CAPTIVES The Rationale Welcome! Tim Averill, Executive Director SET SEG Property/Casualty Pool Michael Rebaleati, Chief Operations Officer Nevada Public Agency Insurance Pool CAPTIVE OVERVIEW What is a captive insurance company? 1
What is a Captive Insurance Company? A captive insurer is generally defined as an insurance company wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer s underwriting profits. A form of self-insurance whereby the insurer is owned wholly by the ensured to meet the risk-management needs of the members. Captive insurance is utilized by insureds that choose to put their own capital at risk by creating their own insurance company, working outside of the commercial insurance marketplace, to achieve their risk financing objectives. Total Captives Per Region There were 7,006 captives worldwide in 2016, a 2.3% increase over 2015. 46.3% 38.7% 12.3% 2.4% 0.3% United States North American Offshore Europe Asia Canada Source: Captive Managers & Domiciles Rankings + Directory. Business Insurance Holdings, 2017. Types of Captives* Pure/Single Parent 1 Wholly owned by one parent company 5 Risk Retention Group Owned by policy holders and members 2 Group Owned by multiple non-related organizations 6 Sponsored/Cell Captives Owned by 3 rd party sponsor 3 Association Owned by members of a common industry or trade association 7 Agency Captive Owned by insurance agents Branch 4 Division of an existing off-shore captive formed in the US Special Purpose Financial Captive 8 Created for a limited purpose of entering into a SPFC contract *Your captive manager will determine which type is best for you. 2
Why Should a Pool Use a Captive? Creates flexibility and options for consideration Premium Commercial rates not competitive Combined premium is advantageous Access to Capacity Federal Programs (TRIA) Reinsurance otherwise not accessible in commercial market Operational Commercial coverage not available. Provided coverage that the pool is statutorily unable to provide. Proof of insurance needed Seeking formalized risk funding and loss control monitoring Good loss ratios and risk management protocols Investment income Desire for a potential profit center Desire for a regulated environment Protection from political risk Common Captive Coverages 1 Workers Compensation 5 D&O Liability 2 General Liability 6 Employment Practices Liability 3 Property, including wind and quake 7 Excess Liability 4 Professional Liability 8 Medical Stop Loss *Your captive manager will determine which type is best for you. Captive Development Process Your captive manager will help you navigate the process below. Formal feasibility study Business plan development Review current insurance program and risk appetite Decision to proceed Captive application, license, incorporation and capitalization There are several key pieces to operating a captive that you must discuss with your captive manager, including the development of a service team and reporting structure to work under your Board of Directors. 3
Top 10 Captive Managers Ranked by captives managed worldwide in 2016 Company 2016 Captives Domiciles Marsh Captive Solutions, New York Aon Captive & Insurance Management, London Willis Towers Watson P.L.C., London Strategic Risk Solutions Inc., Concord, MA 1,215 1,191 385 268 46 52 36 22 USA Risk Group Inc., Barre, VT 218 25 Source: Captive Managers & Domiciles Rankings + Directory. Business Insurance Holdings, 2017. Top 10 Captive Managers Continued Ranked by captives managed worldwide in 2016 Company 2016 Captives Domiciles Artex Risk Solutions Inc., Itasca, IL JLT Insurance Management, Bermuda AMS Insurance Management Services Ltd., British Virgin Islands R&Q Captive Holdings Ltd., London Atlas Insurance Management, Cayman Islands 200 164 115 114 86 30 10 6 16 12 Source: Captive Mangers & Domiciles Rankings + Directory. Business Insurance Holdings, 2017. Estimated Cost of a Captive Formation & Feasibility: $35,000-$55,000 Includes actuary study, legal fees for formation, fees for application preparation and domicile fees. Ongoing Operations: $100,000-$150,000 Includes captive management, actuary, audit, legal, travel and meetings, premium taxes and license fees. Capitalization: $250,000-$500,000 (minimum) In the form of cash, marketable securities or irrevocable letter of credit. 4
CAPTIVE CASE STUDY SET SEG Property/Casualty Pool MASB-SEG Property/Casualty Pool LANSING Created in 1985 to provide coverage for Michigan s public education community, the pool has matured and provides hands-on programs with services handled in-house. 514 Members Michigan Public Schools Intermediate School Districts Community Colleges Property and Liability Auto Liability Auto Physical Damage Cyber Liability Educators Legal Liability General Liability Property MASB-SEG Reinsurance Limited Domiciled in the Cayman Islands Association Captive: Wholly owned and controlled by MASB-SEG Property/Casualty Pool $5 million capitalization Interlocking boards 5
Why the Pool Formed a Captive? 1 Comply with statutory aggregate excess requirements 4 Ensure greater stability by providing an alternative to the commercial market 2 Strengthen our negotiation position with reinsurance partners 5 Broaden our offerings outside the scope of the Pool s primary coverage 3 Offer protection from increasing regulation 6 Potential to turn Pool reinsurance expense into future member surplus Evolution of Risk MASB-SEG Reinsurance Limited 1985 2007 2010 2011 2013 Aggregate excess Annual Aggregate started small Property Deductible Employee Dishonesty Bonds Auto Liability, General Liability, Educators Legal Liability, Property Property & Liability Quota Share Future Growth MASB-SEG Reinsurance Limited On average, we place $2 million per year in our captive in the Cayman Islands Current Programs and Coverages: Statutory Aggregate Excess Coverage Property and Liability Excess Coverage Employee Dishonesty Bonds Participation in the Pools Quota Share Property and Liability Reinsurance Programs 6
MASB-SEG Reinsurance Placement Summary Property Reinsurance MASB-SEG Casualty Reinsurance MASB-SEG Educators Legal Liability Reinsurance 7
Total Impact Over the past 10 years, SEG Re has successfully provided reinsurance security to the Pool, generating annual average rate of return in excess of 24%. CAPTIVE CASE STUDY Nevada Public Agency Insurance Pool Why Nevada Pool Formed Two Pure Captives Flexibility in coverage design, scope and retentions for underlying pools. Flow of capital to captives supported access to reinsurance and higher retentions. Investment income opportunities are not as restricted as for public agencies and helps reduce costs over time. Nevada Premium tax savings 3.5% plus Surplus lines fees 0.4% reinsurance tax 0.25%. Open Meeting Law and Public Records Laws do not apply to captives, but do to pools. 8
Public Risk Mutual Formed and capitalized by Nevada Public Agency Insurance Pool A non-profit pure captive mutual insurance company Granted Certificate of Authority from Insurance Division on July 25, 2004 Capitalized with $1,000,000 Grants from the parent NPAIP has continued when funds are available A comprehensive cyber assessment program is being funded by PRM investment income. PRM coverage exposure has steadily increased. Public Compensation Mutual Formed by Members of Public Agency Compensation Trust (PACT). A non-profit association captive mutual insurance company Granted Certificate of Authority from Insurance Division on July 1, 2007. Initial Capitalization $5,000,000 Grants from parent PACT continue. An online Fire/EMS training series is funded by PCM. Relationships of NPAIP/PACT NPAIP Lloyd s 2017-2018 Property Structure 9
NPAIP 2017-2018 Liability Structure Graph UE s participation decreased to 75% and PRM s participation increased to 25% Considering the Future What additional services are you expanding on? Cyber Liability Medical Stop-Loss Questions & Discussion 10