ESTABLISHING AND OPERATING A CAPTIVE INSURANCE OPERATION IN BARBADOS JLT INSURANCE MANAGEMENT SEPTEMBER 2018
TABLE OF CONTENTS 1. CAPTIVE BASICS 2. RISK TRANSFER 3. UTILIZATION MODELS 4. UNDERSTANDING THE CAPTIVE PROCESS 5. EXAMPLES 6. CONCLUSION 7. APPENDICES
1 CAPTIVE BASICS
CAPTIVE BASICS WHAT IS A CAPTIVE? Vital financial tool A limited purpose, licensed insurance company, the main business purpose of which is to insure the risks of the captive s owners, related companies or associated third parties Either an insurance or reinsurance company Established in an accredited International Financial Centre Must have substance in the IFC as a bone-fide insurer JLT INSURANCE MANAGEMENT (BARBADOS) LTD 4
CAPTIVE BASICS WHY DO ORGANIZATIONS ESTABLISH A BARBDOS CAPTIVE? Control Management of claims Program design Coverage Fill coverage gaps Exclusions for difficult risks Capacity Access to reinsurance Captive Strategic enabler Compliance Legal and tax certainty Premium allocation Cost Leverage the market Commercial Affinity programs Extended warranties JLT INSURANCE MANAGEMENT (BARBADOS) LTD 5
CAPTIVE BASICS CLIENT PROFILE Financial Stability Good risk management practices Good spread of risk with predictable losses The ability to finance exposure Good claims history Long-term commitment from senior management Unusual or hard-to-place risks Strong business partners Purpose other than tax benefits JLT INSURANCE MANAGEMENT (BARBADOS) LTD 6
Traditional JLT INSURANCE MANAGEMENT CAPTIVE BASICS TRADITIONAL AND NON-TRADITIONAL LINES Property All Risk Crime Third Party Liability D&O Cargo Cyber Risk Surety Product Liability Non Traditional Life Trade Credit JLT INSURANCE MANAGEMENT (BARBADOS) LTD 7
2 RISK TRANSFER
RISK TRANSFER JLT INSURANCE MANAGEMENT (BARBADOS) LTD. 9
RISK TRANSFER Risk Retention vs Risk Transfer JLT INSURANCE MANAGEMENT (BARBADOS) LTD. 10
RISK TRANSFER Traditional Scheme vs. Captive Scheme TRADITIONAL SCHEME CAPTIVE SCHEME 100% EXCESS LAYER 100% REINSURANCE MARKET QUOTA SHARE REINSURANCE MARKET PRIMARY LAYER DEDUCTIBLES DEDUCTIBLES JLT INSURANCE MANAGEMENT (BARBADOS) LTD. 11
RISK TRANSFER Where does the captive operate? 100% EXCESS LAYER QUOTA SHARE REINSURANCE MARKET PRIMARY LAYER DEDUCTIBLES Limit is covered by the captive in excess of local deductibles. The primary layer is the first section in the risk structure to be affected in the event of a loss, due to this, premium in this layer is higher. JLT INSURANCE MANAGEMENT (BARBADOS) LTD. 12
RISK TRANSFER Where does the captive operate? QUOTA SHARE 100% EXCESS LAYER REINSURANCE MARKET Excess layer provides full coverage to the risk surplus once the capacity of the first layers has been fully utilized. The probability of the excess layer to be affected in the event of a loss is lower, therefore premiums are usually lower. PRIMARY LAYER DEDUCTIBLES JLT INSURANCE MANAGEMENT (BARBADOS) LTD. 13
RISK TRANSFER Where does the captive operate? The captive accepts a proportional participation of each risk up to the established limit. The premiums in this participation are proportional to the same percentage of the retention. QUOTA SHARE 100% EXCESS LAYER REINSURANCE MARKET PRIMARY LAYER DEDUCTIBLES JLT INSURANCE MANAGEMENT (BARBADOS) LTD. 14
RISK TRANSFER How does the captive operate? Flow-Through Reinsurer 1 Insured Insurance Co Reinsurer Captive Reinsurer 2 Reinsurer 3 Net Line Insured Insurance Co Reinsurer Captive Reinsurer 1 Reinsurer 2 Reinsurer 3 JLT INSURANCE MANAGEMENT (BARBADOS) LTD. 15
UTILIZATION MODELS 3
UTILIZATION MODELS WHAT TYPES OF CAPTIVE STRUCTURES ARE AVAILABLE? Single Parent Cell Captive Association/Group Captive SCALE >$1M in premium Any minimum premium level Typically a min. of $250k in premium, no maximum FEATURES Larger account solutions Unilateral control of captive (subject to regulator) No risk sharing, unless pooling arrangement is deployed Typically established by a 3 rd party sponsor Insured can rent the captive space Typically lower operating costs Could be a protected cell or incorporated cell structure Sharing risk is required Access to profitability of insurance program Considerably greater control as compared to guaranteed cost insurance Lack of unilateral control of services and risk No risk sharing Communal risk management JLT INSURANCE MANAGEMENT (BARBADOS) LTD 17
UTILIZATION MODELS SINGLE PARENT CAPTIVE EXAMPLE Parent Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary 1 Barbados Captive 2 Reinsurance/ Excess Single Parent Direct Write Captive Workflow 1. Subsidiaries submit exposures to captive 2. No requirement for admitted carrier to issue policy in Canada 3. The captive may purchase reinsurance or stop-loss for excess protection JLT INSURANCE MANAGEMENT (BARBADOS) LTD 18
Front Company JLT INSURANCE MANAGEMENT UTILIZATION MODELS The Simple Reinsurer Captive Canadian Parent Operating Subsidiary Gross premium First-party losses Net premium Losses Captive (Barbados) Third-party losses Letter of credit Losses Premium Single Parent Reinsurance Captive Workflow 1. The captive domiciled in Barbados reinsures the front company, which insures the operating subsidiary 2. When there is a requirement for admitted carrier to issue the primary policy in Canada depending on line of business Reinsurer Reinsurer 2 (excess of loss) 3. The Barbados captive may similarly purchase reinsurance or stop-loss for excess protection JLT INSURANCE MANAGEMENT (BARBADOS) LTD 19
UTILIZATIN MODELS CELL STRUCTURE EXAMPLE Owner Barbados Cell Captive JLTIM HAS A CELL STRUCTURE OPTION IN BARBADOS Management company Cell 1 Cell 2 Cell 3 Several S/H Single S/H JLT INSURANCE MANAGEMENT (BARBADOS) LTD 20
UNDERSTANDING THE BARBADOS CAPTIVE PROCESS 4
UNDERSTANDING THE CAPTIVE PROCESS The Domicile of Barbados Mature domicile with legislative enactments since 1983 261 licensed captives in Barbados as at January 2018 Extensive Treaty Network System Flexibility on accounting and reporting standards Long experience of working with international tax matters Signatory to the OECD s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) JLT INSURANCE MANAGEMENT (BARBADOS) LTD 22
UNDERSTANDING THE CAPTIVE PROCESS CAPTIVE DEVELOPMENT PROCESS Review Current Insurance Program and Risk Appetite Formal Feasibility Study Decision to Proceed Business Plan Development Captive Application, License, Incorporation and Capitalization Commence Operations JLT INSURANCE MANAGEMENT (BARBADOS) LTD 23
UNDERSTANDING THE CAPTIVE PROCESS WHAT IS A FEASIBILITY STUDY? Regulatory, Tax & Legal Analysis Establishing Core Objectives Domicile Selection FEASIBILITY ANALYSIS Data Collection Timeline is typically a minimum of 8-12 weeks The Incorporation and licensing phase is typically 4-6 weeks Program Design Actuarial Analysis JLT INSURANCE MANAGEMENT (BARBADOS) LTD 24
UNDERSTANDING THE CAPTIVE PROCESS CAPITAL REQUIREMENTS Initial Minimum Capital Stand Alone Cell in Rent-a-captive $125,000 $12,500 Ongoing Solvency Requirement 20% of Net Premium Income for each successive year 20% of Net Premium Income for each successive year JLT INSURANCE MANAGEMENT (BARBADOS) LTD. 25
UNDERSTANDING THE CAPTIVE PROCESS ISOSCELES IN BARBADOS Wholly owned subsidiary of JLT Insurance Management (Barbados) Limited Ease in setup due to established internal sign-off procedures: Letter of Understanding Deed of Guarantee Preference Shareholder s Agreement Management Service Agreement One-off cost for set up and capitalization and a further fixed annual cost. With minimum frictional costs the premium spend can start at a very low premium level No restrictions in lines of business underwritten by the facility JLT INSURANCE MANAGEMENT (BARBADOS) LTD. 26
UNDERSTANDING THE CAPTIVE PROCESS SETUP COSTS FOR A BARBADOS CAPTIVE Feasibility Work Performed Low End High End Captive Consulting $25,000 $100,000+ Legal and/or Tax $10,000 $25,000+ Actuarial $7,500 $25,000+ Implementation Work Performed Low End High End Incorporation and Licensing $10,000 $20,000 Re-domiciliation of Entity $15,000 $20,000+ Change of Insurance Manager $2,500 $5,000 JLT INSURANCE MANAGEMENT (BARBADOS) LTD 27
UNDERSTANDING THE CAPTIVE PROCESS TYPICAL ONGOING COSTS FOR A BARBADOS CAPTIVE Work Performed Low End High End Captive Management $30,000 $100,000+ Audit $10,000 $30,000 Actuarial $5,000 $25,000+ Domicile fees $10,000 $10,000 Legal, Corporate and/or Tax $5,000 $15,000+ Resident Director Fees $2,500 $5,000 Bank/Investment/LOC Fees $500 $15,000 JLT INSURANCE MANAGEMENT (BARBADOS) LTD 28
UNDERSTANDING THE CAPTIVE PROCESS WHAT ARE THE BENEFITS OF ANY CAPTIVE FORMATION? BENEFITS BENEFITS The opportunity to see favorable risk management business outcomes The drive to recapture leakage in traditional risk transfer solutions The opportunity to take risk and profit positions in affiliate business The drive to control frictional and non-loss costs The ability to deal with the unwillingness/inability of insurers to provide cost effective insurance The ability to satisfy a need for new capacity for certain risks The ability to resolve the lack of confidence in the traditional market s ability to differentiate and provide stable protection There is an enhanced focus on loss prevention and intelligent claims handling JLT INSURANCE MANAGEMENT (BARBADOS) LTD 29
UNDERSTANDING THE CAPTIVE PROCESS WHAT PITFALLS/CHALLENGES SHOULD YOU UNDERSTAND? CHALLENGES CHALLENGES Incurring unexpectedly large losses Compliance issues Meeting and maintaining capital requirements Competing uses for available capital Accessing capital for competing needs Distributing profits Winding down program Restrictions on selling or transferring ownership Focus and commitment must be long term Overcoming the learning curve JLT INSURANCE MANAGEMENT (BARBADOS) LTD 30
5 EXAMPLES
EXAMPLES Captives and Financial and Professional Risk Products Where there is no coverage under the existing policies or to deal with specific exclusions Professional Risks Professional Indemnity (E&O) Cyber & Privacy Liability Financial Risks Cyber & Private Liability Electronic & Computer Crime Professional Liability (Institution) Other Risks D&O Liability Employment Practices Transaction Liability Prospectus Offering of Securities Liability Bullion in Storage Kidnap & Ransom Liability JLT INSURANCE MANAGEMENT (BARBADOS) LTD 32
EXAMPLES Captives and Mining The case for a self-insured vehicle: Heavy investment in mining assets Political Risk and K&R activity in remote regions Nationalization of mineral assets Handling of hazardous substances/waste disposal and control Environmental Impairment Natural Disaster (e.g. earthquake and floods) Climate Change/Water Scarcity JLT INSURANCE MANAGEMENT (BARBADOS) LTD 33
EXAMPLES Captives and Employee Benefits Types of Coverage: Retirement/Pension Healthcare/Medical Life/Death Disability/Income Protection PA/Accident/TBD Other (Dental, Optical, Critical Illness, EAP, Cash Plans) JLT INSURANCE MANAGEMENT (BARBADOS) LTD 34
EXAMPLES CAPTIVES AND SURETY Insured Captive Commercial Insurer(s) 3 rd Party Surety can be used as a like-for-like replacement for LoC Frees up banking lines lowering cost of capital Create additional capacity for guarantee requirements The surety bond is a direct replacement for a letter of credit, with the bond amount equating to the letter of credit amount The bond obligation is a pure ondemand mechanism Surety typically doesn t require reserves to be raised JLT INSURANCE MANAGEMENT (BARBADOS) LTD 35
6 CONCLUSION
CONCLUSION Summary: Captives tried and tested Canadian corporations all seek to utilize Captive structures for a number of benefits Next Steps: Will this work for me? Pre-feasibility assessment performed by JLT JLT INSURANCE MANAGEMENT (BARBADOS) LTD 37
APPENDICES BIOGRAPHY 6
JLTIM BARBADOS Ricardo has been with the Barbados office since November 1994 and has served in the role of President since January 2003. His primary responsibilities include oversight of captive insurance and international business clients and business development of the Barbados operations. Ricardo Knight, FCCA, FCA President and CEO Ricardo_knight@jltgroup.bb 246-823-0400 He is also a past President of the Barbados International Business Association (BIBA), a self-financed private sector organization comprising companies engaged in international business in Barbados and companies which are otherwise strategically associated with this sector. Ricardo has held various positions in BIBA ranging from Chairman of the Insurance Sub-Committee and Director, to the first Barbadian born President. He currently serves as Chairman of the Joint Policy Working Group on behalf of the Government of Barbados which deals with issues relating to the International Business Sector. Ricardo is also a Fellow of the Association of Chartered Certified Accountants (FCCA) and the Institute of Chartered Accountants of Barbados (FCA). Ricardo has primarily worked with client companies in North America with a focus on Canada and Latin America. Many of these companies are incorporated in Barbados and utilize the country s extensive International tax and bilateral investment treaties to support the structuring associated with their establishment. Ricardo writes regularly about global business relating to international financial services and especially on captive insurance issues for local and international magazines. In addition, he has presented at numerous industry and business conferences in the Americas. He moderated recent sessions as part of the LATAM Inward Mission to Barbados series, has presented at both the U.S. and Canadian Risk Managers (RIMS) annual conferences. JLT INSURANCE MANAGEMENT (BARBADOS) LTD.. 39
JLTIM BARBADOS Effective October 1, 2012, Kirk became the Executive Vice-President of JLT s Barbados operations having joined the Group in 2006 as Vice President, Insurance. Prior to joining the team, he had already spent more than a decade in Barbados in public accounting and financial services, specializing in international insurance management. Kirk Cyrus, FCCA, FCA Executive Vice President Kirk_Cyrus@jltgroup.bb 246-256-9361 Kirk brings to the Group a distinguished track record in the management and administration of international structures with diverse operations and involving varying jurisdictional governance and oversight. His work experience includes working with clients both in the U.S. and Canada, along with many client relationships across Latin America. A Barbadian and graduate of the University of the West Indies, Kirk holds a First Class Honors Degree in Computer Science and is a Fellow of the Association of Certified Chartered Accountants (FCCA) and the Institute of Chartered Accountants of Barbados (FCA). He is a frequent contributor in local and global publications on international financial services and has also presented at industry and business conferences in the Americas. JLT INSURANCE MANAGEMENT (BARBADOS) LTD. 40