Captive Insurance

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Captive Insurance
CAGNY June 1, 2005 New York City
Derick A. White, CPA, CFE Director of Captive
Insurance Vermont Department of Banking,
Insurance, Securities and Health Care
Administration
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What is a Captive?

• formalized self-insurance
• wholly owned subsidiary
• licensed in a state (or country)
• a regulated insurance company with a limited
  license

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Why form a Captive?

• Obtain Coverage
• Control Cost
• Focus on Risk Management
• Manuscript Policy
• Pre-loss funding

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History

• Bermuda during the early 1970s
• Colorado, Georgia, Tennessee
• Vermont in 1981
• Hawaii in 1986
• Recent States

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Types of Captives

• Pure
• Industrial Insured
• Association
• Risk Retention Groups
• Sponsored (Rent-A-Captives)
• Reciprocal
• Branch

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Some Coverages Currently Written with Captives

• General Liability
• Product Liability
• Workers Comp
• Auto Liability
• Auto Physical Damage
• Property
• Business Interruption
• Marine Cargo
• Terrorism

• Environmental Impairment
• Credit
• Professional Liability
• Political/War Risk
• Aviation
• Strike
• Employee Benefits
• DO

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Trends

• Medical Malpractice
• Terrorism
• Redomestication

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Vermonts Captive Industry Profile

• numbers (over 700 licensed
• companies)
• management firms (14 active)
• service providers (CPAs, banks,
• actuaries)
• Vermont Captive Insurance
• Association

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Total Number of Vermont Captive Licenses Issued
732
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2004 Financial Results Vermont
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Role of the Actuary

• Feasibility Study
• Annual Opinion
• Financial Projections
• Actuarial Review of applications
• Examinations

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Current Events

• Title/mortgage insurance
• Risk transfer
• GAO-risk retention groups
• NAIC accreditation

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(No Transcript)
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Captive Insurance CompaniesWilliam D.
MotherwayExecutive Vice President Tishman
Realty Construction Co., Inc.
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A Brief History

• Historical Review
• Most early captives were wholly-owned 50s.
• By 1960 there were approx.. 100 captives in
  operation including some groups
• 80s-90s Rent-A-captives and Cells
• Critical factors for development of the industry
• Availability of coverage problems
• Pricing inequity - swings from soft to hard
  markets leaving good risks with Hats in Hand
• Lack of flexibility with insurance coverage and
  wording
• Regulatory Responsiveness by Domiciles
• Changing Owner Needs

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Current Trends Key Opportunities

• Property Programs Getting Fresh Look
• Return to Deductible Retention Captives
• Hard Reinsurance Market Lack of Support
  Underwriting
• Contractors
• Nursing Homes
• Medical Malpractice
• DO
• Property
• Many Others
• Terrorism Risk Insurance Act of 2002
• Group Program Proliferation in Stressed Classes
  of Business

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Controls and Flexibility

• Reasons for a Captive
• Internalize insurance program underwriting
  profits
• Unbundle insurance services, reduce insurance
  costs
• Access to the reinsurance markets
• Enhance premium funds, cash flow and investment
  income
• Leverage markets, greater control, enhance
  strategic partnerships
• Policy design flexibility, specific to insureds
  risk profile

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The Stage is Set

• All forms of Captives are subject common
• attributes
• Financial
• Regulatory
• Control
• Flexibility

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What is a Captive and Who Uses them?

• Single-Owner (Pure) Captives - insure only the
  risks of the owner or the owners subsidiary
  operations (Exception - controlled unaffiliated
  business)
• Companies with predictable attritional losses
  (high frequency. low severity)
• Companies with better than market average loss
  experience
• Companies with poor loss experience but committed
  to improved risk management
• Companies with uninsured risks
• Companies that wish to consolidate global
  programs
• Companies able to sell insurance products to
  their customers

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Key Financial Considerations

• Risk retained within the economic family
• Program loss sensitivity
• Additional fixed costs of captive operations
• Investment and liquidity
• Capital commitment (Cash , LOCs, other)
• Tax deductibility (paid losses vs. loss reserves)
  
• Income and Local Taxes
• Each Structure discussed contains some or all of
  these

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Typical Design Structures

• Direct Writing Captive
• Retain all Risk or Cede Risk to a Reinsurance
  Partner
• Reinsuring / Assuming Captive
• Assumes risk from a fronting carrier or another
  ART vehicle
• Retains or retro-cedes to a reinsurance carrier

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Captive - Operating as a Direct Writer
Insured
Shareholder Dividends
Insurance Premiums
Capitalization
Captive Insurance Company (Owned by Insured)
Claim Settlements
Claimants
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Captive - Operating as a Reinsurer
Insured
Capitalization
Insurance Premiums
Shareholder Dividends
Policy Issuing Company
Claimants
Claim Settlements
Security to Guarantee Reimbursement of Losses
Reimbursement of Losses
Premium Less Fronting Fee Excess Insurance
Captive Insurance Company (Owned by Insured)
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Risk Retention Group

• An RRG is an insurance entity owned and
  controlled by two or more non-affiliated
  organizations insured by the RRG.
• Homogeneous and insure similar types of
  businesses risks or Heterogeneous and insure
  risks of several types of organizations.
• RRGs in the United States are licensed to issue
  policies and and operate under the Federal Risk
  Retention Act of 1986.
• They are stock, reciprocal or mutual in
  organizational form.

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Association Captive

• An Association Captive is an insurance company
  owned and controlled by two or more
  non-affiliated association insured by the
  captive.
• Homogeneous and insure similar types of
  businesses risks or Heterogeneous and insure
  risks of several types of organizations.
• Association Captives in the United States are
  licensed by a domiciliary state (VT for example)
  and use a fronting carrier.
• They are stock, reciprocal or mutual in
  organizational form.

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Ownership

• Are insureds owners of the entity? In what way
  and how much?
• Joint and Several liability?
• Assessable policy?
• Withdrawals?
• Other?

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Management and Governance

• Board of Directors
• Officers
• Shareholders
• Professional Managers
• Investments
• Regulatory and Tax Issues
• State insurance regulation
• Possible use of a fronting carrier
• Liability Risk Retention Act of 1986
• Financial responsibility laws
• Tax treatment of group captives
• Dividend distribution

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Service Providers

• Front carrier (if applicable)
• Reinsurance (specific and aggregate)
• Management
• Underwriting
• Claims and Loss Adjustment
• Actuarial
• Banking
• Investment Management
• Auditors
• Legal Counsel

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Benefits

• Better member service
• Lack of coverage and capacity fears eased
• Price no longer total market driven
• Long term relationship with knowledgeable
  partners
• Protection against competition
• Protection against market instability
• Profit driven

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Captive Forms - Rent-a-captive/ PCC

• A non-owned facility
• Clients do not contribute capital but instead
  rent it from the rent-a-captive sponsor
• Usually located off shore, e.g. Bermuda,
  Barbados, Guernsey or Cayman
• PCC law offers protection to rent-a-captive
  participants
• Affordable and quick option for most smaller
  companies
• Company selection criteria - cost of risk greater
  than 1m and net worth greater than 25m

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TRIMCO Insurance Company Overview

• Parent Company - Tishman Realty Construction
  Co., Inc.
• Industry
• Construction
• Hotels and Realty
• Real Estate

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TRIMCO Insurance Company Overview

• Details of Vermont Captive
• Licensed - December 2001
• Operational - January 1, 2002
• Program Structure
• Direct Deductible Reimbursement - (Premium
  5.0M )
• Workers Compensation
• General Liability
• No Loss Portfolio Transfer

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TRIMCO Insurance Company Overview

• Key Operational Components
• Start-up costs 25k
• Operational/Administrative Costs - 90k annually
• The Future
• Program Changes

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• The floor is open for Questions