WELCOME TO THE WORLD OF CAPTIVES

Transcription

1 WELCOME TO THE WORLD OF CAPTIVES Mike Meehan, CIC, CRM Consultant Milliman, Inc. Anne Marie Towle, CPA EVP, Captive Practice Leader JLT Insurance Management November 27, 2018

2 Learning Objectives Objective 1 Attendees will learn about the basics of captive insurance and gain an understanding of the various types of captive options available. Objective 2 Attendees will be able to leverage best practices for analysis within their organization. Objective 3 Attendees will be able to apply risk concepts to captive basics and interpret results for their organization

3 Agenda Captive Basics (including a brief history) Why captives are formed Benefits and Challenges Types / Utilization Models The Captive Formation Process Concept to Operations The Feasibility Study Implementation and Operations Best Practices

4 CAPTIVE BASICS Add appropriate footer info via insert/header&footer

5 What is a Captive? Vital financial tool A limited purpose, licensed insurance company, the main business purpose of which is to insure the risks of the captive s owners A risk assumption vehicle An insurance or reinsurance company Specifically established to insure or reinsure the risks of its parent or associated third parties

6 Today, Captives are mainstream Worldwide Number of Captives *Source: Business Insurance 2017 estimated based upon both new licenses and a number of closures

7 Companies (or groups of companies) with: Who should consider a captive? Financial stability and a willingness to invest in themselves Good claims history and a low loss ratio Good risk management practices and willingness to be proactive Long-term commitment Willingness to work with other companies (potentially competitors)

8 Who should consider a captive? Some examples:: Financial stability and willing to invest in themselves Good claims history with a low loss ratio The ability to finance exposure Good risk management practices and willingness to be proactive Long-term Commitment from Senior Management

9 Why are Captives Formed? Control Management of claims Program design Coverage Fill coverage gaps Exclusions for difficult risks Capacity Access to reinsurance Captive Strategic enabler Compliance Legal and tax certainty Premium allocation Cost Leverage the market Commercial Affinity programs Extended warranties

10 Types of Risks Auto (Deductible Reimbursement) Traditional Lines Emerging Lines Workers Comp. Property (Deductible Reimbursement) Wage & Hour Coverage Construction Risk Warranty Risks CAPTIVE Executive Risk Reputational Risk D&O (Deductible Reimbursement) Environmental Liability Network Security Quake, Flood or Wind EPLI Regulatory Liability INSURER/ REINSURER General Liability

11 Types of Captives Single Parent Sponsored Cell Captive Association/Group Captive Risk Retention Group SCALE >$1M in premium Any minimum premium level Typically a min. of $250k in premium, no maximum Any premium volume FEATURES Medium to Larger account solutions Unilateral control of captive (subject to regulator) No risk sharing, unless pooling arrangement is deployed Typically established by a 3 rd party sponsor Insured can rent the captive space Typically lower operating costs Could be a protected cell or incorporated cell structure No risk sharing 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 Sharing risk is required Policy holders are share holders Formed in a state/domicile and ability to write in all 50 states Liability insurance only Typical Industries: Healthcare, transportation, governments and professional services

12 Benefits BENEFITS The opportunity to see favorable risk management business outcomes The drive to recapture leakage in traditional risk transfer solutions The opportunity to take risk and profit positions in affiliate business The drive to control frictional and non-loss costs BENEFITS The unwillingness/inability of insurers to provide cost effective insurance Global consistency The need for new capacity for certain risks Lack of confidence in the traditional markets ability to differentiate and provide stable protection The enhanced focus on loss prevention and intelligent claims handling

13 Considerations CHALLENGES Incurring unexpectedly large losses Compliance issues Meeting and maintaining capital requirements Competing uses for available capital Accessing capital for competing needs CHALLENGES Distributing profits Winding down program Restrictions on selling or transferring ownership Focus and commitment must be long term Overcoming the learning curve

14 Utilization Models Retained Risk Finance Access to Capacity Captive Rate Arbitrage with Risk Transfer 3 rd party

15 THE CAPTIVE FORMATION PROCESS Add appropriate footer info via insert/header&footer

16 What is the Captive Process? Review Current Insurance Program and Risk Appetite Formal Feasibility Study Decision to Proceed Business Plan Development Captive Application, License, Incorporation and Capitalization Commence Operations

17 Next Steps Internal Evaluation / Planning Identify your Risk Program and Risk Philosophy Gather Data if your loss history is favorable and determine if your organization is willing to invest capital in themselves Contact your Consultant for an evaluation of your existing program and alternative options Create and Execute an action plan for Formal Feasibility Analysis

18 THE FEASIBILITY STUDY Add appropriate footer info via insert/header&footer

19 Feasibility Process Regulatory, Tax & Legal Analysis Establishing Core Objectives Domicile Selection FEASIBILITY ANALYSIS Data Collection Program Design Actuarial Analysis

20 Data Collection Annual Report/10K Organizational Chart Existing Insurance Summary Exposures (i.e. payroll, sales) Historical Losses Historical / Projected company changes

21 Actuarial Why is it necessary? Measures Financial Viability Risk Identification/Quantification Required by Regulators Reinsurance Negotiations What is included? Loss Rates/Premiums/Loss Ratios Expected Adverse Pro Forma Financial Statements Includes: Income Statement Balance Sheet Statement of Cash Flows Typically 5 Year Based on Expected and Adverse Scenarios

22 Program Design & Regulatory, Tax and LegalLegal What Insurance Structure will you develop: Types of insurance Retentions Limits Direct Reinsurance What type of Captive? Who will be the owners? Do I need to be concerned with Tax & Legal Structure? What about Regulatory Requirements?

23 Domicile Criteria Statutory Capitalization and surplus requirements and solvency ratios Receptiveness of regulatory environment Quality of local infrastructure Availability of expertise Stability of regulatory environment Criteria Flexibility as respects investment portfolio Ease of doing business in a suitably regulated environment Experience in business under consideration Efficient financial outcomes: tax, wealth, investment etc.

24 Capital Considerations Regulation and/or Regulator Collateral Requirements (Fronted Program) Type of Risk Insured How is Initial Capital Determined? Policy Limits Variability in Loss Projections Financial Strength of Parent Are Policies Assessable?

25 IMPLEMENTATION AND OPERATIONS Add appropriate footer info via insert/header&footer

26 Implementation of Captive Approval by Owners Capitalize & Commence Operations Draft business plan New Captive Approval & Incorporate Meet with Domicile Submit business plan

27 Captive Operations Shareholders Board of Directors Elects directors Appoints Auditors Elects officers Establishes policies Manages business Oversees Committees Engages service providers

28 Captive Operations TPA Actuary Auditor Carriers Investment Legal Risk Management Manager Captive Regulator

29 BEST PRACTICES Add appropriate footer info via insert/header&footer

30 Closing Thoughts and Things to Consider Corporate governance and culture starts at the top Engage experts who can guide you through the process Running an insurance is likely much different that the business that you are in. Treat it as such. Stay involved. Ask questions on anything and everything you don t understand Communication with service providers is critical Plan early for the future (sharing of dividends, assessments; closing)

31 Questions

32 Mike Meehan THANK YOU Anne Marie Towle