Captive 201

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Captive 201

• After the Feasibility and Implementation

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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.

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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

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Overview of the Bermuda Captive Insurance Market
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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

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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

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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

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Bermuda Captive Market Premiums
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Premiums by Region of Underlying Risk
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Assumed Premiums by Region of Underlying Risk
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Types of Coverage
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Major Property Lines of Business
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Major Casualty Lines of Business
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Bermuda Captive Market Assets
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Assets Detail
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Inside Quoted Investments
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Liabilities Detail
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Profitability Indicators
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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

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Review Feasibility and Implementation
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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

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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

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Day-to-Day Operations
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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?

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Roles and Responsibilities Document in
Procedures Manual
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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

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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

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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

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The Renewal Process
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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!

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Captive renewal pricing

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

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Market Rates
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Experience Rating
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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

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The Audit
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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

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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

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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

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Other Activities/Actions
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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?

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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!

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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

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Captive Review

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

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

• Utilization

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The Ovation

• Questions and Answers