EU Protected Cells Captives on a budget

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1 EU Protected Cells Captives on a budget Ian-Edward Stafrace MIRM FCII PIOR Chartered Insurer Risk Analyst & International Business Development Atlas Insurance PCC Ltd, Malta 22 March 2011 IRM Global Risk Management Professional Development Forum

2 Agenda

3 Why form your own Insurance Vehicle? As a captive risk financing vehicle &/or To sell insurance to third parties

Insurer Your Business Catastrophe Risk Premium Self Insured Premium All

4 Why Captive? Traditional Insurance vs Captive Insurer 100%* of Premium Profits Retained by Insurer Your Business Catastrophe Risk Premium Self Insured Premium All Profits Back to You Re/Insurer Your Cell/ Captive Risks beyond risk appetite reinsured *On average only approx 65% of Premium is used to pay claims

5 Why Captive? 1. Reduce Cost of Insurance 2. Long Term Cover 3. Risk Management Strategy

Cells Premiums tax deductible as expense Underwriting &

6 Why not just self insure? In Self Insurance Reserves treated as profits & taxed Usually internal transfer with no reserve for large claims Temptation to strip funds With Captives/Captive Cells Premiums tax deductible as expense Underwriting & Investment Profit help create reserves allowing higher retention Reinsurance market access

7 Why Sell Insurance To Third Parties? 1. Underwriting Profits + Investment Income 2. Bolt-on To Non Insurance Sale 3. Knowledge Of Product, Market & Profitability 4. Avoid Market Uncertainty

8 Only for Large Organisations? Problem 1: Capital Requirements Problem 2: Fronting Costs Problem 3: Costs to run a separate company

9 SOLUTION: Cell in a Protected Cell Company (PCC) Purpose Segregating cellular assets & liabilities PCC Allow different owners with varying interests to participate in one company Cell Core Cell Insurance Cells set up with less capital as minimum requirements apply to PCC as a whole Cell Cell

10 Where? PCC Domiciles Malta Only EU State To Have PCC Legislation EU Single Passport EU Compliant Regulations Approachable Regulator English, Time Zone, Flight Connections Tax Efficient Over 40 other domiciles have PCC or similar legislation: Gibraltar, Guernsey, Isle of Man, Bermuda, Cayman Islands, various US states...

11 Protected Cells: Low-cost Alternative To Owning A Stand Alone Insurance Company Or Captive No Minimum Guarantee Fund (MGF) Required Complying with EU directives through PCC core capital Example: General insurer with 1 million annual premium Minimum capital needed: EU Standalone Insurer EU Protected Cell

12 Protected Cells: Low-cost Alternative To Owning A Stand Alone Insurance Company Or Captive No Fronting Required for EU/EEA Risks Reinsurance access for smaller investors Lower Running Costs vs. Stand-Alone companies

13 Insulation from other Cells/Core Cell has its own income and expenses Where cell liability arises: 1. Assets of that cell used 2. If insufficient PCC s core assets used 3. Use of assets of other cells prohibited Cellular dividend & tax independence Cell Cell Core Cell Cell

14 Benefits of Protected Cells (in Malta ) Lower Capital Easier Access To Captive Solution Reinsurance For Smaller Entities Direct Writing Into Europe Cell Assets Segregated Favourable Tax Regime No Setup of Separate Company No Board Of Directors Shared Administration

15 Cell Management PCC Board of Directors Cell A Cell B Cell Underwriting & Investment committees Cell Underwriting & Investment committees 3 rd Party Insurance Manager

16 Why own an EU based Protected Cell? Captive Cell Commercial / affinity groups looking for a captive risk financing vehicle Fronting Cell Captive owners wishing to reduce EEA fronting costs Third Party Writing Cell Any business planning to sell insurance to third parties and any combination of the above

A) Captive Cell Lower access point to captive solution

specialist risk-bearers A protected cell in Malta

Sell Insurance To Third Parties In EEA Insure on

17 A) Captive Cell Lower access point to captive solution Special purpose applications Access to reinsurers & specialist risk-bearers A protected cell in Malta allows cell owner to: Insure Directly Own Risks In EEA Sell Insurance To Third Parties In EEA Insure on Non-admitted Basis Risks Globally Where Allowed Reinsure Risks Outside EEA

18 Example 1 French Manufacturer Desire Reduce insurance cost & improve risk financing Facts Multiple Factories, Stores & Offices in France Classes: Property & Non Compulsory Casualty Premium 1,000,000 (approx 30% Property) Loss ratio < 35% past 5 years A) Captive Cell

19 Example 1 French Manufacturer Possible Solution: PCC Cell owned by Manufacturer Injects capital of 410,000 Property: - Excess 50,000 - Reinsured above 200,000 any 1 loss/event Casualty - Reinsured above 100,000 any 1 loss & 300,000 in aggregate Third Party Manager? No PCC Manages Cell Cell Agreement PCC + Cell Owner Cell Committee/s Members 1 PCC + 1 Cell Owner Yes Cell Agreement: PCC + Manager + Cell Owner Management Agreement: PCC -> Manager Cell Committee/s Members 1 PCC + 1 Cell Owner + 1 Manager A) Captive Cell

20 Example 2 Association of Medical Professionals Desire Wants more control over PI cost for members Facts Premium 900,000 Loss ratio < 35% past 4 years Single event/series exposure A) Captive Cell

21 Example 2 Association of Medical Professionals Possible Solution PCC Manages Cell Cell owned by Association of Medical Professionals Injects capital of 370,000 Reinsured above - 30,000 any 1 loss - 350,000 in aggregate Cell Committee/s Members 1 PCC + 1 Association Official Agency Agreement PCC + Association Third Party Claims Handler Agency Agreement A) Captive Cell

22 B) Fronting Cell Cells in Malta can be used as fronting facilities Fronting cell reinsures most/all of the risk Reinsurer could be a non-eu captive Fronting Cell Example 1 Million Annual Premium -- Required Cell Capital 90,000 --

to non insurance sales Short tail risks - E.g.

23 C) Third Party Writing Cell EU cells offer direct access to European market Policyholder Protection Ensured Possible Products Bolt-on products to non insurance sales Short tail risks - E.g. Extended warranty, property damage, theft, marine cargo, travel cancellation Long-tail risks also possible

24 Example Portable Electronics Retailer Desire Retain underwriting profit & have greater control over pricing / commissions / availability Facts AD & Theft cover sold to purchasers Placed with external insurer in return for commission Premium 750,000 8 year claims history - Loss ratio < 40% No event or single large risk exposure C) Third Party Writing Cell

25 Example Portable Electronics Retailer Possible Solution PCC Manages Cell Cell owned by Retailer Injects capital of 135,000 Broker Intermediary? No Agency Agreement PCC -> Retailer Yes Agency Agreement PCC -> Broker Retailer Handling Claims? No Yes Claims Handling Agreement PCC -> Retailer Claims Handling Agreement PCC -> Third Party (E.g. Broker) C) Third Party Writing Cell

Next Steps to consider Cell Route Indicative Back of the Envelope Study Some Key Considerations Premium Ideal: 1m+ Loss Ratio (Claims/Premium) Loss Ratio = Profit Retained &/or Insurance Spend

26 Next Steps to consider Cell Route Indicative Back of the Envelope Study Some Key Considerations Premium Ideal: 1m+ Loss Ratio (Claims/Premium) Loss Ratio = Profit Retained &/or Insurance Spend Available Capital/Collateral (To Capitalise Cell) Typical minimum 18% of Gross Annual Premium depending on risk, inclusion of liability, loss ratio, reinsurance, buffers Risk Appetite Other Factors Lower risk appetite may mean higher reinsurance purchase but at lower cost than primary market Fluctuating primary insurance prices, terms & availability Risk financing flexibility Improved risk information flow, etc Engage the industry to determine viability & options available Brokers, PCCs (Independent/Managed), etc Domicile Choice

$Website: www.atlaspcc.eu Email: ian.stafrace@atlas.com.$

27 Website: Phone: (+356) Atlas Insurance PCC Ltd Ta' Xbiex Seafront Ta' Xbiex XBX 1021 Malta

Securely managed insurance solutions

The Group Securely managed insurance solutions Protected Cell, Incorporated Cell and Segregated Account facilities Value Proposition To provide clients with insurance solutions without the costs or capital