Alternative Risk Transfer 21 May 2004

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Alternative Risk Transfer 21 May 2004
AURIMS
2

• Current Issues
• Uncertain market
• Insurers have to make profit for shareholders
• Insistence on good RM
• Unwillingness to differentiate

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Why Retain Risk?

• Choice - To take advantage of benefits
• Necessity - Risk transfer (e.g. insurance)
• is not available
• Ignorance - Risk is not identified

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Cost of Insurance
Elements of Insurance Premium
Cost of Predictable Claims
State Tax (X)
Loading for Expenses, Commission Profit (30?)
Catastrophe Provision
x
x
Portfolio Subsidy
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Cost of Risk Retention
Cost of Predictable Claims
State Tax (X)
Loading for Expenses, Commission Profit (30?)
Catastrophe Provision
x
x
Portfolio Subsidy
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The Insurers Objective
Premium
Profit
Break-Even
Time
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Object of Risk Retention
Insurance Premium
Retained Risk Premium
Time
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Why look for an alternative?

• To control your risk transfer programme take
  that control away from insurers.
• To reduce money lost to insurers
• To cost-effectively finance retained risk
• These, and other benefits, can be achieved with
  an
• appropriate captive

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Types of Captive

• Traditional (single parent)
• Rent-a-captive
• Association
• Mutual
• PCC

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Captive - benefits 1

• Tax efficient smoothing of retained risk
• Reduced insurance costs
• Retention of
• Underwriting profit
• Investment income
• Access to reinsurance markets

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Captive - benefits - 2

• Uninsurable risks - capacity and flexibility
• Reduced dependence on insurance market
  uncertainties
• Restricted cover
• Claim declinatures
• Insurer security
• Formal risk management focus

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Captive - disadvantages

• Retention of underwriting losses
• Capital committed to non-core business
• External expenses
• Management
• Regulatory
• Management time

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PCC STRUCTURE
Cell A
Cell B
Cell H
Cell G
PCC Owner (Core)
Cell C
Cell D
Cell F
Cell E
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PCC/SAC Features - 1

• Established under Guernsey Protected Cell Company
  Ordinance 1997 Bermuda 2001
• Single company with one
• Board of Directors
• Memorandum and Articles of Association
• Assets and liabilities of each cell separated by
  statute

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PCC/SAC Features - 2

• Solvency test for main PCC - also for cells if
  reliant on cellular capital
• Requires licensed insurance manager
• Requires only one set of accounts
• Documentation in name of PCC - not individual
  cells

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PCC/SAC - Advantages Over Traditional Captives

• Reduced capital requirement
• Lower running expenses
• Reduced management time

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Potential Applications (inter alia)

• Funding insurance deductibles
• Funding excluded/uninsurable risks
• Public/Products Liability - Recall
• Environmental Impairment/Pollution
• Regulatory Changes - Effects on e.g.
  decomissioning costs

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Establishment Requirements

• Good loss experience
• Good risk management
• Effective risk identification and assessment
• Financial ability to retain risk
• Senior management commitment

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PCC as a possible solution for AURIMS members?

• PCC will allow
• Each member to retain risk at own level
• Loss records to be ring fenced
• Reduced reliance on insurance
• Real reward for improved RM

and will also provide an opportunity for an
aggregated Reinsurance purchase, with resultant
economies of scale
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Programme Objectives
Loss Type
Treatment
Low Frequency High Severity
Catastrophe level
Transfer (Insurance?)
Capable of self funding
Medium Frequency Medium Severity
Finance
High Frequency Low Severity
Controlled by operating deductibles
Retain
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Retained at Operating Level
2,000
1,000
750
2,500
3,000
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Cell Retention
800 K
700 K
600 K
400 K
300K
2,000
1,000
750
2,500
3,000
Retained at Operating Level
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EML Reinsurance Need
16m
12m
10m
6m
4m
Cell retention
800 K
700 K
600 K
400 K
300 K
2,000
1,000
750
2,500
3,000
Retained at Operating Level
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16m12m 28 EML
Reinsurance Purchase
EML Reinsurance Need
16m
12m
10m
8m
9m
Cell retention
800 K
700 K
600 K
400 K
300 K
2,000
1,000
750
2,500
3,000
Retained at Operating Level
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Too late to do anything?
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Who to contact for further advice?
Len Hanning Managing Director Miller
Associates Email lenh_at_miller-associates.com.au 02
9262 5555 Chris Charman ACII ACI Arb Managing
Director Thomas Miller Risk Management (UK)
Ltd Email chris.charman_at_thomasmiller.com ? 44
(0) 20 7204 2567