The Role of the Captive Manager

Transcription

1 The Role of the Captive Manager Linda Danna Senior Vice President Marsh Management Services, Inc. Charleston, SC

2 Conception What is a Captive? An insurance vehicle formed by an organization, not otherwise generally involved in insurance, to participate in its insurance arrangements Ultimately a self-funding mechanism for retained risk Not a quick fix and should be part of a long term risk financing strategy a captive insurance company is a bona fide insurance or reinsurance company owned by a non-insurance company and which insures or reinsures the risks of its parent or affiliated companies

3 Number of Captives Worldwide ,525 5,211 5, ,843 4,882 4,936 4,512 4,247 4, ,812 3,624 3,026 3,196 3,285 3,417 3, ,587 6,052 5, Captive Academy of the 14 th September Annual 13, 2013 Executive Educational Conference 3

4 Conception When to Think Captive? Financial: Annual captive premium funding at $2.5 million and up Annual captive premium funding at $1.2 million or below for 831(b) IRS option Commercial rates unaffordable or not competitive Operational: Coverage not available Proof of insurance needed (non-admitted or rated) Manuscript form or broader coverage Negotiating power Seeking formalized risk funding and tracking protocol Desire for a profit center Tax: Federal No state income tax on captives, premium tax only Self Procurement Tax (SPT)

5 Potential Captive Structures Fronted Reinsurance Captive Direct Issue Captive Owner / Insured Fronting insurer issues policies and arranges claims handling service Owner / Insured Captive insurer issues policies and arranges claims handling service and retains risk at agreed level Admitted Fronting Insurer Reinsurance cessions to captive; captive retains risk at agreed level Captive Captive Captive retrocedes risk in excess of its desired retention Captive reinsures in excess of its desired retention Reinsurer Reinsurer 5

6 Domicile Analysis Active Captives by Domicile for Year-End 2012 Other US dom iciles, 4% Rest of the world, 10% Berm uda, 15% Sw itzerland, 1% Delaw are, 3% Cayman, 13% Singapore, 1% Kentucky, 2% Arizona, 2% District of Colum bia, 3% Utah, 5% Nevada, 2% Dublin, 1% Isle of Man, 2% South Carolina, 3% Haw aii, 3% Turks & Caicos, 1% Barbados, 5% Verm ont, 10% Guernsey, 6% British Virgin Island, 3% Luxembourg, 4% Total Active Captives: 6,052 6

7 U.S. Domestic Captive Domiciles 2013 AK WA OR CA NV ID UT AZ MT HI WY CO NM ND SD NE KS TX OK MN IA MO AR LA WI IL MS Captive statutes No specific captive statutes 7 TN IN AL KY MI OH GA WV SC FL PA NC VA NY NH VT NJ MA DE MD DC CT ME Captive Domicile / Number of Captives RI Alabama 23 Arizona 101 Arkansas 1 Colorado 5 Connecticut 2 Delaware 190 DC 170 Florida 0 Georgia 13 Hawaii 179 Illinois 1 Kansas 1 Kentucky 139 Louisiana 0 Maine 3 Michigan 6 Missouri 28 Montana 114 Nevada 133 New Jersey 5 New York 50 North Carolina 0 Oklahoma 5 Oregon 0 South Carolina149 South Dakota 4 Tennessee 20 Texas 0 Utah 287 Vermont 586 Virginia 0 West Virginia 1

8 What Are Companies Doing With Their Captives? Casualty/Liability Employers liability/wc Public/General liability Auto liability Professional liability Products liability, Product recall Environmental liability Excess liability/umbrella Banker s blanket bond Credit Medical malpractice Crime Employment practices Cyber risk Property Terrorism insurance: U.S. TRIA policy with NBCR Pool Re Quota share reinsurance Shipping, cargo, and transit insurance Marine cargo Motor Aviation Residual value Third Party Insurance Pooling facilities Customer related insurance Extended warranty Customer, vendor, and joint-venture business Service contracts Employee benefits: global, voluntary, and ERISA benefits 8

9 Conception Why Establish a Captive? To reduce the parent s cost of risk To gain a strategic advantage To capture profits from related activities

10 Conception What Advantages Are There? Financial Benefits Can reduce insurance costs - by retaining the premium for expected losses Can improve the parent s negotiating position with the insurance and reinsurance markets Can generate underwriting & investment profits Can match revenue and expense - by reserving from current funds for future claim payments Can provide a source of additional revenue - by offering insurance to third parties Direct access to reinsurance markets Rewards good risk management practice

11 Conception What Advantages Are There? Insurance/Strategic Benefits Can provide coverage for risks not usually insurable Can reduce the dependence for commercial insurance Can create flexibility in program design and broader, simpler insurance contracts Can create a more effective and efficient risk management program, through designing cost allocation and claims handling systems generating actuarial information coordinating risk management activity

12 Conception Other Considerations Capital commitment - the captive s capital is not available for use in the parent s business Adverse results - the captive s capital can be eroded by adverse results under the insurance program Operating costs - a captive does incur operating costs and demands a time commitment from senior management

13 Types of Captives Single-parent (pure) captive Group or association captive: Heterogeneous (Mixed/Dissimilar) Homogeneous (Same) Rent-a-captive: Protected cells / segregated cells / segregated portfolios / sponsored captives Risk-retention group (U.S. domiciles): Reciprocal risk-retention groups Branch captives 831(b) (Qualified Small Insurance Company)

14 Domicile Selection Domicile decision criteria: Parent Ownership Structure Premium Taxes Captive Income Taxation Ability to Provide Intercompany Loans to Parent Restricted Classes of Business Incorporation/Annual Operating Costs Capitalization Requirements Investment Restrictions Regulatory Attitudes Infrastructure

15 Step One - Feasibility Risk Management Strategy Discussion; Envisioning & Modeling: Capacity & Appetite to assume more risk Loss Analysis and Forecasts Market response Minimum deductibles / attachment points Premium discounts for increased deductibles / attachment points Fronting fees/security Requirements Guidance on the most appropriate domicile Taxation

16 Strategic Feasibility Review Data collection Retained loss projection Federal & State tax discussion International Tax discussion (if applicable) Ownership & Structure options Investment considerations Economic analysis Domicile comparison Third Party Business opportunities Other lines of cover to include in the future Summary of Revenue Rulings and Relevant Case Law Final recommendations

17 Application Process License Captive Owner Select Service Partners: Attorney, Actuary, Auditor and Manager Select Directors Biographical Affidavits Start Up Fees Attorney Name Reservation Articles of Incorporation By Laws EIN Shareholder/Operating Agreements Captive Manager Business Plan Financial Forecasts Actuarial Study Application Assembly Process Coordination Domicile Insurance Department

18 Step Two - Formation Preparation of Articles of Incorporation, other Legal Documents Select directors for the captive Appoint auditors, lawyers, bankers, etc Business Plan Development Initial Meeting With Regulators Financial forecasts Actuarial Review Application Submission and Review Licensure; Stipulations letter

19 Timeline

20 Captive Formation and Operation

21 Step Three Implementation & Management Company administration, including: maintenance of detailed and comprehensive files of legal and general administration functions of the company Insurance, including: administration of insurance and reinsurance programs Accounting, including: payment and receipt of premiums; integrate with Parent s financials

22 How A Captive Operates Control of the captive will be by an appointed board of directors, usually a mix of professionals and parent company workers The board then appoints local companies for services like banking, auditing, etc Management company carries out all operational functions on behalf of the captive and provides insurance and other expertise that is required by the captive Parent Company Captive Board Auditors Management Company Lawyers Regulators Investment Managers Bankers

23 The Captive s Service Team Client Actuary Banker Department of Insurance Insurance Brokers Captive Manager Auditor Claim Administrators Consultants: Tax, Employee Benefits Investment Advisors Legal Counsel

24 Captive Management Operations Financial Statement Preparation (GAAP & Statutory) Regulatory Filings Reconciliation of Bank and Investment Accounts Policy Issuance Premiums Corporate Record Maintenance Income Tax Provisions Premium Tax Returns Cash Disbursements & Receipts Regulatory Communications with South Carolina Department of Insurance (SCDOI) and the National Association of Insurance Commissioners (NAIC) Budgets and Forecasts Audit Coordination Coordination of Statutory Examinations Board Meetings and Books