Captives for Public Entities JUSTIN A. WILEY, CPCU, RMPE AREA ASSISTANT VICE PRESIDENT GALLAGHER PUBLIC SECTOR MONDAY, SEPTEMBER 18, 2017
Goals: 1. To provide a basic overview of Captives and demonstrate how they may be applicable to the Public Sector. 2. Review an actual case study: State of South Dakota. 2
Objectives: 1. Enabling Legislation 2. What is a Captive? 3. What does a Captive provide? 4. Types of Captives 5. Start-up Costs / Capital Surplus Requirements 6. Support/Administrative Services 7. Benefits & Drawbacks 8. Examples of Public Entity Captives 3
Enabling Legislation 1. Enabling Legislation is the framework that allows Public Entities to join together or pool. Goal to increase economies of scale reduce cost to tax payers. 2. Public entity insurance pooling became popular in the 1980s during a deep hard market. 3. Enabling Legislation varies by State. 4
What is a Captive? 1. A Captive is a special purpose legal entity which is licensed as an insurer. 2. It is established primarily to insure a proportion of the risks of its sponsor often a corporate parent, group, or association. 3. It is risk-bearing. 4. It can be either an insurance or reinsurance entity. 5. In addition to insuring for the parent, a captive can also be used to insure/reinsure the risks of third parties such as customers, suppliers, or subcontractors. 5
What is the intent of a Captive? 1. Establishing a centralized risk framework. 2. Creating tailored, comprehensive, and responsive coverage. 3. Improving claims handling and monitoring. 4. Potentially reducing the overall cost of risk. 5. Potentially increasing cash flow of the combined business enterprise. 6
Why a Captive? 1. Reduce insurance costs 2. Group purchasing power 3. Return of underwriting profit 4. Control over insurance program 5. Long-term stabilization 7
Categories of Captives 1. Pure Captive that is 100% owned by their members 2. Sponsored Captives owned or controlled by parties unrelated to the insureds/members 8
Types of Captives 1. Single-Parent (Pure) Captive 2. Risk Retention Group 3. Group Captive 4. Enterprise Risk Captive (831b) 5. Employee Benefit Captive 6. Rent-a-Captive 7. Segregated/Protected Cell Company 9
Captive/RRG Differences Captive RRG 1 Been around for 100+ years Legislation enabled in 1981 2 Can be single-parent policy holder Shared risk between 2 or more policy holders 3 Any line of coverage Limited to casualty lines only 4 Lower levels of capital Requires at least $500k in capital (though usually more) 5 Domiciled domestically or foreign Must be domiciled in US 6 Fronted by any willing and licenced insurer Not required to be fronted 10
Captive Team 1. Insurance/Captive Manager 2. Insurance Broker/Consultant 3. Legal Advisor (w/captive experience) 4. Tax Advisor (w/captive experience) 5. Claims Administrator 6. Actuary 7. Auditor 8. Bank/Investment Advisor 9. Regulator 11
Captive Process Deliverables Client Decisions Feasibility Formation Function 2-8 Weeks 1-4 Months Annually What property, casualty, and enterprise risks affect my business? Are there specific insurance areas that you want a captive to insure? What are the goals for this captive (e.g., risk management, lower insurance cost, financial statement)? What cash flow and capital can I commit to this captive? Which insurance policies should I purchase through my captive? How will captive be owned? How should the captive s assets be invested? Key management team for captive? Where will it be domiciled? Who in my organization will interact with captive on a regular basis Have there been any changes to my business? Have there been any changes to my business insurance program? Are controls in place to properly identify and submit claims to captive? Client: Client: Client: Feasibility Study materials (current Capital Contribution: $100k - $1m Monthly bank statements insurance policies, summary of Due Diligence on owners of captive Board of Directors meetings business operations and financials, -Personal financial statement interview with underwriters) -Credit /background check Captive Manager: -Documentation on any entity Captive insurance policies Captive Manager: involved in the ownership structure Claims handling Feasibility Study showing benefits, Monthly meetings possible coverages, and estimated Captive Manager: Quarterly management reports premium amounts Corp formed and domiciled Accounting services including Insurance license regulation compliance Insurance policies Coordination of service providers 12
Feasibility Study Feasibility Study to cover the following topics: 1. Introduction and executive summary 2. Organization overview 3. Captive Requirements Cost/benefit analysis Solvency/Capitalization/Premiums Captive structure Directors 13
Feasibility Study 4. Financial analysis Stress testing Prospective Pro Forma Premium funding estimates Expected loss calculations Investment strategy Tax position 5. Other considerations Future develop opportunities of captive Ownership structure Exit strategy 14
Typical Costs and Fees Associated 1. Feasibility Study i. Actuarial ii. Legal, tax and accounting advice 2. Captive Establishment i. Capitalization ii. Application fee iii. Year 1 license fee iv. Incorporation costs v. Captive manager fee vi. Legal fees 3. Ongoing Costs i. Domicile fees ii. Captive management fees iii. D&O Insurance iv. Auditor fees v. Actuarial Fees vi. Meeting/travel costs 15
Preferred Domiciles Top Domiciles Top US Domiciles Top Euro Domiciles Bermuda 797 Vermont 596 Guernsey 319 Cayman 708 Utah 450 Luxembourg 217 Vermont 596 Delware 323 Isle of Man 115 Utah 450 Nevada 202 Dublin 84 Delware 323 Hawaii 197 Sweden 44 Anguilla 319 Montana 196 Guernsey 319 District of Columbia 193 Nevis 268 South Carolina 167 Barbados 236 Tennessee 127 Per Business Insurance Captive Survey 2015 16
In what ways can a Captive serve a Public Entity? 1. Pool insurance (risk share) across State lines 2. Appropriation protection 3. Regulatory oversight 4. Tough to place risk 5. Segregate unique exposures 6. Emerging risk 7. Enterprising/profit component Example: University (Non-profit) electronic device protection program for students/staff with the goal of generating revenue/profit 17
Examples of Public Sector Captives 1. States Risk Retention Group (RRG) 2. Government Entities Mutual (GEM) 3. Alliant Property Insurance Program (APIP) 4. South Dakota Captives 5. Clean Water Insurance Co, LLC (Hillsborough, OR) 6. Transit Re OTRP/MTP Transit Casualty Reinsurance Captive 7. State of NV/City of Las Vegas/Henderson Segregated Cell Worker s Compensation HLHC Presumption Captive (Not Initiated) 18
Justin A. Wiley, CPCU, RMPE Area Assistant Vice President Gallagher Public Sector 407.563.3542 Justin_Wiley@ajg.com