Title: Captive 201
1Captive 201
- After the Feasibility and Implementation
2Captive 201
- After the Feasibility and Implementation
- Presented by
- Kathleen Bibbings, EVP, Aon Insurance Managers
(Bermuda) Ltd. - Traver Alexander, Research Officer, Policy,
Research and Risk Assessment Department, Bermuda
Monetary Authority - Craig S. Melnick, Manager, Global Insurance,
Eaton Corporation - Robert Paton, EVP, Aon Insurance Managers
(Bermuda) Ltd.
3Agenda After the Feasibility and Implementation
- Overview of the Bermuda Captive Insurance Market
- Review Feasibility and Implementation
- Day-to-day Captive Operations
- Captive owner
- Captive manager
- The Renewal process
- Pre-renewal planning
- Captive renewal pricing
- The Audit
- Commencement of audit
- Completion of audit
- Statutory financial return filing
- Other Activities/Actions
- Financial reporting - actual vs. budget
- Board meeting
- Business plan changes
- Captive review
4Overview of the Bermuda Captive Insurance Market
5Sources
- Annual Market Survey on Captives
- Administered jointly by
- Bermuda Monetary Authority
- Bermuda Insurance Managers Association
- Statutory Financial Returns
- All figures for 2008 are provisional
6Bermuda Captive Insurer Classification System
- Class 1 Captives
- Single parent Captives insuring only the risk of
that parent or affiliate - Class 2 Captives
- Single parent or multi-owner captives with
allowance to insure 3rd party risk up to 20 of
NWP - Class 3 Captives
- Captives with allowance to insure 3rd party risk
over 20 but less than 50 of NWP
7Topics
- Gross Written Premiums
- Regional location of underlying risk
- Property and Casualty coverage overview
- Main lines of business written
- Balance Sheet Size and Composition
- Asset side overview
- Quoted investment detail
- Liability side overview
- Profitability Indicators
8Bermuda Captive Market Premiums
9Premiums by Region of Underlying Risk
10Assumed Premiums by Region of Underlying Risk
11Types of Coverage
12Major Property Lines of Business
13Major Casualty Lines of Business
14Bermuda Captive Market Assets
15Assets Detail
16Inside Quoted Investments
17Liabilities Detail
18Profitability Indicators
19Highlights
- Small growth in gross written premiums in 2008
- Continued regional diversity in the location of
risk - Stability in balance sheet positions
- Nearly two-thirds of assets in cash and quoted
investments - Capital and surplus positions well in excess of
regulatory requirements - Bermuda remains the largest captive domicile
20Review Feasibility and Implementation
21Captive Feasibility
- Sell to senior management the business reasons
for the captive - Get approval to do feasibility study
- Partner with a good consultant
- Demonstrate the advantages
- Optimal ownership structure
- Select your insurance or reinsurance markets
- Domicile
- Service providers
- Capitalization and form cash vs. LOC vs. assets
- Obtain approval to implement the captive
22Captive Implementation
- Select name not as easy as it sounds!
- Identify directors and officers
- Obtain latest actuarial study
- Get market quotations to derive pricing
- Prepare proformas
- Complete the narrative Business Plan
- Select law firm to incorporate the entity
- Complete the captive application
- Attend pre-application meeting
- Always be honest and forthright with the
regulators - Submit application
- Obtain license
- Finalize arrangement with insurer or reinsurers
- Commence business
23Day-to-Day Operations
24Day-to-Day Operations
- Who is responsible for what
- Claims management/TPA management
- Claims reserve setting (actuaries)
- Receipts and payables
- Reporting requirements (monthly/quarterly)
- Investment management
- Operations Manuals what should be included?
25Roles and Responsibilities Document in
Procedures Manual
26Day-to-Day operations - Captive Manager
- Act as Principal Representative in Domicile
- Co-ordinate activities of Domicile legal
representatives, brokers, actuaries and other
service providers, provision of financial
services - Preparation of Financial Statements and Forecasts
- Year end audits (independent approved auditor,
assisted by Captive Manager) - Statutory filings
- Treasury Service Activities
- Financial transactions (Captive Manager and
Investment Manager) - Monitoring and processing cash and investment
activities - Assist implementing of collateral requirements
27Day-to-Day operations - Captive Manager Continued
- Insurance Services
- Policy documentation
- Mid-term endorsements
- Claims handling (TPA with reports to captive
manager) - Business Development
- Periodic reviews of captive utilization and
development possibilities (Captive
Manager/Consultant/Broker) - Implementing new programs
28Day-to-Day operations - Captive Owner
- Provide leadership
- Determine the strategic use of the captive
- Set and Manage operational expectations
- Be the ultimate decision maker
- Approve filings
- Approve financials
- Provide necessary data
29The Renewal Process
30Pre-renewal planning
- When should the captive enter the renewal
discussions? As early as possible! - Who should be involved? Broker and insured with
skin in the game - Review objectives
- Primary in captive and excess as insurance?
- Full limits in captive and excess as reinsurance?
- What is the best form of collateral?
- Policy writing and issuance. Standard or
customized? - Do not be afraid to forego use of the captive
when capacity is cheap and security is good!
31Captive renewal pricing
- Three usual methods of calculating premium
- Market rates
- Experience rating
- Other premium pricing techniques
32Market Rates
33Experience Rating
34Other Premium Pricing Techniques
- Mean (or Expected) Loss Expenses
- Loss Ratio (using mean loss estimate, pricing to
achieve a desired loss ratio) - Targeted Return on Equity (pricing required to
achieve targeted ROE, considering mean loss
expenses) - Mean Loss Risk Premium (percent of standard
deviation) - Confidence level
- Last year /- inflation/growth percentage
35The Audit
36Commencement of Audit
- Audit planning meeting several months in advance
- Agree upon timeline and how this will be achieved
- Ensure other service providers agree with the
timeline - Prepared by Client customized request list issued
well in advance - Inform auditors of any major changes in the
program or in the process - Have documentation supporting the main processes
- Avoid Material Weaknesses or Control Deficiency
37Completion of Audit
- Be ready for the start of the audit and ensure
items requested are available to the auditors - Inform the auditors of any changes between
planning and field work - Early completion means less subsequent events
- Recommend frequent communication with auditors to
ensure the audit is progressing smoothly
38Statutory Financial Return Filing
- Specialized reporting format required by domicile
- Required 4 months or 6 months after fiscal year
end depending on class of license - Must be opined upon by an approved auditor
- May require a Loss Reserve Specialist Opinion
prepared by an approved actuary depending on
class of license
39Other Activities/Actions
40Financial Reporting Actual vs. Budget
- Compare written premium closely to actual cash
received - If exposure changes , issue addendum to policy
and associated invoice - Are expense deductions taken by the front company
the same as appears in the contract? Check
carefully! - As premium is recorded and earned, adjust IBNR so
budgeted loss ratio is achieved - As claims and reserves are recorded, adjust IBNR
- Compare claims with expected and take action!
- Is cash being received in a timely manner?
- Interest income in-line with expectations?
- Are general and administrative expenses in line
with budget? If not, why not?
41Board Meeting
- Get it on everyones calendar early
- Consider special invitees such as
- regulator, investment managers, claims, auditor,
actuary, reinsurance broker, etc - Present the important topics such as premium,
claims, investments, dividends, etc. - Encourage meaningful debate
- Review compliance check-list and ensure adherence
- This may be a once a year opportunity to make an
impression dont waste it! - Afterwards.. Have fun!
42Business Plan Changes
- Material changes to business written, limits,
reinsurance, may require prior approval from
regulators - Capital reductions, change in certain investments
(loan backs) may require prior approval from
regulators - Such actions are best recorded as Board decisions
- Rationale for changes should be documented
- Material impact on the captives financials
require revised projections and revised business
plan - Captive manager should make the risk manager
aware of these requirements
43Captive Review
- What measures are available to review
performance? - Review of service providers how have they
performed? - Things learned for next year
44Types of Review
Full Analytical Review Integrated With Parent Fina
ncial Impact
Financial Performance Ratios
Governance Review
45The Ovation