The Principles of Risk Financing Including Captive Insurance Companies

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The Principles of Risk Financing Including
Captive Insurance Companies

• Presented by Advocate Michael Kruger-
• A Gert Cruywagen Signature Presentation

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Where do we Start?

• Official Definition of Risk Management Goals
• The reduction in the probability and severity of
  disasters, incidents and loss producing events,
  with adequate financial provision for the
  consequences of such occurrences, should they
  happen
• The reduction in the total cost of risk

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ACTIONS TO ACHIEVE GOALS

• The effective identification, quantification and
  evaluation of actual and potential risks
• The comprehensive control of risk exposure
  through the implementation of pro-active,
  preventative, protective and recovery measures
• The financing of losses, should they occur,
  throughthe maximum use of own funds, within the
  framework of conservative financial practice and
  shareholder protection
• and the use of safe and secure insurance and
  reinsurance markets to insure catastrophic
  losses, as well as those losses outside of the
  companys self-insurance capabilities

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RISK ASSESSMENT The First Step

• The systematic identification of undesired events
  and their causes, analysing their likelihood of
  occurrence and potential consequences in order to
  make a value judgement as to the acceptability or
  tolerability of the risk.

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VALUE JUDGEMENT

• THE END-PRODUCT OF A RISK ASSESSMENT IS A RISK
  PROFILE
• Consequence value
• A chance of occurrence
• Criticality to the Business (Priority)

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Risk Mitigation

• Generally accepted Risk Mitigation Strategies
• The 4 Ts
• Treat
• Terminate
• Tolerate
• Transfer

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RISK FINANCING OPTIONS

• Self-insurance
• External insurance
• Statutory insurance
• Alternative Risk Transfer (ART)
• Combinations

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RISK FINANCING OPTIONS

• Self-insurance
• Unwitting and unplanned
• Structured
• Excesses and deductibles
• Aggregates

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RISK FINANCING OPTIONS

• Self-insurance
• Structured
• Captive Insurance Companies
• Rent-a-captive
• Cell captives

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RISK FINANCING OPTIONS

• External Insurance
• Assets (Property) Insurance
• Liability (Casualty) Insurance
• Marine classes of insurance
• Crime classes of insurance
• Credit Insurance
• Political Risk Insurance
• Peripheral insurances

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RISK FINANCING OPTIONS

• Statutory Insurance
• WCA
• MVA
• UIF

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RISK FINANCING OPTIONS

• Alternative Risk Transfer (ART)
• Spread loss
• Finite risk
• FinRe
• Risk Bond

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RISK FINANCING PROGRESS

• First Stage
• Totally un(self)-insured
• Second Stage
• Unplanned self-insurance with some external
  insurance

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RISK FINANCING PROGRESS

• Third Stage
• Structured self-insurance with planned external
  insurance
• Fourth stage
• Structured self-insurance with planned external
  insurance to planned level with ART on top

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RISK FINANCING PROGRESS

• Final Stage
• Maximum us of own funds with utilisation of own
  insurance captives, utilisation of variety of ART
  with external insurance only for those exposures
  outside your own self-insurance capabilities and
  catastrophic losses
• With optimum protection of share-owners funds
  and within bounds of conservative financial
  practice

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The Captive

• Definition
• A Captive Insurance Company is an insurance
  company formed by an Enterprise to insure some,
  or all, the risks of its parent. The shareholder
  or parent is not normally in the insurance
  business.

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Comparative Advantages of Own Captive

• Full ownership
• Full control over the ownership
• Full control over appointment of Directors
  (within legal guidelines) and Captive Managers.
• Full control over the captive and its assets.
• Full control over the direction and mission of
  the captive company.
• Full control over decisions regarding classes of
  insurance, insureds, other participants, etc.
• Full control over the final redemption of capital
  on termination.

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Comparative Advantages of Own Captive

• Full control over the information
• Lots of opportunity for savings due to
  efficiencies.
• Full control over investment policy (within
  framework of insurance law).
• Full investment leverage on premiums, premium
  reserves, capital, claims provisions and
  statutory provisions through sharing of capital
  reserves and investments with parent

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Comparative Advantages of Own Captive

• Premiums fully deductible
• Free access to local and international
  re-insurance markets
• Earns reinsurance commissions and insurance
  overrider commissions
• Facilitates building of reserves and provisions
• Full freedom to write unpopular and uninsurable
  risks

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Comparative Advantages of Own Captive

• Funds will be built up through
• Investment income from improved cash flow
• Investment income from timing differences,
• By receiving commissions from reinsurers and
• By retaining excess premium from good loss years.

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Strategic Advantages of Own Captive

• It facilitates the achievement of risk management
  goals
• The captive can reward risk management
  performance
• Premiums can be tailor made to reflect each
  Departments exposure in terms of Estimated
  Maximum Loss Values, total value risk, risk
  control measures and loss record
• Covers can be tailor made to suit the own
  requirements
• Reductions in losses make the captive more
  profitable, enhancing its appeal to reinsurers
• Participation in a captive sharpens the focus of
  management in respect of their risk management
  goals

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Strategic Advantages of Own Captive

• The captive can insure unpopular or expensive
  risks
• The captive can insure risks that are normally
  not insurable (trade risks, maintenance risks,
  pollution risks or business risks)
• The captive will eliminate frustrations due to
  non-insurance matters
• Contributions to self-insurance provisions are
  now turned into premiums

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Financial Advantages of Own Captive

• Separate profit center
• Eliminates the fragmentation of insurance
  purchasing (consumes up to 30 of the premium in
  administration costs)
• Eliminates overheads of the conventional
  insurance markets (retail brokers, local front
  insurers, wholesale brokers, overseas insurers,
  reinsurance brokers)
• Lower cost of insurance (premiums in terms of
  loss performance instead of general loss
  statistics)
• Fluctuations in commercial insurance conditions
  minimized
• Access to wider range of reinsurance markets
  (captive an insurer in its own right). The
  captive will attract the reinsurance commission
  (20)

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Financial Advantages of Own Captive

• Investment income normally only available to the
  insurance companies,
• Improved cash flow
• Contingent profit commission (underwriting
  profits)
• Self-insurance provisions handled much more
  effectively -duplication eliminated.

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The Disadvantages and Risks

• Solvency/ capitalization requirements
• Licensing and establishment costs
• Applications to Financial Services Authority.
• Reinsurance Failure
• Inadequate funding
• Bad investment policy.
• Bad directors decisions.

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Thank You.

• A Gert Cruywagen Signature Presentation