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Captive 201

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Commence business. Day-to-Day Operations. Day-to-Day Operations. Who is responsible for what ... Commencement of Audit. Audit planning meeting several months in ... – PowerPoint PPT presentation

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Title: Captive 201


1
Captive 201
  • After the Feasibility and Implementation

2
Captive 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.

3
Agenda 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

4
Overview of the Bermuda Captive Insurance Market
5
Sources
  • Annual Market Survey on Captives
  • Administered jointly by
  • Bermuda Monetary Authority
  • Bermuda Insurance Managers Association
  • Statutory Financial Returns
  • All figures for 2008 are provisional

6
Bermuda 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

7
Topics
  • 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

8
Bermuda Captive Market Premiums
9
Premiums by Region of Underlying Risk
10
Assumed Premiums by Region of Underlying Risk
11
Types of Coverage
12
Major Property Lines of Business
13
Major Casualty Lines of Business
14
Bermuda Captive Market Assets
15
Assets Detail
16
Inside Quoted Investments
17
Liabilities Detail
18
Profitability Indicators
19
Highlights
  • 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

20
Review Feasibility and Implementation
21
Captive 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

22
Captive 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

23
Day-to-Day Operations
24
Day-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?

25
Roles and Responsibilities Document in
Procedures Manual
26
Day-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

27
Day-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

28
Day-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

29
The Renewal Process
30
Pre-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!

31
Captive renewal pricing
  • Three usual methods of calculating premium
  • Market rates
  • Experience rating
  • Other premium pricing techniques

32
Market Rates
33
Experience Rating
34
Other 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

35
The Audit
36
Commencement 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

37
Completion 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

38
Statutory 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

39
Other Activities/Actions
40
Financial 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?

41
Board 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!

42
Business 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

43
Captive Review
  • What measures are available to review
    performance?
  • Review of service providers how have they
    performed?
  • Things learned for next year

44
Types of Review
Full Analytical Review Integrated With Parent Fina
ncial Impact
Financial Performance Ratios
Governance Review
  • Utilization

45
The Ovation
  • Questions and Answers
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