the role of the captive manager...– protected cells / segregated cells / segregated portfolios /...
TRANSCRIPT
Captive Academy of the 14th Annual Executive Educational Conference
The Role of the Captive Manager
Linda Danna
Senior Vice President
Marsh Management Services, Inc.
Charleston, SC
Captive Academy of the 14th Annual Executive Educational Conference
Conception – What is a Captive?
• An insurance vehicle formed by an organization, not otherwise generally involved in insurance, to participate in its insurance arrangements
• Ultimately a self-funding mechanism for retained risk
• Not a quick fix and should be part of a long term risk financing strategy
“a captive insurance company is a bona fide insurance or reinsurance company owned by a non-insurance company and
which insures or reinsures the risks of its parent or affiliated companies”
Captive Academy of the 14th Annual Executive Educational Conference
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3,0263,196 3,086
3,2853,417
3,6243,812
4,0024,247
4,512
4,843 4,882 4,9365,119 5,211
5,5255,745
5,587
0
1000
2000
3000
4000
5000
6000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Number of Captives Worldwide 6,052
Captive Academy of the 14th Annual Executive Educational Conference
Conception – When to Think Captive? • Financial:
– Annual captive premium funding at $2.5 million and up – Annual captive premium funding at $1.2 million or below for 831(b) IRS option – Commercial rates unaffordable or not competitive
• Operational: – Coverage not available – Proof of insurance needed (non-admitted or rated) – Manuscript form or broader coverage – Negotiating power – Seeking formalized risk funding and tracking protocol – Desire for a profit center
• Tax: – Federal – No state income tax on captives, premium tax only – Self Procurement Tax (SPT)
Captive Academy of the 14th Annual Executive Educational Conference
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Potential Captive Structures
Owner / Insured
Fronted Reinsurance Captive
Admitted Fronting Insurer
Captive
Reinsurer
Direct Issue Captive
Fronting insurer issues policies and arranges claims handling service
Reinsurance cessions to captive; captive retains risk at agreed level
Captive retrocedes risk in excess of its desired retention
Owner / Insured
Reinsurer
Captive
Captive insurer issues policies and arranges claims handling service and retains risk at agreed level
Captive reinsures in excess of its desired retention
Captive Academy of the 14th Annual Executive Educational Conference
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Domicile Analysis Active Captives by Domicile for Year-End 2012
Cayman, 13%
Hawaii, 3%
District of Columbia, 3%
Turks & Caicos, 1%Luxembourg, 4%
Barbados, 5%
Bermuda, 15%
Arizona, 2%
Utah, 5%
Nevada, 2%
Dublin, 1%
Isle of Man, 2%
Kentucky, 2%
Singapore, 1%
Delaware, 3%
Switzerland, 1%
Other US domiciles, 4%
British Virgin Island, 3%South Carolina, 3%
Rest of the world, 10%
Vermont, 10%
Guernsey, 6%
Total Active Captives: 6,052
Captive Academy of the 14th Annual Executive Educational Conference
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U.S. Domestic Captive Domiciles 2013
No specific captive statutes
Captive statutes
WA
OR
CA
WY
NV
MT
ID
AZ
UT
MN
SD
ME
TX
CO
NM
ND
OK
KS
NE IA
MO
AR
LA
WI
MI
IN IL OH
KY
NC
AK
TN
AL SC
MS GA
FL
WV VA
RI
MA
NH
NY
VT
NJ CT
PA
DC
MD
DE
HI
Alabama 23 Arizona 101 Arkansas 1 Colorado 5 Connecticut 2 Delaware 190 DC 170 Florida 0 Georgia 13 Hawaii 179 Illinois 1 Kansas 1 Kentucky 139 Louisiana 0 Maine 3 Michigan 6 Missouri 28 Montana 114 Nevada 133 New Jersey 5 New York 50 North Carolina 0 Oklahoma 5 Oregon 0 South Carolina149 South Dakota 4 Tennessee 20 Texas 0 Utah 287 Vermont 586 Virginia 0 West Virginia 1
Captive Domicile / Number of Captives
Captive Academy of the 14th Annual Executive Educational Conference
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What Are Companies Doing With Their Captives? Casualty/Liability Third Party Insurance Property
• Employers liability/WC
• Public/General liability
• Auto liability
• Professional liability
• Products liability, Product recall
• Environmental liability
• Excess liability/umbrella
• Banker’s blanket bond
• Credit
• Medical malpractice
• Crime
• Employment practices
• Cyber risk
• Terrorism insurance: – U.S. TRIA policy
with NBCR – Pool Re
• Quota share reinsurance
• Shipping, cargo, and transit insurance
• Marine cargo
• Motor
• Aviation
• Residual value
• Pooling facilities
• Customer related insurance
• Extended warranty
• Customer, vendor, and joint-venture business
• Service contracts
• Employee benefits: – global, voluntary,
and ERISA benefits
Captive Academy of the 14th Annual Executive Educational Conference
Conception – Why Establish a Captive?
• To reduce the parent’s cost of risk
• To gain a strategic advantage
• To capture profits from “related” activities
Captive Academy of the 14th Annual Executive Educational Conference
Conception – What Advantages Are There? Financial Benefits • Can reduce insurance costs - by retaining the premium for expected
losses
• Can improve the parent’s negotiating position with the insurance and reinsurance markets
• Can generate underwriting & investment profits
• Can match revenue and expense - by reserving from current funds for future claim payments
• Can provide a source of additional revenue - by offering insurance to third parties
• Direct access to reinsurance markets
• Rewards good risk management practice
Captive Academy of the 14th Annual Executive Educational Conference
Conception – What Advantages Are There?
Insurance/Strategic Benefits
• Can provide coverage for risks not usually insurable
• Can reduce the dependence for commercial insurance
• Can create flexibility in program design and broader, simpler insurance contracts
• Can create a more effective and efficient risk management program, through
– designing cost allocation and claims handling systems
– generating actuarial information
– coordinating risk management activity
Captive Academy of the 14th Annual Executive Educational Conference
Conception – Other Considerations
• Capital commitment - the captive’s capital is not available for use in the parent’s business
• Adverse results - the captive’s capital can be eroded by adverse results under the insurance program
• Operating costs - a captive does incur operating costs and demands a time commitment from senior management
Captive Academy of the 14th Annual Executive Educational Conference
Types of Captives
• Single-parent (pure) captive
• Group or association captive: – Heterogeneous (Mixed/Dissimilar) – Homogeneous (Same)
• Rent-a-captive: – Protected cells / segregated cells / segregated portfolios
/ sponsored captives
• Risk-retention group (U.S. domiciles): – Reciprocal risk-retention groups
• Branch captives • 831(b) (Qualified Small Insurance Company)
Captive Academy of the 14th Annual Executive Educational Conference
Domicile Selection
• Domicile decision criteria: – Parent Ownership Structure
– Premium Taxes
– Captive Income Taxation
– Ability to Provide Intercompany Loans to Parent
– Restricted Classes of Business
– Incorporation/Annual Operating Costs
– Capitalization Requirements
– Investment Restrictions
– Regulatory Attitudes
– Infrastructure
Captive Academy of the 14th Annual Executive Educational Conference
Step One - Feasibility
Risk Management Strategy Discussion; Envisioning & Modeling:
– Capacity & Appetite to assume more risk
– Loss Analysis and Forecasts
– Market response
• Minimum deductibles / attachment points
• Premium discounts for increased deductibles / attachment points
• Fronting fees/Security Requirements
– Guidance on the most appropriate domicile
– Taxation
Captive Academy of the 14th Annual Executive Educational Conference
Strategic Feasibility Review
– Data collection
– Retained loss projection
– Federal & State tax discussion
– International Tax discussion (if applicable)
– Ownership & Structure options
– Investment considerations
– Economic analysis
– Domicile comparison
– Third Party Business opportunities
– Other lines of cover to include in the future
– Summary of Revenue Rulings and Relevant Case Law
– Final recommendations
Captive Academy of the 14th Annual Executive Educational Conference
Application Process
Captive Owner
Select Service Partners: Attorney, Actuary,
Auditor and Manager Select Directors
Biographical Affidavits Start Up Fees
Attorney
Name Reservation Articles of Incorporation
By Laws EIN
Shareholder/Operating Agreements
Captive Manager
Business Plan Financial Forecasts
Actuarial Study Application Assembly Process Coordination
Domicile Insurance
Department
License
Captive Academy of the 14th Annual Executive Educational Conference
Step Two - Formation
• Preparation of Articles of Incorporation, other Legal Documents
• Select directors for the captive
• Appoint auditors, lawyers, bankers, etc
• Business Plan Development
• Initial Meeting With Regulators
• Financial forecasts
• Actuarial Review
• Application Submission and Review
• Licensure; Stipulations letter
Captive Academy of the 14th Annual Executive Educational Conference
Step Three – Implementation & Management
• Company administration, including: maintenance of detailed and comprehensive files of legal and general administration functions of the company
• Insurance, including: administration of insurance and reinsurance programs
• Accounting, including: payment and receipt of premiums; integrate with Parent’s financials
Captive Academy of the 14th Annual Executive Educational Conference
How A Captive Operates
• Control of the captive will be by an appointed board of directors, usually a mix of professionals and parent company workers
• The board then appoints local companies for services like banking, auditing, etc
• Management company carries out all operational functions on behalf of the captive and provides insurance and other expertise that is required by the captive
Parent Company
Captive Board
Management Company Auditors
Investment Managers
Bankers
Regulators
Lawyers
Captive Academy of the 14th Annual Executive Educational Conference
The Captive’s Service Team
Banker
Captive Manager
Consultants: Tax, Employee Benefits
Claim Administrators
Investment Advisors
Insurance Brokers
Department of Insurance
Actuary
Client
Legal Counsel
Auditor
Captive Academy of the 14th Annual Executive Educational Conference
Captive Management Operations • Financial Statement Preparation (GAAP & Statutory) • Regulatory Filings • Reconciliation of Bank and Investment Accounts • Policy Issuance • Premiums • Corporate Record Maintenance • Income Tax Provisions • Premium Tax Returns • Cash Disbursements & Receipts • Regulatory Communications with South Carolina Department of
Insurance (SCDOI) and the National Association of Insurance Commissioners (NAIC)
• Budgets and Forecasts • Audit Coordination • Coordination of Statutory Examinations • Board Meetings and Books