Financing Retained Risk

Peter Willitts

Structure – What is a Captive?

• Insurance subsidiary of a commercial/financial company, or a consortium or an association of individuals

• Formed to primarily insure, or reinsure the risks of its parent, or of a number of parties with risks in common or unrelated risk

• Usually formed in a specialized environment or “domicile” – “onshore” or “offshore”

Why are Captives Formed

• Reduce Risk Financing costs

• Solve problems

• Profit center

Reducing Risk Management Costs

• Controlling destiny through progressive retentions

• Access to Reinsurance

• Reduced Dollar Swapping

• Improved Loss Control incentive

• Tax savings

Tax

• Acceleration of deduction– Humana– Non-Related

• Arbitrating U.S. Tax Rate• 953(d) Election• Pooling• Premium Tax

Solving Problems

• Coverage– e.g.

• D&O

• E&O

• Product Recall

• Administrative– Consolidation of Programs

– Rationalization of Deductibles

Profit Center

• Customer Programs

– Warranty

– Disaster Recovery

– Cell Phone

– Credit Life

• Other

– Suppliers

– Contractors

Structure – Types of Captives

• Single Owner

• Multi-owner or Association

• Rent-a-Captive – multiple non-owner

• Protected or Segregated Cell Captive (PCC, SPC, SAC) – any of the above

Association Captives

• Generally a hard market phenomenon

• Commitment to feasibility essential

• Risk Sharing must be understood

• Most effective when solving a common problem

• Homogenous or Heterogenous

Rent-a-Captives

• Sponsored by insurers or brokers

• Rent-a-Captive vs Segregated Cell

• Relationship established through Shareholders Agreement

• Indemnity Provision

• Dividend distribution process

Decision Making Process

• Level of Retention

• Form of Retention

• If captive, which domicile

• Feasibility study should address all 3

Domicile Comparison

987

733

542

439382

208 207165 158 122

0

100

200

300

400

500

600

700

800

900

1000

Berm

uda

Caym

an Is

lands

Verm

ont

Barbad

os

Guer

nsey

Luxembourg

Dublin

Isle

of M

an

Hawai

i

South C

arolin

a

Why Bermuda

• Why not?

• Experience

• The Insurance and Reinsurance Market

• Geography

• Flexibility

Bermuda Incorporation Procedure

• Select a Law firm

• Select a Manager

• Select a Name

• Submit Shareholder information for approval

• Submit Pre-Incorporation information

• Submit Form 1B for registration together with confirmation capital is paid in

Types of Business

•Related

•Unrelated

•Connected

•Affiliated

Established License Classes

• Established “Classes of Insurers”

– Class 1 – Single Parent Captive

– Class 2 – Association Captive/20% unrelated

– Class 3 – Catch all – “third party company”

– Class 3 A - 50% Unrelated, less than $50M

– Class 3 B – 50% unrelated, more than $50M

– Special Purpose Insurer

– Class 4 – CAT Companies/Publicly listed companies

• FLIP.

Captive Running Costs

Approximate Costs of Incorporating and Operating

a Single Parent Captive in Bermuda

Costs of Incorporation Captive Costs

Lawyers Fees $10,000

Government incorporation disbursements $1,265

Registration – Companies Act* $3,820

Registration – Insurance Act $971

$16,555

Annual Operational Costs

Lawyers Fees $6,000

Estimated Captive Management Fee $50,000

Registration – Companies Act* on $120K capital $3,820

Registration – Insurance Act class 1 $971

Audit Fee – estimate $20,000

Other $3,500

$85,890

*Please note that this table gives an approximation of the costs associated with incorporating and operating a captive in Bermuda. Professional service fees vary by firm.

Other services such as actuarial valuations and tax advice may be required

Servicing Infrastructure

.

19

INTERNAL AUDIT

SECRETARIAT

ACCOUNTS

INSURANCE

AUDITORS

BANKS

REGULATORS

ACTUARIES

LAWYERS

TAX

TREASURYLEGAL

CEO

• Risk control• Broker• Insurer• Claims administration• RI Broker• RI

Captive Manager