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Introduction to Captive Fronting Programs
August 24, 2016Sam JonesAVP, Senior Account Manager – Captive [email protected]/frontingandcaptiveservices
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Expertise, Solutions, and Service
Casualty Financial Lines Property Consumer
AIG Multinational
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History of innovation► Many years involvement in providing an extensive range of innovative, non-traditional
solutions to clients’ unique risks► Corporate commitment to this space as evidenced by dedicated resources and senior
management support► A tradition of partnering with clients to truly understand their business needs to provide
innovative risk transfer and risk financing solutions
► A market leader providing non-traditional insurance and reinsurance► Requisite skills sets: underwriters with a diverse background, actuaries, lawyers,
accountants, credit officers, claims professionals and operational specialists dedicated to this business
► Ability to analyze complex and unique risks and the technical expertise to analyze risks for which there is no conventional insurance market
► Superior servicing and claims handling, reporting, and management ► In-depth knowledge and advice on structure, coverage, and local regulations
Choosing a Strategic PartnerKey characteristics to consider when selecting a strategic insurance partner
History of innovation
Proven expertise
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History of innovation► Ability to insure virtually all lines of business► Extensive product customization ability ► Broad flexibility to cover a unique exposure, class of risk, and/or type of contract (e.g.,
insurance, reinsurance, loans, or other financial products) ► Significant risk bearing and risk financing capacity► Full range of captive management and protected cell services
► Extensive global network► Multinational policy issuance capabilities and expertise controlling multi-currency cash
flows ► Ability to issue locally admitted policies as part of a global master program
Choosing a Strategic Partner (Continued)Key characteristics to consider when selecting a strategic insurance partner
Program Flexibility
Global capabilities and resources
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A captive is…
An insurance or reinsurance company formed primarily to insure its owner(s) and affiliated companies
A risk management and financing vehicle that offers an alternative to conventional insurance
A regulated entity within the domicile in which it operates
A captive typically…
Has no employees so all of the usual “insurance company” functions are outsourced to third parties
Provides coverages that the owner wishes to retain or that are unavailable in the traditional market
Is unrated
What Is a Captive Insurance Company?
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A captive may…
Be owned by a single parent, a group/association, or a sponsor who rents captive cells to unrelated third parties
Be viewed as a form of formalized self-insurance Write some third party business depending on the captive’s jurisdiction and definition Operate as either an insurance or reinsurance company Reduce the need for, and reliance on, commercial insurance Allow for flexibility in program design and coverage for difficult to insure risks Access the commercial reinsurance market directly Provide financial benefits such as reduced total costs of risk, investment earnings and
cash flow, balance sheet protection, and tax planning opportunities Provide incentive for loss control and increase senior management’s awareness of the
cost of risk and control
What Is a Captive Insurance Company? (Continued)
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AIG defines a Captive Program as:
Any program in which an AIG company issues a master policy and/or local policies that are reinsured in whole or in part to an insured’s captive, protected cell company (PCC), or a rent-a-captive, used as a retention funding mechanism.
What Is a Captive Program?
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Basic Captive Fronting Structures
AIG cedes to the captive the portion of the premium and liabilities to be retained by the captive which may retrocede all or a portion of risk to reinsurers with whom AIG has no direct relationship. AIG retains the remainder of the premium and limit on a net basis and may retrocede all or a portion of risk directly to reinsurers.
AIG cedes 100% of the premium and liabilities to the captive. A captive may retrocede risks to reinsurers but AIG has no direct relationship with the reinsurers but AIG may be one of the reinsurers.
Gross LineGross Line
Net LineNet Line
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Captive Program Structures
Risk Transfer
Captive Retention
Most common captive structure for global business
Enables company to purchase risk transfer at consistent level in market while varying what is retained in-country
Captive takes “working layer” losses; deductible helps manage insurance premium tax costs
1 million
2 million
500 million
Local/Risk Deductibles
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Captive Program Structures
Often used when company is facing capacity constraints
Can lead to very significant retentions in order for company to create enough “value” for captive
Significant retentions can make collateral requirements difficult to manage
Risk Transfer(75%)
Captive Retention
(25%)1 million
500 million
Local Deductibles
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Types of Captives
Single Parent Captive: An insurance or reinsurance company formed primarily to insure its owner (parent company) and its affiliated companies.
Rent-A-Captive: A client “rents” a portion or segregated “cell” within a sponsored captive facility. Clients without a captive can experience many of the benefits of a captive through participation without having to go the lengths of creating their own single parent captive. AIG sponsors two such captive cell facilities in Vermont and Bermuda. These arrangements may also be referred to as a Protected Cell Company (PCC) or Segregated Accounts Company (SAC).
Association or Group Captive: An insurance company which is formed and owned by an industry, trade or service group, or a group of companies strictly for the benefit of its members to meet a shared insurance need.
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• Address unique risks and operational challenges
• Provide flexibility in program design
• Introduce strategies to support sales of products or services
• Prevent difficult risks from impeding a planned merger, acquisition, or divestiture
Reasons for Forming a Captive
• Obtain evidence of insurance meeting regulatory and market requirements
• Resolve a situation in which market conditions or underwriting capacity are limiting risk transfer availability
• Access reinsurance or excess markets more efficiently
• Improve efficiencies of multinational programs/ operations
Financial Insurance Strategic• Desire to retain more risk• Reduce collateral or capital
requirements • Create more certainty for cash
flow management and reducing volatility
• Realize potential tax efficiencies• Offset certain liabilities • Reduce total costs of risk to the
Parent organization• Potential profit center
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Control & Compliance Global risk management and protection Uniformity of cover with centralized insurance placement Certainty as to the legal entity issuing policies and handling claims Centralized claims reporting Central point of contact Locally admitted policy Contract certainty and local evidence of insurance Regulatory and tax compliance
Strategic Value Advancement of risk management culture Access to multinational knowledge Systems integration for loss reporting and premium/policy tracking Consistent service standards
Responsiveness and Flexibility Claims settlement Structural flexibility to optimize total cost of risk Cash flow
Benefits of Multinational Programs
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Can lead to a greater assumption of risk than intended Insurance isn’t a core business for 99% of captive owners Direct impact of negative claims experience Start-up, operating, and management costs Collateral requirements Capitalization requirements Regulatory oversight Time frame for program implementation Current interest rates and maturity of losses will impact estimated cost/benefit
Potential Captive Considerations
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Lines of Business Where We Have Worked
Traditional
Aviation
Automobile (Liability & Physical Damage)
General Liability
Contractors All Risk
Fidelity
Professional Liability / E&O
Product Liability
Workers’ Compensation
Employers Liability
Property / Business Interruption
Global Programs
Marine
Environmental
Non-traditional
Extended Warranty
Employee benefits
Cyber risk
Product recall
Litigation or investigation expenses
M&A coverage gaps
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For More Information
History of innovation► www.aig.com/frontingandcaptiveservices
Pro
► Captive Management – US Sam Jones 1.803.748.1223 [email protected]
► Captive Management – Global Bob Gagliardi 1.802.419.1234 [email protected]
Visit Us on the Web
Contact Us – Phone and Email
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American International Group, Inc. (AIG) is a leading global insurance organization. Founded in 1919, todaywe provide a wide range of property casualty insurance, life insurance, retirement products, mortgageinsurance and other financial services to customers in more than 100 countries and jurisdictions. Ourdiverse offerings include products and services that help businesses and individuals protect their assets,manage risks and provide for retirement security. AIG common stock is listed on the New York StockExchange and the Tokyo Stock Exchange.Additional information about AIG can be found at www.aig.com and www.aig.com/strategyupdate | YouTube:www.youtube.com/aig | Twitter: @AIGinsurance | LinkedIn: www.linkedin.com/company/aig. Thesereferences with additional information about AIG have been provided as a convenience, and the informationcontained on such websites is not incorporated by reference into this material.
AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insuranceoperations of American International Group, Inc. For additional information, please visit our website atwww.aig.com. All products and services are written or provided by subsidiaries or affiliates of AmericanInternational Group, Inc. Products or services may not be available in all countries, and coverage is subject toactual policy language. Non-insurance products and services may be provided by independent third parties.Certain property-casualty coverages may be provided by a surplus lines insurer. Surplus lines insurers do notgenerally participate in state guaranty funds, and insureds are therefore not protected by such funds.Insurance coverage is account specific and is governed by actual policy language. This presentation does notconstitute an offer to sell any of the insurance coverage or other products or services described herein. We donot provide legal, credit, tax, accounting or other professional advice, and you and your advisors shouldperform your own independent review with respect to such matters as they relate to your particularcircumstances and reach your own independent conclusions regarding the benefits and risks of any proposedtransaction or business relationship.
© American International Group, Inc. All rights reserved.
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