Polling App This session will use a series of interactive polls. To participate, please download the Bermuda Captive Conference 2018 App: 1. Visit your phone s App Store or Play Store and search for, download and install the CrowdCompass AttendeeHub app to your smartphone. 2. In the CrowdCompass AttendeeHub search for and download the event Bermuda Captive Conference 2018. 3. You will need to set up a login. Once you create a login, you will be sent a verification code to the email you registered with. 1
Debunking Common Captive Myths 2
Panelists Ellen Charnley, President, Marsh Captive Solutions Susan Molineux, Associate Director - Property Casualty, AM Best Jane Sandler, Vice President - Global Risk Management, McKesson Corporation Maria Sheffield, Corporate Counsel, Caterpillar Inc. Ellen Charnley President, Marsh Captive Solutions Susan Molineux Associate Director Property Casualty, AM Best Jane Sandler Vice President Global Risk Management, McKesson Corporation Maria Sheffield Corporate Counsel, Caterpillar Inc. 3
Agenda At the end of this session, you will be able to: Detail the benefits of placing a captive at the core of business and risk strategy formation. Watch for shifts in captive formations that support new business purposes and goals. Assemble tools to balance your captive s alignment with organizational objectives. 4
What Myths Are Holding Back Your Organization? Captives are only formed in hard markets. Captives are only formed by large public companies. Captives are only formed for tax reasons. Captives don t pay taxes. Only US companies form captives. Captives trap my cash. Captives are only used by a few industries. Captives are only used for traditional property and casualty risks. Myths busted 5
Poll Question 1 Having a captive at the core of your risk management strategy offers which of the following benefits? A) Accelerate corporate objectives. B) Support business units. C) Provide access to capital. D) Protect human capital. E) All of the above. 6
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Myths Busted Captives at the core of innovative risk management strategies: Few tools at a risk manager s disposal are more strategically or tactically valuable. Provides a direct link to the innovation and growth in alternative capital. Increasing availability of loss and exposure data enables firms to take greater control of their risk. 8
0.923 0.915 0.908 0.901 0.895 0.890 0.887 0.888 Myth #1: Captives Are Only Formed in Hard Markets Total Captives Worldwide (1991 to 2017) 2,833 2,895 2,988 3,026 3,196 3,086 3,285 3,417 3,624 3,812 4,002 4,247 4,512 4,843 4,881 4,951 5,119 5,211 5,525 5,587 5,831 6,125 6,420 6,739 6,851 6,700 6,647 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Global Insurance Market Index (quarterly, 2012-2017) 1.000 1.004 1.007 1.010 1.011 1.010 1.008 1.005 1.001 0.994 0.988 0.977 0.967 0.956 0.944 0.932 Q12012 Q22012 Q32012 Q42012 Q12013 Q22013 Q32013 Q42013 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12016 Q22016 Q32016 Q42016 Q12017 Q22017 Q32017 Q42017 Source: Business Insurance, Marsh. 9
Poll Question 2 What is the most common size of captive by amount of premium written? A) Small (<US$1.2 million). B) Average ($US1.2 million - $5 million). C) Large ($US5 million - $20 million). D) Extra-Large (>US$20 million). 10
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Myth #2: Captives Are Only Formed by Large Public Companies Size of captives shifts: Traditionally, extralarge captives generating more than US$20 million in premiums dominated the landscape. 2012 2013 2014 Under US $1.2M Ne t Pr emium US $ 5M - US $20M Net Prem iu m 24% 26% 43% 41% US $ 1.2M - US $5M Net Prem iu m Grea ter than US $20M Ne t Pr emium 18% 32% 18% 19% 11% 11% 27% 29% Small captives now account for almost 40% of captive insurers, up from 24% in 2012. 2015 2016 2017 40% 44% 40% 18% 18% 17% 12% 19% 21% 31% 20% 23% Source: Marsh Captive Solutions Client Benchmarking 12
Myth #2: Captives Are Only Formed by Large Public Companies Private vs. public companies: There is a growing trend for private companies to own captives, mostly attributable to the growth of small captives. Currently, 47% of captives are owned by private entities, dispelling the myth that captives are only for large public Fortune 500 companies. 47% Private vs. Public Companies Priv ate Public 53% Source: Marsh Captive Solutions Client Benchmarking 13
Poll Question 3 What percent of US captive owners realize deferral tax benefits by treating their captive as an insurance company for federal income tax purposes? A) Less than 25%. B) 25-50%. C) 51-75%. D) All of the captives. 14
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Myth #3: Captives Are Only Formed for Tax Reasons In 2017, 45% did not take a US tax position. This indicates that operational risk management gains are increasingly more attractive as a benefit. Reasons for not wanting to be taxed as an insurance company may include: - Tax exempt members. - REIT members. - Short-tail property (not a big deal). - Fully reinsured. Did Not Take a US Tax Position 45% Source: Marsh Captive Solutions Client Benchmarking 16
Myth #3: Captives Are Only Formed for Tax Reasons Used to access TRIPRA and other terrorism pools: Write coverage for perils typically excluded from risk transfer policies (i.e., Nuclear, Biological, Chemical, and Radiological (NBCR), cyber, non-physical damage (PD) business interruption, etc.), providing access to the government backstop. Access to reinsurance program to cover potential gap in TRIPRA trigger threshold and/or TRIPRA deductible. 17
Myth #3: Captives Are Only Formed for Tax Reasons US$1 billion limit 18% captive coinsurance share (prior to January 1, 2019) $179,640,000 82% TRIA Federal Government coinsurance share (prior to January 1, 2019) $818,360,000 Insured loss $ 1,000,000,000 Captive deductible 2,000,000 Subtotal $ 998,000,000 18% quota share 179,640,000 Government share $ 818,360,000 Captive share $ 181,640,000 Please note if Insured did not offer NBCR Terrorism coverage through its captive, it would be liable for the full US$1 billion loss rather than only US$181.6 million under the captive arrangement (whereby it obtains catastrophic protection from the TRIA pool). Captive Captive deductible: $2,000,000 (20% of projected year one written premium) NOTE: The captive deductible is based upon 20% of the captive s projected year one written premium which is assumed to be US$10,000,000. 18
Poll Question 4 What is the primary benefit your organization derives from its captive? A) Realize tax benefits. B) Access reinsurance markets. C) Act as a formal funding vehicle to insure risk that the parent has decided to self assume. D) Centralize global insurance program. 19
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Myth #3: Captives Are Only Formed for Tax Reasons The real reason organizations form captives: Act as a form al funding vehicle to insure risk that the pa ren t h as d eci d ed t o se l f-a ssu me 60% As organizations understanding of risk matures, their risk management strategies become more sophisticated, increasing the likelihood of forming or expanding a captive. Funding corporate retained risk is a key value driver of captive formation for 60% of Marsh-managed parents. Access reinsuranc e mark ets Des ig n an d ma nu scri pt own p ol ic y form Rea li ze ta x be ne fi ts Cen tra l ize gl ob al i ns ura nce prog ram Provide means forsubs idiaries to buy down co rpo ra t e ret en t io ns t o d esi red le vel s. Provide evidenc e of insurance to meet contractual requirements with third parties ors tatutory ob l ig at io ns. Wr i t e t hi r d- pa r ty bus in es s 12% 19% 23% 27% Source: Marsh Captive Solutions Client Benchmarking 35% 42% 41% 21
Myth #4: Captives Don t Pay Taxes In 2017, Marsh-managed captives wrote more than US$55 billion in premium and paid US$1.78 billion in taxes worldwide. Types of taxes paid by captives: - Federal income taxes. - Federal excise taxes. - State premium taxes. - Self-procurement taxes. - State income taxes. - Insurance premium taxes. - Local country income tax where parent company is located. 22
Myth #5: Only US Companies Form Captives Parent companies by region. EUROPE: 26.9% of parent companies. $5.5 billion in premium. NORTH AMERICA : 60.1% of parent companies. $37.2 billion in premium. CARIBBEAN: 5.1% of parent companies. $2.2 billion in premium. ASIA-PACIFIC: 3.3% of parent companies. $354.9 million in premium. LATIN AMERICA: 0.8% of parent companies. $71.5 million in premium. AFRICA: 0.4% of parent companies. $30 million in premium. MIDDLE EAST: 0.7% of parent companies. $585 million in premium. AUSTRALIA: 2.7% of parent companies. $192.4 million in premium. Source: Marsh Captive Solutions Client Benchmarking 23
Myth #6: Captives Trap My Cash Not true! For year-end 2017, captives under management by Marsh: - Had in excess of US$106 billion in capital and surplus. - Loaned more than US$76 billion back to their parent companies. Uses for excess capital: - Fund risk management projects. - Dividends. - Loan-backs. - Premium holidays. - Expansion of business plan. 24
Myth #7: Captives Are Only Used by a Few Industries Growing complexity drives premium volume in captives: Financial institutions, health care, and manufacturing continue to dominate captive usage. However, increasing complexity of risk and the pace of emerging risks has led other industries to adopt or expand their captives use, as noted in premium size. Percentage by Number of 2017 Captives Industry Gross Premiums in USD 24% Financial Institutions $20,910,160,591 12% Health Care $2,018,866,453 7% Manufacturing $1,402,383,116 6% Retail/Wholesale $2,791,632,817 5% Construction $326,885,491 5% Transportation $1,260,113,022 4% Communications, Media & Technology $4,862,121,569 4% Power & Utility $891,898,518 4% Energy $801,049,398 3% Other Services $482,391,118 3% Automotive $406,127,336 3% Real Estate $83,156,272 3% Chemical $345,888,103 Percentage by Number of 2017 Captives Industry Gross Premiums in USD 3% Misc. Other $4,315,871,284 2% Mining, Metals & Minerals $544,933,418 2% Food & Beverages $893,056,210 2% Marine $642,557,510 2% Life Sciences $1,486,642,993 1% Education $101,321,450 1% Aviation, Aerospace & Space $679,885,371 1% Agriculture & Fisheries $294,459,791 1% Professional Services $316,913,193 1% Public Entity & Not For Profit $35,214,205 1% Sports, Entertainment & Events $173,002,368 1% Forestry & Integrated Wood Products $39,703,294 1% Hospitality & Gaming $75,657,314 Source: Marsh Captive Solutions Client Benchmarking 25
Myth #8: Captives Are Only Used for Traditional Property and Casualty Risks TOP RISKS Cyber Terrorism HOW ARE CAPTIVES BEING UTILIZED TO ADDRESS THESE RISKS? Tailored policies that address gaps. Adding CAT limits. Access to reinsurance market. Coverage for perils providing access to the government backstop. Access to reinsurance program to cover potential gap in TRIPRA. CAT Events Economic Downturn Help stabilize the parent s post-event balance sheet. CAT bond access. Insurance Linked Securities (ILS). Access to reinsurance markets. Build of surplus in capital with flexible investment strategies. Source: World Economic Forum, Global Risks 2016 26
Multinationals Turn to Captives for Complex and Costly Risks Year-Over-Year Growth in Captives Underwriting Cyber Liability Year-Over-Year Growth in Captives Underwriting Multinational Pool Benefits Top Industries With Captives Writing Cyber Liability Communications, Media & Technology. Financial Institutions. Real Estate, Hospitality & Gaming. Retail/Wholesale, Food & Beverage. Transportation. 10% 30% Source: Marsh Captive Solutions Client Benchmarking Top Industries With Captives Writing Multinational Pool Benefits Communications, Media & Technology. Financial Institutions. Mining, Metals & Minerals. Retail/Wholesale, Food & Beverage. The number of Marsh-managed captives reinsuring multinational employee benefit risks continues to increase, growing by 30% in 2017 over the previous year and 550% since 2012. Captives using cyber liability programs increased by 10% in 2017 over 2016; since 2012, cyber liability programs in captives have grown by 240%. 27
Cyber Risk and the Right Fit for Captives Top industries using captives for cyber risk: Communications, Media & Technology. Financial Institutions. Healthcare. Retail/Wholesale, Food & Beverage. 18% Year-Over-Year Cyber Growth 30% 19% 10% 20 14 20 15 20 16 20 17 Source: Marsh Captive Solutions Client Benchmarking 28
Captives as a Profit Center Top industries for unrelated third-party programs: Communications, Media & Technology Construction Financial Institutions Real Estate, Hospitality & Gaming Manufacturing & Retail Handheld Device Extended Warranty OCIP/ CCIP Warranty Credit/ Life Travel/ Trip Renters Insurance Employee Benefits Extended Warranty Shippers Interest Source: Marsh Captive Solutions Client Benchmarking 29
In Conclusion Myths holding back your organization: Captives are only formed in hard markets. Captives are only formed by large public companies. Captives are only formed for tax reasons. Captives don t pay taxes. Only US companies form captives. Captives trap my cash. Captives are only used by a few industries. Captives are only used for traditional property and casualty risks. Myths busted: Captive formation does not track to the global insurance market index. Captive size has shifted and includes many private parent companies. Nearly half of captives do not take a US tax position. Marsh-managed captives paid US$1.78 billion in taxes worldwide. New domiciles are gaining traction including in Asia-Pacific. Marsh-managed captives loaned US$76 billion back to their parent companies. Many industries have expanded their captive use. Captives are at the core of an innovative risk management strategy. And: Multinationals often turn to captives for complex and costly risks. Cyber risk can be the right fit for captives. Captives can be a profit center by writing unrelated third-party programs. 30
Recommendations 31
Questions and Answers 32