Willis Management (Guernsey) Limited Captive Management in Guernsey

Willis Management (Guernsey) Limited Captive Management in Guernsey September 2003 Continue...

Contents Introduction... Company Profile... Captive Management Services... Board of Directors... Investment Management... Taxation... Captive Insurance Company Establishment... Checklist for Establishment... Cost of Establishment Operation... Team Profiles... 2 Willis Captive Management in Guernsey September 2003

Introduction Guernsey is the leading European captive domicile, with over 380 captives and 50 Protected Cell Companies made up of over 200 cells licensed for insurance purposes. The financial and regulatory infrastructure is recognised as being the strongest of all the European captive domiciles. Steady growth in new captives is continuing, and existing captives continue to thrive and develop. Guernsey has developed technical and managerial captive expertise, enabling it to offer management services far beyond standard "accounting and reporting" services. Willis Management (Guernsey) Limited would be pleased to discuss any of the features and principles of captive insurance management, and to explain the unique benefits offered by Guernsey. Why choose Guernsey as the domicile for a captive insurance company? 3 Willis Captive Management in Guernsey September 2003

Company Profile Willis is one of the largest captive managers in Europe and has management companies in all the major reputable captive locations worldwide. Willis Management (Guernsey) Limited is a wholly owned subsidiary of the Willis Group, the world's third largest insurance broking organisation. It was formed in 1981 and has: Well over 50 companies under management including 4 mutuals and 8 protected cell companies. Over 30 staff employed in Guernsey. Net retained premium (i.e. after reinsurance), in excess of 275million. Funds under management in excess of 1.5billion. Our client base includes many major multinational corporations, including industrial and commercial operations, financial institutions and leisure groups. We serve wholly owned and association captives, and mutual insurers on whose behalf we underwrite in excess of 35 classes of insurance and life assurance on both a direct and a reinsurance basis. Sample list of Willis Clients Alliance & Leicester Abbey National ABTA travel agents Britannia Building Society British Institute of Freight Forwarders Delta plc Ernst & Young (Sweden) Euclidian Group plc First Rand La Farge SA Misys plc Nisshin Fire & Marine SAPPI Royal Bank of Scotland The Rank Group Transport for London Woolworth Group Limited 4 Willis Captive Management in Guernsey September 2003

Captive Management Services The core functions involved in captive management are carried out by Willis Management (Guernsey) Limited. Willis has teams of professionals qualified and experienced in each of the relevant disciplines, which include: Insurance Accountancy Company Secretarial Corporate Governance These core functions are carried out in Guernsey in order to comply with the requirements of the Guernsey Financial Services Commission (GFSC), and demonstrate that the captive has a true Guernsey base and identity. Each servicing team benefits from a Chartered Accountant and a qualified insurer (Associate of the Chartered Insurance Institute or better), supported by a number of experienced administrators. The office has a support infrastructure including a Compliance Officer, a dedicated IT unit, corporate secretarial expertise and a fully trained Money Laundering Reporting Officer. Willis has established contacts with the GFSC, all major (and many minor) fronting insurers and reinsurers, broking houses etc. to facilitate the smooth and effective administration of your captive insurance programme. Willis also has established contacts with all major banks, investment managers, legal advisers, auditors etc. to ensure the smooth running of the company. Whether management requirements are for a cell, PCC or captive, Willis has a team of dedicated professionals available. Insurance Management Captive development and programme design Underwriting Premium administration Policy documentation Claims handling, administration and reporting Liaison with insurance and reinsurance brokers Maintaining underwriting accounts & statistics Accountancy Management accounts Group consolidation reporting Statutory annual accounts Full accounting documentation including budgets and cashflow statements Company Secretarial Compliance with Guernsey regulations Provide registered office (if required) Act as General Representative Maintenance of corporate records Notice and Minutes of directors meetings Preparation of board papers Corporate Governance Compliance with the Licensed Insurer's Code of Conduct through the production and maintenance of a Framework including: Procedure Manual Key Risk & Control Matrix Schedule of Key Actions Act as Compliance Officer Act as Money Laundering Reporting Officer Banking and Investments Cash management Monitoring of investment managers (if appointed) Monitoring currency exposures Authorisation and payment of expenses 5 Willis Captive Management in Guernsey September 2003

Board of Directors Constitution of the Board of Directors Typically the majority of the Board of Directors will be Guernsey residents. In most cases, a captive will have three or five directors, of whom the majority will be Guernsey residents and the balance will be shareholder representatives. In some circumstances a different board composition may be more appropriate. All licensed captive insurers in Guernsey are required to have at least one Guernsey resident director with no other direct relationship with either the parent company or appointed manager of the captive. Willis would be pleased to introduce a number of potential local directors, from a range of professional backgrounds and experience. Board of Directors Meeting Pack Prior to each Directors' Meeting, Willis will prepare and distribute to directors and approved interested parties a bound board pack containing information to assist the directors in the decision making process and keep them properly advised of the activities of the company. Minimum pack contents: Notice and agenda of meeting Minutes of previous meeting Status report of all matters arising from previous meeting Summary of insurance cover provided by the Company Managers report, which will include: Introduction Underwriting review (including reinsurance) Claims review Financial review Any other business (e.g. new business, industry developments) Financial information, including: Management Accounts with comparatives as required Underwriting Accounts Claims information, appropriately analysed Other relevant information Investment Information Report by the Investment Managers Portfolio Valuation Compliance Review Analysis of cash deposits 6 Willis Captive Management in Guernsey September 2003

Investment Management An element of the financial return from the captive insurance company will consist of investment income,both from the company's share capital and from its premium income. The establishment and execution of an appropriate investment policy is therefore very important.criteria by which the investment policy should be judged include: Security Liquidity Yield The purpose of the investment policy is to enable the captive's funds to be held in a form which is secure and liquid enough to meet the potential claims obligations, whilst obtaining the best possible yield on the funds. In the case of a global insurance programme, it is important to consider the mix of currencies of liabilities as well as the projected pay out pattern of losses. The majority of captive insurance companies use professional investment managers, who follow formal guidelines laid down by the captive's board of directors. Guernsey has many reputable investment managers experienced in the particular demands of captive insurance fund management. The appointment of an investment manager may be considered once the captive's funds reach the order of 10m, dependent upon the shareholder's and board's attitude to investment risk. Tenders will normally be invited from a panel of investment managers, and presentations made to the Board of Directors of the captive, who will then decide which manager to appoint. Guernsey has a wide choice of professional investment managers available locally. It is advisable that the investment manager be accessible by the captive insurance manager, as close liaison will be required. Until a captive has sufficient funds to justify the appointment of an investment manager, the normal route is to place funds into fixedterm bank deposits appropriate to cashflow requirements. This service can be provided by Willis under delegated authority from the board. Alternatively, a professional moneybroker or cash manager, or a bank's treasury service can be appointed, or funds invested in a managed money fund. Should the captive business plan include inter-company loans to a related group party, Willis would be pleased to negotiate the amount and terms of such a loan with the insurance regulator. We have a wide experience of such negotiations and can advise on the likely outcome to assist in business planning. 7 Willis Captive Management in Guernsey September 2003

Taxation The taxation of captive insurance companies in Guernsey is designed to offer the maximum flexibility to the industry, and has greatly assisted the continued growth of Guernsey as a leading captive domicile. The taxation options are as follows: 1. Full tax exemption, subject only to payment of an annual fee of 600. 2. Taxation of 20% on operating profits. 3. Taxation solely of the captive's investment income derived from its shareholders funds; this is on a sliding scale and is effectively capped at 60,000. 4. Taxation at an agreed rate between 0% and 30%, upon formation of an "International Business Company". The vast majority of captives in Guernsey adopt Option 1 (Tax Exemption), giving freedom to distribute any or all of the company's profits to its shareholders by way of dividends, (subject to any requirements of the shareholders' own tax authorities), although captives under management by Willis do adopt other options. The proposed taxation basis should be considered at incorporation, but need not be finally established until after the financial yearend. The basis can be changed from one year to the next. For example, if the Company elects for tax-exempt status in year one, it could choose to be liable for 20% taxation in year two, and then tax-exempt again in year three. This flexibility does not extend to option 4, which must be elected from incorporation for a fixed period and renegotiated when the period expires. Other options may be elected at this point. Guernsey Advisory & Finance Committee has announced its intention to abolish exempt and International Business companies in 2008 through the introduction of a zero tax rate for insurers. Many companies are looking to comply with their parental Controlled Foreign Companies regulations by making the captive tax resident in the parent's tax domicile. Though not available everywhere, and not appropriate to all clients, Willis has extensive experience of such arrangements particularly with UK resident Groups and can advise and assist in the administration of such arrangements. Willis has extensive experience... particularly with UK resident Groups... 8 Willis Captive Management in Guernsey September 2003

Captive Insurance Company Establishment The establishment of an insurance company in Guernsey involves its incorporation and subsequent licensing by the Guernsey Financial Services Commission (GFSC). The licensing is a relatively straightforward exercise, entailing the completion of an application form and the presentation of a business plan, which is normally based on a feasibility study. Captives domiciled in Guernsey are regulated by the Insurance Division of the GFSC, under the Director of Insurance. He will not only be involved in the licensing process, but will also take an ongoing interest in the progress of the captive as it develops. The application form will require details of the ownership, share capital and share structure of the captive, as well as questionnaires from each of the proposed directors of the Company. Administrative issues, such as Registered Office, Company Secretary, and Insurance Manager, are also addressed. The purpose of the licensing procedure is to ensure that the captive is being established for bona fide reasons, and that it will be sufficiently capitalised to accept the underwriting risk which is proposed. Whilst the insurance regulations in Guernsey are designed to assist the development of captive insurance business, the nature of insurance regulation is very strict, and the laws and regulations must be adhered to at all times. A detailed business plan must be submitted to the Director of Insurance, including detailed financial projections, giving information regarding the proposed business, including programme structure, expected premiums/claims, operating expenses, investment income and reinsurance markets. This information is then used to produce a full financial plan over at least a three year period (and longer, if long tail risks such as liabilities are written). Comprehensive due diligence must be undertaken to ensure compliance with anti-money laundering legislation. Willis Management (Guernsey) Limited is experienced in the preparation and presentation of captive business plans as well as in the incorporation of captive insurance companies in Guernsey. We would be pleased to describe the full incorporation process, and to explain the responsibilities of the captive management company under the Guernsey regulatory regime. Cell formation with incorporated protected cell company Similar consideration as with a pure captive incorporation process applies. The main differences being the approval of the PCC's Board of Directors to form the cell and the completion of the Cell Management Agreement to access and utilise the cell within the spirit of the agreement rules and regulations. 9 Willis Captive Management in Guernsey September 2003

Checklist for Establishment Captive establishment This process can be completed in a relatively short time, provided the insurance programme and capital structure are known. Whilst Willis has managed to complete the establishment of a captive within seven working days, a period of six to eight weeks would be more typical. Feasibility of a captive agreed 1 2 Parent company board approval of captive. Business plan prepared. 3 4 Select board of directors, and discuss business plan. Business plan agreed with captive parent. 5 6 Company incorporated. Draft licence application and business plan discussed with Director of Insurance. 7 8 Licence application submitted. Directors' meeting to issue shares, discuss Business Plan and to appoint: Auditors Secretary Bankers Managers 9 Licence approved. 10 Capital subscribed. 11 Licence issued. Commence business. Cell establishment This process can be completed in a relatively short time, provided the insurance programme and capital structure are known. Whilst Willis has managed to complete the establishment of a cell within fourteen working days, a period of eight weeks would be more typical. 2 Parent company board approval of cell. 4 Manager to table business plan for consideration by PCC 6 Cell application and business plan considered with Director of Insurance at Guernsey Financial Services Commission. (GFSC) 8 PCC board approved. 10 Cell Capital subscribed. Feasibility of a cell agreed. Commence Business. 1 Parent company approve the cell management agreement. 3 Business plan prepared. 5 Business plan agreed with cell parent. 7 Confirmation from the GFSC that they have no objection to the cell being formed. 9 Cell management agreement signed by cell parent PCC and Manager. 10 Willis Captive Management in Guernsey September 2003

Cost of Establishment Operation The costs associated with the incorporation, licensing and operation of a Guernsey-based captive insurance company are very low compared with the financial benefit a successful captive can offer its parent. Costs associated with the establishment and ongoing management of a PCC may be higher than those indicated above dependent upon the levels of complexity and activity of the vehicle. Willis would be pleased to provide costings once additional information about the PCC had been finalised. The annual costs to run a cell within an existing Willis facility will depend on the complexity of the business plan and the management time required to handle the cell. Typically, these can be up to half that of a wholly owned captive. Costs of Establishment: Legal Fees 800-10,000 Application Fee single parent captive 3,100 protected cell company 3,100 per cell 1,040 Stamp duty (maximum - 0.5% x authorised share capital) 5,000 Annual Operating Costs: Management Fee Pure captive 40,000 (typical fee for a simple insurance programme, but may be higher for more complex programmes) Own PCC 30,000 (for a PCC core + 10,000 plus per cell dependent on insurance complexity) Cell in a third party sponsored PCC plus 27,000 (for a cell, including access fees due to the PCC core for rented cells) Audit Fee min 4,000 Government Fees 3,200 ( 3,100 GFSC licence fee, 100 Greffe filing fee) 0.25% of gross premium income (min 775, max 3,100) for cells Directors Fees 4,000 (typical fee per director, depending on amount of work involved) Exempt Tax Fee 600 The costs...of a Guernsey-based captive insurance company are very low compared with the financial benefit a successful captive can offer its parent. 11 Willis Captive Management in Guernsey September 2003

Team Profiles Daily supervision of our client companies is the responsibility of one of our Managers and/or Directors. Of our 31 staff, the majority have (or have made substantial progress towards) professional qualifications in either insurance or accounting, to ensure that a full management service can be offered in all aspects of insurance company management. Development work is performed both in conjunction with our specialist Captive Consulting unit as well as with other parts of the Willis Captive Practice as required. Managing Director Dominic Wheatley, BSc ACII Dominic has overall responsibility for the management of the Guernsey operation and for ensuring the quality of services to each client company. Dominic is a graduate in economics and an Associate of the Chartered Insurance Institute. He is a Chartered Insurer with over fifteen years' insurance experience, having previously worked in underwriting management and as an aviation reinsurance underwriter in the London market. He joined the company as an Account Manager in 1995. He is presently a member of the Guernsey Insurance Advisory Committee. Account Director Richard W. Falla, B.Ed. (Oxon) Richard manages a number of client companies that write large multinational programmes, and he has considerable experience in their establishment. He is an Oxford graduate who has now spent thirteen years as account manager and director with Willis in Guernsey. Richard is a member of the Executive Committee of the Guernsey Insurance Company Management Association. Account Director Gary Tansell MSc AIRM ACIS Gary manages a portfolio of multi-national captives and protected cell companies. Gary's team specialises in unconventional captive structures and complex accounting requirements. Gary is an Associate of the Institute of Risk Management, a Chartered Secretary and has an MSc in Corporate Governance. He has over 20 years experience in offshore finance, specialising in captive insurance for the last 12 years with Willis in the Isle of Man and Guernsey. Gary runs the Accounting Task Force that ensures the consistent application of the latest accounting practice across the office. Account Director Martin Best, ACII FCIB Martin manages a number of clients covering a broad range of risk classes. He has wide experience in the establishment and operation of captives, and in the design and implementation of corporate insurance programmes and the use of captives in ART structures. Martin is an Associate of the Chartered Insurance Institute and a fellow of the Chartered Institute of Bankers. He has over 20 years' insurance experience. Martin is responsible for compliance and quality throughout the office, and was responsible for the development of Willis' market leading initiative in response to the new Corporate Governance Code of Conduct. Account Director Shaun Brook, ACII Shaun oversees the management of a number of client companies with structured, global corporate programmes. He specialises in the design and implementation of structured programmes utilising reinsurance capacity and a range of non-conventional means of security, and the development of bespoke captive solutions to unusual risk financing issues. Shaun is an Associate of the Chartered Insurance Institute and a Chartered Insurer. He has over nineteen years of insurance experience, having previously worked as a Professional Indemnity underwriter and a broker in the UK. Shaun moved into captive management when he moved to Guernsey in 1995 and joined Willis in 2000. In addition to his Account Directorial responsibilities Shaun is very active on the consulting side of the Willis Captive Practice, working on a range of technical and commercial projects. 12 Willis Captive Management in Guernsey September 2003

Willis Management (Guernsey) Limited P.O. Box 384 The Albany South Esplanade St Peter Port Guernsey GY1 4NF Channel Islands Telephone: +44 (0) 1481 720049 www.williscaptives.com Willis Management (Guernsey) Limited is a member of the Willis Group WIM/1595/07/03 Willis Limited, Registered number: 181116 Registered address: Ten Trinity Square, London EC3P 3AX Lloyd s Broker and Member of the General Insurance Standards Council