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Expanding Beyond Your Original Captive Business Plan Courtney Claflin, University of California Peter Gerken, Steel City Re Brian Johnson, Bartlett Actuarial Group, Ltd Moderator: John Ferrara, Ernst & Young August 8, 2017 2017 VCIA; Speaker materials used by VCIA under license.
Polls 4
Live Content Slide When playing as a slideshow, this slide will display live content Poll: Is your captive focused on one item? 5
Live Content Slide When playing as a slideshow, this slide will display live content Poll: What is the purpose of your captive? 6
Live Content Slide When playing as a slideshow, this slide will display live content Poll: What are the best words to describe why you have a captive? 7
Live Content Slide When playing as a slideshow, this slide will display live content Poll: What are the biggest roadblocks to expansion of your captive? 8
Fiat Lux 9
University of California System 10 university campuses $33 Billion Annual revenues 5 academic medical systems 3 national laboratories 280,000 employees 375,000 students Sports teams, stadiums, airplanes, airports, foreign everything imaginable 10
Fiat Lux Structure 2012-2016 UC Regents Fiat Lux Board of Directors Fiat Lux Issue deductible reimbursement policies- 5 lines of cover: Work comp GL/AL Medical malpractice Employment Practices Note: Policies issued for top 50% of self insured retentions Results = $25 million premium/ $50 million in assets 11
Overview of Captive Utilization Philosophy Retained Risk Risk Transfer Access to 3rd Party Finance Rate Arbitrage Capacity Utilizations Business Purpose Governance around retained risks Enhancing risk management efforts Better use of capital to retain risk than transfer Harmonization of risks across global portfolios Reducing cost of risk transfer Reinsurance market cost of risk transfer is less than retail equivalent Managing TCOR Recapturing Ceding Commission Transferring risk to alternative forms of capacity, which may not be otherwise accessible in commercial retail market Accessing profitability imbedded in insurances sold to affiliates / consumers / partners Creating stickiness for core product offerings Further penetration into consumer / partner / affiliate wallets Examples Deductible buy-down Participation in excess programs Fronted global programs Multinational benefit pooling Capital Efficiency: Reinsurance pass through Excess Re placements Integrated risk programs Multinational benefit pooling Credit risk transfer ART solutions Cat bonds Integrated aggregates Parametric triggers Terrorism pools Consumer facing insurance programs Forced placed insurances Affiliate business Agency captives Bringing together correlated and non-correlated risks to benefit from severity risk diversification effect Harmonizing and aggregating global and individual risk programs to maximize risk transfer market leverage and diversify market concentration in risk portfolios 12
Fiat Lux Structure- 2016 Current 13
Fiat Lux Structure- 2016 Current Sponsored new captive- UC Health RRG, A Reciprocal Risk Retention Group Insure 25 lines of cover for UC Direct reinsurance placements vs. excess (wholesale vs. retail) Quota share arrangements with reinsurers Provide 3 rd party reinsurance to UC Health RRG Provide stop loss reinsurance (health) to 375,000 individuals 100,000 student health plan 275,000 staff/faculty plan $980 million premium/ $1.4bn assets/ $150m unrestricted net position 14
Fiat Lux Structure - 2017 UC Regents Fiat Lux Board of Directors Fiat Lux UC Health RRG AIF UC Health RRG SAC UC Health RRG A Reciprocal Risk Retention Group UC Core Cell Company UC Voluntary Life & DI Cal State Cell Co.? Opportunities 15
QUESTIONS 16
Reputational Risk 16
Agenda Measuring Reputation Risk Monitoring & Managing Reputation Risk Mitigating and Transferring Reputation Risk 18
Assuring Reputation to Create Value Reputation can elevate and enhance the enterprise value of an organization Reputation must be managed at a strategic level to signal stakeholders Benefits to expanding the captive business plan Strategic relations with capital markets, regulators, and customers Break down operational silos within enterprise Financing retained risk A Risk Management tool 19
Measuring Reputation Risk 20
Measuring Reputation Risk Steel City Re s Reputational Value Metrics Heart health: Reputation health: Blood pressure (mm/hg) Exercise tolerance (HR/mph/time) Serum cholesterol (mg/dl) Body mass index (kg/m 2 ) sales volume, cycle time, pricing HR costs cost of credit, credit protection investor behavior regulatory behavior 21
Authority and Credibility Steel City Re s Reputational Value Metrics Foundation 15 years of actuarial data 5.5 million data points Deployment Hundreds of captives Hedge Fund x 9 years KRMA, Exchange traded fund Repuvar a DJI/CME Index RepSPX outperforming S&P500 340%! 6000.00 5000.00 4000.00 3000.00 2000.00 1000.00 0.00 S&P500 Rebased RepuSPX 22
Monitoring & Managing Reputation Risk 23
Reputation Assurance is a Risk Management Tool Reputational Value Metrics (RVM) measure both upside value as well as downside risk RVM provides an almost real time measure, not available anywhere else in financial or insurance services Metrics are shared upfront at time of underwriting as well as multiple times during the policy term 24
Risk: Losses Typically Underestimated During Event Because reputational risk has a long-lasting emotional component 3-Year Average Initial Indemnification Experience (Steel City Re) 25% 23.7% 20% 15% 10% 5% 0% 5.2% 3.8% Initial Expectation 0.0% 20 wks 13.3% Final Expectation 11.8% Market Cap Loss Sales Loss Net Income Loss 25
Risk: Exploding Cost of Loss Because reputational risk exacerbated by baseline community anxiety and anger Huge 461% 259% 227% 231% 100% 132% 2011 2012 2013 2014 2015 2016 26
Risk: Personal at Level of Director and Officer Because emotions can be mitigated with sacrifice directors are being targeted and replaced The risk is now personal TOP BOARD ISSUE Targeted Replaced CMG 33% 0% DB 20% 20% MYL 23% 0% VRX 55% 55% VW 100% 30% WFC 7% 7% YHOO 82% 0% Average 46% 16% Source: AgendaWeek, 6 Feb 2017 27
Mitigating and Transferring Reputation Risk 28
Comparative Insurance Market Solutions AIG Munich Re Steel City Re Parameter Indemnified cost of PR Estimated loss of net income Parametrically determined % limits Value of parameters After, as allowed After, forensically determined Before Use of funds PR services Unrestricted Unrestricted Instrumental Value** $500K-$25m As needed $25-$100m Strategic Value No No Tolerance (Emotions) Premium** >2% ROL As needed 0.5%-4.9% ROL **Significant variance/flexible structures 29
Dealing with Emotional Features of Reputation Risk Reputation Assurance: Signaling quality and integrity (like a warranty) 30
Steel City Re Parametric Risk Transfer: % Limits Time=20 weeks Baseline = 2 σσ Loss Gate = nσσ Indemnification Changing Parameter 31
Triggers and Losses Qualitative: A business process fails and it receives adverse publicity Processes and media must be scheduled Quantitative: A sustained material drop in the RVM If RVM drops below the first Loss Gate, an insured will be indemnified for 20% of the limits; below the fifth Loss Gate, 100% of the limits Covered Loss shall not exceed the lesser of the Actual Loss sustained by the Insured or the Policy Limit RVM (GU) 1.05 0.90 0.75 0.60 0.45 2/22/08 4/9/09 6/4/10 RVM Loss Gate 1 Loss Gate 2 Loss Gate 3 Loss Gate 4 Loss Gate 5 Loss Gates are multiples of standard deviations of the Named Insured s historic RVM volatility 32
Money Talks/Actions Speak Assuring Reputation Indemnifying Going-forward Losses $100 million Line Slip Tokio Marine Kiln 1 st party indemnifications for companies, directors & officers Parametric with rigorous pricing and underwriting support Flexible; excellent with captives Reversing Emotional Charges communicates the quality of governance absolving board members. NACD Directorship, Jan/Feb 2016 33
Captive Insurance Case Studies Health Services Energy Services Financial Services Size $20M $90M $1B Risk Quality & Safety Safety & Sustainability Ethics (Liquidity)** Pricing 2.1-4.2% Prox / 0.56%-1.0% Remote 8.5%-16.5% Prox/ 2.2%- 4.2% Remote 4.9%-9.7% Prox/ 1.3%-2.5% Remote Limits $3M $8M $50M Triggers Capital 6.8% Loss in Revenue Prem=3.11% ($93K); Cap+$31K 15.8% Loss in Revenue 9.1% Loss in Revenue Prem=12.2% ($976K); Cap+$325K Prem=7.13% ($3.5M); Cap+$1.2M **OCC-defined regulatory risk 34
Underwriting and Pricing Support for Captives Captives can bear up to 100% of the risk Available for public or privately owned Modify RVI policy language for desired cover and triggers (no Index) Risk finance and loss absorption capacity Quantification drawn from SCRe actuarial data and expertise Provide comfort to regulators and tax authorities Underwriting services provided Key domiciles have been briefed 35
Reputation-Expanding the Captive Business Plan Summary Manage emotions Measure impact objectively Strategically signal stakeholders Enable Risk Management on an almost real time basis Enable risk financing and Indemnification of goingforward losses Limited Commercial Options** Emotions Measurement Going Forward 36
QUESTIONS 37
Actuarial Considerations 38
Expansion of existing coverage(s) Increased occurrence and/or aggregate limits Expansion of manuscript policies Generally requires loss history Gross losses Maybe more than captive time period 39
Current uninsured coverage(s) Enterprise Risk Management coverages Disruptions to revenue Outside occurrences that require additional expense Disruptions to business continuity Loss history preferable but not necessarily required Commercial coverages Large deductible reimbursement Excess covers Catastrophic covers Loss history generally required 40
Generally utilized actuarial methodologies Trended ultimate loss projections Industry statistical data Monte Carlo simulations Commercial insurance filings Other repositories of data / statistics 41
QUESTIONS 42
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