Taking Control with a Captive

Introduction

Speakers:

• Scott Gemmell, Senior Vice President, Marsh

• Jon Schmieden, Director, Global Insurance & Risk Management, Alcon Laboratories

Moderator:

• Roger Gillett, Member of the Bermuda Insurance Advisory Committee

Gaining Control of Insurance Spend

• Retain the premium for expected losses

• Capture profits that would otherwise be earned by insurers

• Reduce reliance on commercial insurers and avoid market fluctuations

• Create flexibility and provide cover for “uninsurable risks”

Risk Retention Decision

Yes

Retain

Transfer

No

Risk retention capacity How much risk can I afford to

retain?

Risk retention decision How much risk should I

actually retain?

Low frequency high severity risks

High frequency low severity risks

Insurance

Funding decision Should I formally fund for

losses?

Pay as you go

Pre-loss funding mechanisms

Post-loss funding mechanisms

Balance sheet fund

Loss sensitive premiums

Structured Insurance

Captive Contingent

capital

Premium Credits

Pure Group PCC

• Understand the capacity and appetite to assume more risk

• Determine future expected losses

• Gauge market response

Three Key Issues

Risk Tolerance is…

“the financial ability to pay for own losses from cash flow, provisions and other available liquid funds as a result of risk

related events”.

OR

“an acceptable amount of financial impairment that can be retained without a material impact on the business”.

Risk Appetite is…

“how much risk an organization is willing to retain.”

Risk Tolerance & Appetite

Loss Analysis

Policy Year Number Non-Zero Claims Gross Paid Gross Outstanding Gross Incurred Revalued Gross Incurred

1999 6 24,066 - 24,066 43,610

2000 14 4,870,970 - 4,870,970 8,352,443

2001 16 583,865 38,461 622,326 1,014,705

2002 32 22,457,854 - 22,457,854 34,875,456

2003 28 1,253,309 508,157 1,761,466 2,592,944

2004 14 715,251 - 715,251 998,267

2005 43 908,538 - 908,538 1,203,476

2006 40 1,011,397 592,077 1,603,474 2,013,492

2007 72 812,774 150,614 963,388 1,141,648

2008 54 322,200 212,962 535,163 599,406

2009 21 5,958 138,562 144,520 153,191

Total 340 32,966,181 1,640,833 34,607,014 52,988,638

Loss Analysis

LOSS ANALYSIS

Determine Future Expected Losses

Correlations

MonteCarlo

Simulations

Co-variance

VAR

PortfolioTheory

Curve fitting

ConfidenceLevel

Stochastic

VolatilityRiskFusion

WACC

WAAWTM

Deductible: 50,000 100,000 200,000 500,000 750,000 1,000,000 Gross

Aggregate: None None None None None None None

Long-Term Average: 2,733,000 5,083,000 7,576,000 9,670,000 10,285,000 10,628,000 11,650,000

Percentile:

5th (1 in 20 yr low) 1,997,000 3,717,000 5,566,000 6,946,000 7,226,000 7,357,000 7,503,000

10th (1 in 10 yr low) 2,153,000 4,013,000 5,996,000 7,502,000 7,863,000 8,011,000 8,215,000

20th (1 in 5 yr low) 2,360,000 4,390,000 6,541,000 8,204,000 8,634,000 8,856,000 9,153,000

25th (1 in 4 yr low) 2,431,000 4,523,000 6,739,000 8,472,000 8,925,000 9,161,000 9,524,000

50th 2,732,000 5,081,000 7,558,000 9,616,000 10,214,000 10,530,000 11,164,000

75th (1 in 4 yr high) 3,033,000 5,639,000 8,392,000 10,805,000 11,537,000 11,952,000 13,203,000

80th (1 in 5 yr high) 3,107,000 5,774,000 8,603,000 11,102,000 11,891,000 12,356,000 13,803,000

90th (1 in 10 yr high) 3,310,000 6,152,000 9,173,000 11,920,000 12,811,000 13,368,000 15,521,000

95th (1 in 20 yr high) 3,473,000 6,457,000 9,640,000 12,627,000 13,624,000 14,266,000 17,129,000

99th (1 in 100 yr high) 3,792,000 7,041,000 10,560,000 14,025,000 15,156,000 15,957,000 21,626,000

Excess over:

90th percentile 3,529,000 6,558,000 9,793,000 12,845,000 13,898,000 14,554,000 18,250,000

95th percentile 3,672,000 6,824,000 10,202,000 13,450,000 14,605,000 15,338,000 20,246,000

99th percentile 3,957,000 7,359,000 11,050,000 14,697,000 15,982,000 16,962,000 26,265,000

Loss Forecasting

Programme Retained Cost Insurance Cost Policy Taxes Total Cost of Risk

Deductible Expected 90% threshold excess over

90% threshold Expected

Transfer Premium

5% of transfer premium

Expected 90% threshold excess over

90% threshold

A B C D E F G H I J

1 50,000 2,733,000 3,310,000 3,529,000 8,917,000 12,491,000 625,000 15,848,000 16,426,000 16,645,000

2 100,000 5,083,000 6,152,000 6,558,000 6,567,000 9,917,000 496,000 15,495,000 16,564,000 16,971,000

3 200,000 7,576,000 9,173,000 9,793,000 4,074,000 7,097,000 355,000 15,028,000 16,625,000 17,245,000

4 500,000 9,670,000 11,920,000 12,845,000 1,980,000 4,429,000 221,000 14,321,000 16,571,000 17,495,000

5 750,000 10,285,000 12,811,000 13,898,000 1,365,000 3,480,000 174,000 13,938,000 16,464,000 17,552,000

6 1,000,000 10,628,000 13,368,000 14,554,000 1,022,000 2,820,000 141,000 13,589,000 16,329,000 17,515,000

7 Unlimited 11,650,000 15,521,000 18,250,000 - - - 11,650,000 15,521,000 18,250,000

Gauge the Market Response

Total Cost of Risk

?

55.00

60.00

65.00

70.00

75.00

80.00

85.00

90.00

95.00

100.00

105.00

110.00

115.00

120.00

125.00

Q3 20

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Q1 20

08

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Future Market Conditions

Take Control….

Captive Year 1 Captive Year 2 Captive Year 3 Etc……..

Theory meets RealityJon Schmieden

Director, Risk & Insurance

Alcon Laboratories, Inc.

Alcon, Inc. the Largest Eye Care Company in the World!!!

William ConnerWilliam Conner1907-19921907-1992

Robert AlexanderRobert Alexander1912-19851912-1985

• Founded in 1947, Fort Worth, Texas

• Founders: Alexander and Conner

• Unmet needs of ophthalmologists

• Small NYSE company in 1971

• Nestlé 1977

• IPO 2002 / Nestlé

• Novartis 2010

c.> 70 Affiliates (Legal Alcon Entities)

5 Research Centers

16 Manufacturing facilities

Alcon’s Product Spectrum

• Pharmaceutical• Ophthalmic• Otic & Nasal

• Consumer Products• Vision Care, Optifree• Vitamins

• Surgical• Therapeutics• IOLs• Instruments• Refractive/Laser

Alcon, Inc. Group Profile

Major Divisions Sales $US Millions

Pharmaceuticals $2,677Consumer Products 825Surgical Products 2,997Total $6,499

Employees Headcount

U.S. 7,100International 8,500Total Employees 15,600

Ownership Org. Chart

Alcon, Inc.Switzerland

Alcon International Entities

Trinity River Insurance Co. Ltd.(TRICL)

Bermuda

Alcon Holdings, Inc.(AHI)

United States

TRICL (USA) Inc.Vermont

Trinity River Insurance Co. Ltd. (TRICL)

• Bermuda domicile, since 1999

• Over $650 million in assets

• Surplus over $250 million

• Annual Premiums over $40 million

• All lines of P&C direct or reinsured (international and US risks)

• All Lines of L&H internationally reinsured and reinsures US risks

TRICL (USA), Inc.

• Vermont domicile, since Jan. 2003

• Over $47 million in assets

• Annual Premiums over $30 million

• All lines of P&C direct or reinsured

• Reinsure US employee benefits risks

• Reinsure Int’l employee benefits risks

Captive Structures“Direct Issue Captive”

TRICL

TRICL issues policies and arranges claims handling service and retains risk at agreed level.

Alcon pays premium

To TRICL

ALCON

1. Global Excess Product Liability (including extended discovery)

2. Global Property and Business Interruption (including earthquake)

3. Crime Insurance

4. Fiduciary Liability

5. US Trade Credit

6. Product Recall

7. Employment Practices

8. U.S. Medical Stop-Loss

9. US Workers Compensation Deductible Buyback

10. Punitive

“Direct Issue Captive”Insurance Programs

Captive Structures“Reinsurance to Captive"

Admitted Fronting InsurerAIG, Generali or Aetna

TRICL

Fronting insurer issues policies, arranges claims handling service and pays claims.

Alcon pays premium to “Front”

Reinsurance cessions to TRICL.

TRICL retains risk at agreed level and pays claims within retention.

ALCON

“Reinsurance to Captive” Premiums Invoiced Locally

1. Global Primary Auto Liability

2. Global General Liability (including Products)

3. Global Clinical Trials Liability

4. Global Transit Insurance

5. Japan Trade Credit

6. International Medical, LTD and Life Insurance

7. US Life and LTD

DOL Exemption Timeline

• March – April 2004– Retain Consultant/fiduciary– Compile/organize data for DOL submission

• May 2004– Request/obtain Vermont approval for benefits insurance– Submission of PTE application to DOL– Submission of supporting data to fiduciary

• July 2004– Initial approval from DOL– Employee comment/review period

• August 2004– Final PTE Approval

DOL Exemption Requirements

• Captive in the United States or U.S. Territory

• Captive has at least 1 year audited operations

• Fronting Insurer (A Rating)

• Independent Fiduciary

• Utilize Indemnity Reinsurance only

• Market rates/premiums

• Enhanced Benefits to Participants/Beneficiaries

• No commissions

Information Needed

• Captive audited financial statements

• Captive Pro Forma’s/Business Plan

• Captive Certificate of Incorporation & Articles of Incorporation

• Copies of reinsurance agreements

• Copies of current insurance policies

• Claims / Loss history (3yrs)

• Copies of SPD’s

• Copies of recent competitive bids (3yrs rate history)

Captive Advantages

• Reduced premium expenses for operating entities

• Reduced the group tax expense

• Supported business (certificates, M&A, etc.)

• Financed loss prevention

• Improved risk profiles through risk engineering and BCP

• Centralize data and consolidate risks globally

• Reduced administration and risk management expenses

• Driven down Total Cost of Risk

• Strengthened risk management organisation in terms of structure, processes and compliance

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