captives: 101 and beyond
DESCRIPTION
Introduction to Captive Insurance Companies.TRANSCRIPT
Captives: 101 and Beyond
Phillip J. Gajewski, CPCU, ARMAVP, Business Development
Meadowbrook Insurance Group
What is a Captive?
Captive insurance organizations are insurance companies that are owned and controlled by their insureds.
A captive insurance company can be defined as a special purpose insurer whose sources of business are (1) its shareholders and their affiliates which put their own capital at risk, or (2) other participants such as association or group members.
What are the Reasons for Forming a Captive?
Stabilize insurance costs by getting off the pricing “roller coaster”.
Separate your own premium and loss experience from those of other groups or insureds.
Assure availability of tailored coverage. If experience is good, insurance costs
can be trimmed through premium reductions or dividends.
If loss experience is adverse, the situation should still be better because of realized investment income.
How a Captive Can Save Costs.
Eliminates normal insurance company overhead.
Realize investment income on premium and capital.
Realize investment income on loss reserves.
Specialized claims handling and administration.
Specialized loss control activities.Potential tax advantages?
Advantages
Reduced operating costs Investment income and underwriting
profit Broader coverage Pricing and coverage stability Direct reinsurer access Improved service Increased control Immediate reward for reducing losses Enhanced risk management status Fewer regulatory restrictions
Types of Captives
Single-Parent Captive (Pure)Group (or Association)
CaptiveAgency CaptiveHybrid…
also,Rent-a-Captives
Method of Writing Business
Direct Write Captivesvs.
Use of / Need for Fronting Companies
Risk-Sharing Opportunities?
Risk Sharing Partnerships
ExcessCommercialReinsurers
Front Co.
Quota SharePremium
Quota ShareLosses
UnderwritingProfit
+Investment
Income
Agency
Policyholder
Captive
Shareholders
ExcessCommercial Reinsurers
100%
$750,000(Excess Layer)
$250,000 (Working Layer)
QUOTA-SHARE (Captive decides their share)
Limitation of Risk
$1 Million Exposure
Front Co.50%
CAPTIVE50%
Collateral Requirementsfor Fronting / Risk-Sharing
Letter of Credit (LOC)Trust AgreementFunds Withheld
Domicile Selection
On-ShoreAL, AR, AZ, CO, DE, DC, GA, HA, IL,
KY, ME, MO, MT, NV, NY, RI, SC, SD, UT, VT
vs.Off-Shore
Bermuda, Barbados, British Virgin Islands, Caymans, Dublin, Guernsey
Domicile Selection Factors Capitalization Requirements Surplus Requirements Investment Restrictions Reporting and Auditing Requirements Loss Reserving Requirements Income and Local Taxes Government Fees Overall Regulatory Climate Formation Time Miscellaneous Underwriting Limitations Acceptance by Fronting Companies and Reinsurers Formation Costs Management and Legal Fees Availability of Banking, Accounting, & Other
Services Location-Specific Factors
Average Annual Operating Costs
Management Fees: $35,000 - 250,000Legal Fees: $15,000 – 40,000Auditing, Actuarial: $15,000 – 45,000Government Fees: $3,000 – 10,000Meeting Expenses: $10,000 – 50,000
III. CORPORATION DOCUMENTATION
A. CharterB. Offering MemorandumC. Subscription AgreementD. Escrow AgreementE. By-Laws
IV. MULTIPLE OWNERS RELATIONSHIPS
A. Voting RightsB. Capital ContributionC. Standards for Participation In A
Group CaptiveD. Profit Participation In A Group
CaptiveE. Departing Shareholders/InsuredsF. Settlement of Disputes
I. INTRODUCTION
A. Domiciles and Legal StructuresB. Corporation DocumentationC. Relationships Between Multiple
OwnersD. Insurance RegulationE. Securities RegulationF. Insurance DocumentationG. Management ServicesH. Contracts
II. DOMICILES AND STRUCTURE
A. Company DomicileB. Corporate FormC. CapitalizationD. Board of DirectorsE. OfficersF. CommitteesG. Name of Captive
Captive Formation Steps
V. INSURANCE REGULATION
A. U.S. Insurance RegulationB. Captive Domicile Regulation
VI. SECURITIES REGULATION
A. U.S. Securities RegulationB. Captive Domicile Regulation
VII. INSURANCE DOCUMENTATION
A. Policy FormsB. Fronting ArrangementsC. Underwriting GuidelinesD. Rating of PolicyholdersE. MiscellaneousF. Reinsurance Placement
VIII. MANAGEMENT SERVICES
A. Designate ManagerB. Designate Law FirmC. Designate BankD. Designate AuditorsE. Other Service Providers
IX. CONTRACTS
A. Management AgreementB. Reinsurance AgreementC. Trust Agreement
Captive Formation Steps
Disadvantages /Potential Pitfalls
Captive Costs Capitalization and commitment Dependent upon service providers Internal administrative costs
Poor Underwriting Results Inadequate loss reserves and potential losses
Competitive Insurance Environment Failure to Employ Loss Control Techniques Large, Single Insured/Stockholder Possible taxation problems Some insurer/broker resistance
Increased cost of other insurance
Captive Resources:
www.captive.comIRMI – International Risk
Management Institute.Captive Insurance Company ReportsCaptives & the Management of RiskCaptive Practices & Procedures
Thank You!Questions?