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Captive Insurance
Derick A. White, CPA, CFE
Director of Captive Insurance
Vermont Department of Banking, Insurance,
Securities and Health Care Administration
CAGNY June 1, 2005 New York City
What is a Captive?
“formalized self-insurance” wholly owned subsidiary licensed in a state (or country) a regulated insurance company with
a limited license
Why form a Captive?
Obtain CoverageControl CostFocus on Risk ManagementManuscript PolicyPre-loss funding
History
Bermuda during the early 1970’sColorado, Georgia, TennesseeVermont in 1981Hawaii in 1986Recent States
Types of Captives
PureIndustrial InsuredAssociationRisk Retention GroupsSponsored (Rent-A-Captives)ReciprocalBranch
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 D&O
Vermont’s Captive Industry Profile
numbers (over 700 licensed companies)management firms (14 active)service providers (CPA’s, banks, actuaries)Vermont Captive Insurance Association
2004 Financial Results Vermont
Premium Written $ 10.6 billion
Net Income $ 8.6 billion
Total Assets $ 85.7 billion
Capital & Surplus $ 51.2 billion
Role of the Actuary
Feasibility Study Annual Opinion Financial Projections Actuarial Review of applications Examinations
www.bishca.state.vt.us
State of VermontCaptive Insurance
VT Department of Banking, Insurance,Securities & HealthCare Administration
89 Main Street, Drawer 20Montpelier, VT 05620-3101
(802) 828-3304
Captive Insurance Companies
William D. MotherwayExecutive Vice President
Tishman Realty & Construction Co., Inc.
A Brief History
Historical Review Most early captives were wholly-owned ‘50s. By 1960 there were approx.. 100 captives in operation
including some groups 80’s-90’s – 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
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 D&O Property Many Others
Terrorism Risk Insurance Act of 2002
Group Program Proliferation in Stressed Classes of Business
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 insured’s risk profile
The Stage is Set
All forms of Captives are subject commonattributes:
Financial Regulatory Control Flexibility
What is a Captive and Who Uses them?
Single-Owner (Pure) Captives - insure only the risks of the owner or the owner’s 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
Key Financial Considerations
Risk retained within the “economic” family Program loss sensitivity Additional fixed costs of captive operations Investment and liquidity Capital commitment (Cash , LOC’s, other) Tax deductibility (paid losses vs. loss reserves) Income and Local Taxes Each Structure discussed contains some or all of these
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
Captive - Operating as a Direct Writer
ClaimSettlements
ShareholderDividends
Claimants
Insured
Captive Insurance Company (Owned by Insured)
Capitalization InsurancePremiums
Captive - Operating as a Reinsurer
Capitalization
Security toGuaranteeReimbursementof Losses
ShareholderDividends
InsurancePremiums
Insured
ClaimSettlements Claimants
PolicyIssuing
Company
Captive Insurance Company (Owned by Insured)
Reimbursement of LossesPremium Less
Fronting Fee &Excess Insurance
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.
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.
Ownership
Are insureds owners of the entity? In what way and how much?
Joint and Several liability?
Assessable policy?
Withdrawals?
Other?
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
Front carrier (if applicable)Reinsurance (specific and aggregate)ManagementUnderwritingClaims and Loss AdjustmentActuarialBanking Investment ManagementAuditorsLegal Counsel
Service Providers
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
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
TRIMCO Insurance Company Overview
Parent Company - Tishman Realty & Construction Co., Inc.
Industry:
Construction
Hotels and Realty
Real Estate
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
TRIMCO Insurance Company Overview
Key Operational Components
Start-up costs $25k
Operational/Administrative Costs - $90k annually
The Future
Program Changes
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