An Introduction to CaptivesGalen Buisson, BancorpSouth Insurance ServicesMarc LaPointe, USA Risk Group

The Captive Marketplace

• $8.354 Billion in Premiums for 2011• 25-35% of the commercial market• Over 70% of the Fortune 500 have

captives• Captives paid 92.7 cents per hundred in

premium versus $1.01 for the commercial market in 2011

Source: Programbusiness.com/A.M. Best

What is a Captive?• A limited purpose insurance company• A risk-bearing vehicle• A corporate asset• Usually, a wholly-owned subsidiary of

a parent company• The concept is at least 70 years old

Why Form a Captive?• Economic reasons• Coverage reasons• Program control• Reinsurance access• Building a corporate

asset• Strategic corporate

tool

Types of Captive Structures• Single Parent Captive – owned by a parent• Group Captive – sharing risks with others• Rent-a-Captive – renting of a shell and capital

• Cell Captive – many corporate shells from a single captive

• Series LLC – A variation on the Cell Captive

• Special Purpose Captive – Catch all structure

Component Captive Parts

• Performing an initial feasibility study• Creating a business plan• Choosing a Captive Manager• Choosing a domicile• Obtaining a license• Providing initial capital• Beginning operations• Monitoring performance

Partners in the Process• Insurance broker • Captive manager• Domicile regulator• Legal representation• Actuarial • Accounting • Claim handling / TPA• “Fronting” insurer• Reinsurance relationships

Capital Requirements and Costs

• Feasibility study - $25,000 minimum one time cost. Varies with complexity

• Surplus contribution – Statutory minimum ($250K to $1M) plus additional capital at the discretion of the commissioner of insurance. General rule for every $3 of Net Premium you need $1 of capital

• Operating costs - $35,000 to $100,000 annually plus any fronting/reinsurance costs

• Claim adjusting costs – vary by type of claim • Taxes as applicable (premium/Federal)

Surplus Versus Premiums • Initial capital (surplus) provides the basis for

the amount of premium that the captive can write. This is usually between 3 and 5 times the amount of the surplus.

• $250,000 surplus can underwrite $750,000 to $1,250,000 in annual net premium

• More premium volume requires more surplus• Adverse loss activity can deplete surplus

An Economics Example Premium: $5,000,000

- Fronting Cost (7.5%) $ 375,000

- Operating Cost $75,000 - Reinsurance Cost $1,250,000 - Claim Costs* $1,300,000

Annual Profit** $2,575,000 * includes adjusting charges ** less applicable taxes

Considerations• Captive is a long-term insurance strategy• Captive is a regulated entity• A captive does not replace the need for loss

prevention/control. It does not hide or eliminate bad losses

• A captive is subject to an annual actuarial study to assure its ability to pay claims

Considerations (Con’t)

• A captive is a business and exists to:• Make a profit• Risk Management Tool

• Favorable tax treatment requires a captive be:• Formed for business purpose• Meets IRS Safe Harbor Rule

• Not all businesses are suitable for captives• Frictional operating costs must be considered

in low premium captives

Sound Captive Strategies• Taking a long-term view • Maintaining a carefully controlled underwriting

approach• Participating in underwriting profits• Building a Strategic Asset• Controlling the overall insurance program by

leveraging the captive

Summary

A captive can be a very meaningful tool in ACHIEVING COST SAVINGS and CONTROLLING CORPORATE

INSURANCE PROFILES while BUILDING A MEANINGFUL

CORPORATE ASSET. Most of the world’s major corporations have established captives for

these reasons.

• The largest independent captive manager in the world

• One of the top 5 captive managers• Offices in 4 US states and licensed

managers in 11 US states• International Offices in Bermuda, Malta

and Cayman Islands

• BancorpSouth Insurance Services, Inc. is one of the 5 largest bank owned brokerage houses in the United States

• Offices throughout the Southeastern United States and 660 employees

• Marine and Captive Expertise in-house

Your Panelists• Marc Lapointe - Senior Vice-President of USA Risk Group. Mr.

Lapointe has over 20 years of captive experience and is the global production manager for USA Risk. He is also the author of the Arizona captive statute and founder of CaptiveGuru.com.

• Galen Buisson - Director of Special Risks for BancorpSouth Insurance Services. Mr. Buisson has over 30 years of captive experience with multi-national conglomerates and marine captive experience. He has provided captive solutions to Fortune 500 companies in the US, Latin America as well as various other countries.