26