01 Captive Insurance For Global Risk Management JLT Barbados Moderator: Ricardo Knight President & CEO Ray Mattholie Thomas M. Jones Partner Toronto, Tuesday, March 7, 2017
01
Captive Insurance For
Global Risk Management
JLT Barbados
Moderator:
Ricardo Knight
President & CEO
Ray Mattholie
Thomas M. Jones
Partner
Toronto, Tuesday, March 7, 2017
1 Captive Formations
Key Drivers to
Formation
Feasibility Studies
Setup Steps &
Timeline
Capitalization &
Operating Costs
2 Operational
Considerations
Regulation
Corporate
Governance
Best Practice
Financial
Performance
3 Program Structures
ROI, Fronting
Pricing
Methodology
Lines of Business
Retention &
Structure Examples
Presentation Overview
02
OR
Commercial Insurance • Self-Insured
Retention
(SIR) Program
• Large Deductible
Program
• Captives
Self-Insurance Mechanisms
Risk Transfer Solutions
03
Captive Insurance Programs…
…wholly owned subsidiaries of
all types of entities typically
writing the risks of its owner
and/or affiliates…
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Profile of the Captive Insurance Market
• 6,939 captives globally
• In 70+ domiciles (… and in 35 States in the U.S. comprising
of 44.6% of global captives)
• $300B of the global insurance premium of $4,554B
• Over 75% having an association with the U.S.
• Over 90% of the Fortune 500 Companies
• 50% of the Global Property and Casualty Premium written
through captives
• 236 Captives in Barbados
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Profile of the Insurance Market
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Leading Captive Domiciles
Rank Domicile 2015 2014
1 Bermuda 797 800
2 Cayman Islands 708 759
3 Vermont 596 587
4 Utah 450 422
5 Delaware 323 333
6 Anguilla 319 379
6 Guernsey 319 321
8 Nevis 268 282
9 Barbados 236 231
10 Luxembourg 217 224
- Captive Insight
Profile of the Insurance Market
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The nature of the mining of natural resources means:
• Operations in remote and inhospitable areas and susceptible to natural catastrophe
• Impact of climate change
• New technological advancements
• Economic and other uncertainties in operating countries that also affect the supply of key consumables
• Debt Financing and the global financial Crisis
Corporate Balance Sheet Dynamics
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COST SAVING:
• Stabilization of premium using capacity and retained earnings during hard markets
• Insulates owner from withdrawal of market capacity
• Long term consistency
• Use as a profit center
CAPACITY:
• Remove “uninsurable” risk exposures from parent’s Balance Sheet
• Management of Deductibles and retention limits
• Create capacity (via direct insurance, act as a reinsurer)
• Strategic layer completion
CONTROL:
• Corporate focus on own Risk Management
• Corporate control of own premiums & claims
• Influence program design & cost
• Centralized access to loss data
• Claims handling
Benefits of Captives
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• Stability of Cost - insulates the group from insurance market volatility
• Placement of Special risks - where coverage is not available; where there is minimal information available; or where the cost of risk transfer is prohibitive
• Reinsurance Market Access – given their specialized nature it is important that R/I can be accessed directly by the insured
• Funding of the Retained Risk - this remains the primary use of captives for large companies generally for those high frequency, low severity exposures
• Deductible Rationalization – in larger mining companies with many business units, captives can harmonize corporate risk retention while maintaining local affiliate deductibles
• Capturing Profit – captures underwriting profit and investment income on premiums paid to the captives w.r.t. the reserves established for claims
• Tax Efficiency - u/w profits derived from non-Canadian risks may be classed as “Exempt Surplus” and may not be subject to Canadian tax on consolidation
Benefits of Captives to Mining Companies
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When is a Captive the Right Fit?
QUANTITATIVE
• Premium Volume – To justify frictional costs. US$1M net premium retention is a benchmark
• Risk Retention Level – sufficient capital required should there be a requirement to retain risk
• Loss Ratios – 80% or lower is adequate to generate a return for short tailed risks
• Timing of Settlement – the type of program allows for the use of cash while claims adjustment is in progress. For longer-tailed risks the cash is accessible for a few years
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When is a Captive the Right Fit?
QUALITATIVE
• Premium/Risk Distribution – Not one exposure in one location, but rather with different exposure across locations
• Commitment– initial buy in from CFO and Risk Manager where quantitative and qualitative factors must make sense and then ultimately the board of directors
• Loss Control – focused attention to keep losses to a minimum by making loss control a priority
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Road Map to Captive Formation
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Risk Identification
• What specific risks does the sponsor believe will fit within a captive structure?
• Are these currently placed in the commercial market?
• Are these “uninsurable” risks?
• What are the regulatory issues?
• Fronting required?
Risk Quantification
• Collection of data
• Loss history (minimum of 5 years)
• Exposures, limits, territories, etc.
Setup – Feasibility Study
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Vital to show how the captive’s performance will be measured.
• Pro forma financial projections 5yrs
• Detailed analysis of program structures
• Regulatory compliance (solvency / liquidity calcs)
• 3rd party business (as applicable)
• Directors & Officers – detailed bios
• Identify & appoint service providers
Setup – Business Plan
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Cost Item Service Provider Low High
Incorporation and Licensing
Manager 10,000 20,000
Government Fees
Regulator 740 740
License Fee Regulator 10,000 10,000
FATCA Tax 1,800 2,500
Audit Certification
Chartered Accountant
1,000 2,500
TOTAL 23,540 35,740
Set up Costs for Stand-Alone – US$
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• Set-up cost associated with cell rental is the minimum capital of
US$12,500 plus the manager’s one-off set up fee
Cost Item Service Provider Low High
Management Manager 40,000 150,000
Audit Auditor 15,000 45,000
Corporate Administration
Secretary 2,500 10,000
License Regulator 10,000 10,000
Actuarial Actuary 5,000 25,000
Director Fees Local Executive 2,500 5,000
Miscellaneous Misc. 3,000 5,000
TOTAL 78,000 250,000
Annual Operating Costs for Stand-Alone – US$
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• Annual fee for a cell rental is either a % of premium or a fixed fee to at least
cover the expenses attributable to the rented cell
Captive Domicile Snapshot – Barbados / Bermuda
BERMUDA BARBADOS
Number of captives/managed insurance companies 797 236
SCC Legislation Yes Yes
ICC Legislation No Yes
Applicability of Solvency II Yes No
Minimum Capital - Insurance Captive $120,000/$250,000 $125,000
Minimum Capital - Reinsurance Captive $120,000 $125,000
Minimum Solvency Margin 20% NWP 20% NWP
Migration/Re-domiciliation legislation Yes Yes
Loan-back to parent company permitted Yes Yes
Loan-back to parent company admissible asset Yes restricted Yes restricted
Audited Financial Statements required Yes (Statutory only) Yes
Corporate Income Tax 0% 0%
Annual License fees - Captive $5,000 $10,000
License Application Timeframe 1 month 1 month
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Barbados - Regulatory Environment
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Barbados - Regulatory Environment
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“…The process by which the Captive makes and executes management decisions…”
Captive
Compliance Standards Confirmation to the regulator
that the company complies in
all material aspects with the
requirements of the
governance code
Competence, capability, honesty, integrity and technical soundness of members and their attendance and eligibility to vote at meetings
Composition of Board of Directors
The extent to which there is a deviation from the defined risk and the process by which this is handled
Risk Review
Practice directives from regulator stating the minimum requirements for governance
Legislative Oversight
Corporate Governance
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Insurance
Management
Services.…
The role of the captive manager is very different to the one of the broker
Essentially, the manager is the staff of the captive insurance company
What to expect from a full service manager:
• Financial reporting
• Insurance services
• Business planning
• Treasury management
• Optimized I.T. systems
Operations Best Practice
The captive manager is the gate-keeper to maximum success through coordination and team facilitation
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• Increase retentions in existing U/W structure
• Optimize investment risk/returns
• Enter new lines of related business
• Enter new lines of (controlled) 3rd party
business
• Loan-backs to related entities
• Dividend back to the parent
How best to deploy surplus capital...
Operations Best Practice
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The Direct Writer Captive
Reinsurer 1
Reinsurer 1 Reinsurer 2
Captive (Barbados)
Reinsurer (excess of loss)
Premium
First-party losses
Third-party
losses
Premium Losses
The Barbados captive directly insures the risks of the operating
subsidiary.
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Local, Regional or International
Operating Subsidiary
Parent Co. Inc.
Local, Regional or International
Operating Subsidiary
The Reinsurer Captive
Reinsurer 1
Reinsurer 1 Reinsurer 2
Parent Co. Inc.
Gross
premium
First-party losses
Third-
party
losses
Captive (Barbados)
Reinsurer (excess of loss)
Premium
Losses
Fro
nt
Com
pany
Losses
Letter of credit
The Barbados captive reinsures the admitted insurance carrier (i.e.
fronting company), that insures the operating subsidiary.
Net premium
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• RETURN ON INVESTMENT:
• Challenging?
• Investment income to offset underwriting results can be challenged
• FRONTING:
• Onshore regulators require that certain risks such as WC and 3rd Part
businesses use admitted carriers
• There are few strong fronting companies hence market share
monopoly has affected pricing and hence captive margins
• Also requirement for fronting companies to guarantee the payment
of claims
• Risk sharing with Captives or 100% of risk is ceded back to captive
• In addition to their fees, fronting companies require captives to
collateralize their expected liabilities through LOC or to do so
with other assets.
• LOC Can sometimes cost more than income generated from
Investments
ROI and Fronting Considerations
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Utilize commercial market techniques to develop bespoke pricing
methodology:
• Stability of Cost - Stability in the cost of risk over the long-term.
• Viable Underwriting Premiums - Ensure that the captive underwrites
to a profit/breakeven in the long term, and maintains sufficient
premium for expected attritional losses.
• Ensure Risk Transfer - Pricing in line with risk retention and
expected loss ratios.
• Strong Governance - In establishing a bespoke pricing methodology,
the captive can demonstrate a consistency in its approach and
demonstrate that key decision making functions are undertaken
within the captive at an arms length from the shareholder.
•
Pricing Methodology
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• Fronting for reinsurance
capacity
• Primary retention/deductible
funding
• Property/Time Element
• Large retentions
• Casualty
• Primary casualty funding
• Professional liability
• Marine cargo and transit
• Employee insurance products
• Group life and disability
• Terrorism
• Bonding
• Punitive damages ‘wraps’
• Filling gaps in excess
programmes and DIC
• Dealing with ‘uninsurable’
risks
Typical Lines of Business
Captive
Solutions
DIC/DIL
wraps Loss
portfolio
transfers
and
ADC’s Excluded
perils write-
back
protection
Costs cap
collars
Reinsurance
(excess of
loss and
quota share) Commutation
and
Novations
Finite
Risk
Single
and multi-
line
aggregate
stop loss
Second and
subsequent
loss event
protections
Retention
buy-downs
Natural
catastrophe
buy-outs
Risk
Incubation
Swing
premium
protections
Capacity
boosters
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Retention Strategy and Growth (e.g. Startup)
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Retention Strategy and Growth (e.g. maturing)
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Innovation
Retention Strategy and Growth
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• Heavy investment in mining assets
• Political Risk and K&R activity in remote regions
• Nationalization of mineral assets
• Handling of hazardous substances/waste disposal and control
• Environmental Impairment
• Natural Disaster (e.g. earthquake and floods)
• Climate Change/Water Scarcity
MINING EXPOSURES
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• A Mining Co’s captive can participate in a U.S.WC program
• This requires licensed paper in all states thus preventing the captive from issuing a direct policy.
• The Deductible Buy Down policy would provide guaranteed cost cover for the deductible and the benefit of the tax deduction on the premium paid to the captive.
Common Risks - Workers Compensation
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Common Risks - Surety
• Surety can be used as a like-for-like replacement for LoC
• Frees up banking lines lowering cost of capital
• Create additional capacity for guarantee requirements
• The surety bond is a direct replacement for a letter of credit, with the bond amount equating to the letter of credit amount
• The bond obligation is a pure on-demand mechanism
• Surety typically doesn’t require reserves to be raised
Insured
Commercial Insurer(s)
Captive
3rd Party
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Common Risks – Employee Benefits Structure
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Common Risks - Employee Benefits - Traditional vs. Captive
Fully Locally Insured Utilizing Captive
Premiums Premiums set by local commercial market based on wider market experience as well as previous specific claims experience with no global pricing influence.
Premium rates set by the captive based on an organizations individual loss history rather than the wider insurance market, thereby protecting the company’s local operations from external negative factors and removing insurer expenses and profits.
Financial Volatility
Commercial insurers will react to market conditions and so premiums will have volatility e.g. zika virus, terrorist threats.
The captive allows companies to enjoy smoothed premiums as it will look to charge the right risk premium based on personal not market experience.
Dividends All underwriting profit retained by each local insurer with limited exceptions where local with-profit terms may apply.
Investment income from premiums and any underwriting profit are retained by the captive/ parent company.
Claims Insurers will only pay claims that are consistent with policy terms and conditions.
The captive involvement allows companies full discretion to make decisions regarding claims
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Fully Locally Insured Utilizing Captive
Risk Management – Policy Exclusions and Limits in Cover
Subject to commercial insurance market approaches to policy exclusions and limits e.g. passive war & terrorism, AIDS, suicide etc.
Ability to provide cover for risks excluded and limits imposed in local commercial insurer markets.
Tailored Cover Subject to commercial insurance market approaches to “uninsurable risks” or overages that would otherwise be too costly e.g. sky diving hobbies.
Ability to provide flexibility by making exceptions and provide specific cover when required e.g. a local Executive with a sky diving hobby that could still be covered
Broking Model Typically a local broking/servicing model may apply: • Annual/bi-annual market review and
rebroking exercise • Intermediated administration services These services will be funded by way of commission and/or fees.
In addition to the potential for savings on the local commission/fees that could be achieved, further savings can be achieved through the change in service model: • Triennial risk/admin charge
benchmarking exercise for captive • Intermediated administration
services
Common Risks - Employee Benefits - Traditional vs. Captive
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Conclusions
Summary: • Captives tried and tested
• Mining companies should seek to utilize Captive
structures
Next Steps: • Will this work for me?
• Pre-feasibility assessment performed by JLT
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Ricardo O. Knight, FCCA, FCA
CEO & President
JLT Insurance Management (Barbados) Ltd.
Phone: (246) 432-4000 ext. 3238
Mobile: (246) 823-0400
E-mail: [email protected]
Contact
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