Employee Benefits & Captives. A presentation for the International Employee Benefits Association. London, October 7 th 2008

Transcription

1 Employee Benefits & Captives A presentation for the International Employee Benefits Association London, October 7 th

2 Captives: a quick history 1870 Protection & Indemnity clubs (about 100, up until 1950) Bermuda, 1962 Fred Reiss management co. birth of the term Captive Today Approximately 5,000 captives Approximately 40 managed global Employee Benefits plans 36% Bermuda 13% 6% 8% 9% (AM Best s Captive Directory) 29% Cayman Island Vermont Guernsey Luxembourg Other Countries 2

3 Captive Ownership & Governance Parent Company At arm s length Captive Corporate-owned SPC (Segregated Portfolio Company) Single legal entity with core capital + multiple protected cells Rented Captive The assets of the insured are not separated from the assets of the captive 3

4 Why move beyond pooling? Multinational pooling No risk retained by Parent no alignment with Parent s risk strategy Shared pool dividends are taxed Balance sheet allocation of pool dividend: accounting challenge Captive Owns corporate risk strategy Diversification of risks: human risks are low severity / predictable frequency but Catastrophic Risk is an issue Benefits and costs are transparent in the captive s P&L The captive as an economic profit centre Underwriting profit ROIC 4

5 Reinsurance to Captive Company Corporation reinsures its own EB risk through the Captive Insurance Network is fronting the Captive company 100% risk transfer Suitable for large multinationals Fully insured Risk benefits (Group Life, Disability, Accident, Medical) Pension fund liabilities Established Captive, opportunity for risk diversification P&C risks human risks 5

6 Reinsurance to Captive Company A network approach Client Network Local Client Subsidiaries Local insurer Local client subsidiary Captive Quarterly Reinsurance Quarterly Reinsurance and Information Coordination Local service Information Head Office Coordination 6

7 R.C.C.: practical advantages Simple set up One single Retrocession Agreement Single currency No set up fees Effective Quarterly reinsurance balance settlement cash flow investment return Quarterly reinsurance statements improved information Flexibility opportunities for upfront premium discount Flexible local underwriting terms Customer supportive A network of insurance professionals Mediating the culture shift: Risk Management & Human Resources issues 7

8 Captives, Risk Employee Benefits & Reserves LTD/STD Reserves Held Locally Mandated by most local regulators Solvency of local carrier as a guarantee for captive LTD/STD Reserves Set by captive Not allowed by most local regulators Significant know-how required Higher insolvency risk higher captive collateral Interest on captive reserves is tax free IBNR s Local IBNR s mandated by law Central IBNR s usually waived 8

9 Captive Collateralization Parental Guarantee Most effective collateral, but may not be acceptable for some parents May be disruptive of captive s preferred tax status Letter of Credit Traditionally expensive, may be cheaper nowadays thanks to mutual economic interests Usually secured by investment securities of the captive Alternative tools Insolvency Premium Trust agreement funded by investment securities of the captive 9

10 Beyond Risk: Captives and Pension Plans Assumption: pension plan assets can be transferred into a Captive Regulatory Reserves Total liabilities of local pension plan Best Estimate Liabilities Best Estimate Liabilities Total liabilities of reinsured pension plan Solvency Margin Solvency Margin Opportunity for upfront Capital Release Leveraging Captive vs Local regulatory requirements 10

11 Beyond Risk: Captives and Pension Plans Fronting Network Captive Most sizable pension plans are self-funded Portfolio evaluation: Longevity Risk immunization Administration: in-house vs TPA ALM: very prudent strategy, full cash/time matching of Assets&Liabilities None to little Longevity Risk tolerance High capital availability Release of local regulatory reserves surplus More aggressive ALM strategy: partial mismatching, higher equity exposure 11

12 Beyond Risk: Captives and Pension Plans Background Annuity issued locally by suitably rated insurer Annuity liabilities reinsured to a captive Assets held in a ring-fenced account Role of Network AA-rated fronting company Pricing Coordination of administration via TPA ALM if needed 12

13 Beyond Risk: Captives and Pension Plans Parent obligation Maintain capital adequacy Suitable investment policy Captive governance (actuarial valuations / asset valuation) Financial reporting Role of Captive Protected cell structure Security of reserves and capital Investment strategy 13

14 Generali Employee Benefits, Brussels Head Office Avenue Louise Brussels Belgium Tel + 32.(0) contact@generali-international.be Please visit 14