captive 201 after the feasibility and implementation
TRANSCRIPT
Captive 201After the Feasibility and Implementation
Captive 201
After the Feasibility and Implementation
Presented by:
Kathleen Bibbings, EVP, Aon Insurance Managers (Bermuda) Ltd.
Traver Alexander, Research Officer, Policy, Research and Risk Assessment Department, Bermuda Monetary Authority
Craig S. Melnick, Manager, Global Insurance, Eaton Corporation
Robert Paton, EVP, Aon Insurance Managers (Bermuda) Ltd.
Agenda – After the Feasibility and Implementation • Overview of the Bermuda Captive Insurance Market
• Review – Feasibility and Implementation
• Day-to-day Captive Operations– Captive owner– Captive manager
• The Renewal process– Pre-renewal planning– Captive renewal pricing
• The Audit– Commencement of audit– Completion of audit– Statutory financial return filing
• Other Activities/Actions – Financial reporting - actual vs. budget– Board meeting– Business plan changes – Captive review
Overview of the Bermuda Captive Insurance Market
Sources
• Annual Market Survey on Captives– Administered jointly by:
• Bermuda Monetary Authority • Bermuda Insurance Managers Association
• Statutory Financial Returns
• All figures for 2008 are provisional
Bermuda Captive Insurer Classification System
• Class 1 Captives– Single parent Captives insuring only the risk of
that parent or affiliate
• Class 2 Captives – Single parent or multi-owner captives with
allowance to insure 3rd party risk up to 20% of NWP
• Class 3 Captives– Captives with allowance to insure 3rd party risk
over 20% but less than 50% of NWP
Topics
• Gross Written Premiums – Regional location of underlying risk– Property and Casualty coverage overview
• Main lines of business written
• Balance Sheet Size and Composition – Asset side overview
• Quoted investment detail – Liability side overview
• Profitability Indicators
Bermuda Captive Market Premiums
Bermuda Captives: Gross Written Premiums (US$ billions)
4.41 4.41 4.78 4.7 4.09
8.26 8.08 8.66
5.77
7.11 6.947.71
6.07
6.79
9.03
0
5
10
15
20
25
2008 2007 2006 2005 2004
Class 1 Class 2 Class 3
19.419.821.5
19.4
16.7
Premiums by Region of Underlying Risk
Bermuda Captives: Geographical Distribution of Underlying Risk Insured (2008)
5%
21%
10%
13%
43%
54%
4%
9%
9%
8%
43%
14%
7%
18%
72%
58%
0% 20% 40% 60% 80% 100%
Class 1
Class 2
Class 3
All Captives
Europe North America Caribbean and South America Global All Other Regions
Assumed Premiums by Region of Underlying Risk
Bermuda Captives: Geographical Distribution of Underlying Risk Assumed from Insurance Carriers (2008)
Global 34%
Caribbean and South America
4%
North America 48%
All Other Regions 3%
Europe 10%
Types of Coverage
Bermuda Captives: Types of Business Written (2008)
40%
29%
30%
32%
59%
70%
63%
65%
2%
1%
3%
7%
0% 20% 40% 60% 80% 100%
Class 1
Class 2
Class 3
All Captives
Property Casualty Financial and Other
Major Property Lines of Business
Bermuda Captives: Main Property Lines of Business (2008)
14%
49%
60%
81%
64%
17%
6%
11%
13%
11%
9%
1%
2%
6%
3%
0% 20% 40% 60% 80% 100%
Class 1
Class 2
Class 3
All Captives
Marine Hull and Cargo Auto P D
Property Damage and Business Interruption Aviation Hull and CargoAll Other Lines
Major Casualty Lines of Business
Bermuda Captives: Main Casualty Lines of Business (2008)
13%
26%
29%
31%
29%
5%
11%
46%
14%
31%
45%
9%
3%
9%
5%
18%
0% 20% 40% 60% 80% 100%
Class 1
Class 2
Class 3
All Captives
General Liability Medical Malpractice
Workers Compensation/Employers Liability Professional Liability (other)All Other Lines
Bermuda Captive Market Assets
Bermuda Captives: Assets (US$ billions)
18.09 17.29 16.37 16.15 15.04
40.59 45.135.4 33.66
25.4426.39
16.9613.46 16.63
38.77
0
25
50
75
100
2008 2007 2006 2005 2004
Class 1 Class 2 Class 3
88.884.1
72.165.0 65.3
Assets Detail
Bermuda Captives: Asset Composition (2008)
2%
4%
2%
48%
33%
20%
6%
5%
5%
5%
12%
19%
20%
28%
1%
45%
50%
30%
13%
23%
0% 20% 40% 60% 80% 100%
Class 1
Class 2
Class 3
All Captives
Cash Unquoted Investments
Quoted Investments Investment in/Advances to Aff iliatesPremium Receivables Other Assets
Inside Quoted Investments
Bermuda Captives: Quoted Investment Profile (2008)
10%
18%
6%
13%
6%
86%
80%
77%
82%
7%
8%
8%
0% 20% 40% 60% 80% 100%
Class 1
Class 2
Class 3
All Captives
Bonds and Debentures Equities All Other Quoted Investment
Liabilities Detail
Bermuda Captives: Liability Composition (2008)
31%
48%
44%
43%
56%
32%
34%
37% 6%
9%
7%
5%
8%
2%
3%
4%
3%
1%
12%
0% 20% 40% 60% 80% 100%
Class 1
Class 2
Class 3
All Captives
Unearned PremiumsLoss and Loss Expenses ProvisionsInsurance and Reinsurance Balances PayableStatutory Capital and SurplusAmounts due to Aff iliatesOther Liabilities
Profitability Indicators
Bermuda Captives: Profitability Indicators (2008)
7%
11%
16%
11%
80%
71%
74%
51%
0% 20% 40% 60% 80% 100%
Class 1
Class 2
Class 3
All Captives
Expense Ratio Loss Ratio
Highlights
• Small growth in gross written premiums in 2008– Continued regional diversity in the location of
risk
• Stability in balance sheet positions – Nearly two-thirds of assets in cash and quoted
investments– Capital and surplus positions well in excess of
regulatory requirements
• Bermuda remains the largest captive domicile
Review – Feasibility and Implementation
Captive Feasibility• Sell to senior management the business reasons for the captive
• Get approval to do feasibility study
• Partner with a good consultant
• Demonstrate the advantages
• Optimal ownership structure
• Select your insurance or reinsurance markets
• Domicile
• Service providers
• Capitalization and form – cash vs. LOC vs. assets
• Obtain approval to implement the captive
Captive Implementation• Select name – not as easy as it sounds!• Identify directors and officers• Obtain latest actuarial study• Get market quotations to derive pricing• Prepare proformas• Complete the narrative Business Plan• Select law firm to incorporate the entity• Complete the captive application• Attend pre-application meeting• Always be honest and forthright with the regulators• Submit application• Obtain license• Finalize arrangement with insurer or reinsurers• Commence business
Day-to-Day Operations
Day-to-Day Operations• Who is responsible for what
• Claims management/TPA management
• Claims reserve setting (actuaries)
• Receipts and payables
• Reporting requirements (monthly/quarterly)
• Investment management
• Operations Manuals – what should be included?
Roles and Responsibilities –Document in Procedures Manual
CONTENTS CONTINUED… Page No.
4 RESPONSIBILITIES Purpose 26 Chair 26 Manager 26 Claims Committee 28 Underwriting Committee 29 Investment Committee 31
5 UNDERWRITING PROCEDURES Purpose 32
6 INTERNAL CLAIMS PROCEDURES Purpose 33 Notification of claims 34
7 FINANCIAL REPORTING PROCEDURES Purpose 40 Responsibilities 40 Processing of Premium Cessions 40 Collection of Cash for Premium Cessions 40 Processing of Reinsurance Policies 41 Payment of Reinsurance Premiums 41 Reporting and Paying Claims 42 Day to Day Operations of Financial Services 40 Reporting Financial Results to ESM Reinsurance Limited. 43
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CONTENTS Page No.
1 INTRODUCTION
Purpose of Manual 4 Role of ESM Reinsurance Limited 4 Queries or Unusual Circumstances 6 Manual Pages Filing Instructions 7 2 GENERAL CORPORATE DATA Company Information 8 Registered Office and Details of Incorporation 9 List of Current Directors 10 List of Current Officers 11 Legal Counsel 11 Auditors 11 Agents 11 Committees & Members 12 Risk Management Consultant 12 Investment Managers 12 Investment Custodians 13 Banking Information 13 TPA Details 13 Letter of Credit Issuer 14
3 POLICY – SUMMARIES (Examples) Primary Property Damage / Business Interruption Policy 15 Primary General Liability Reinsurance Policy 21 Transit Risks Policy 24
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Day-to-Day operations - Captive Manager• Act as Principal Representative in Domicile
• Co-ordinate activities of Domicile legal representatives, brokers, actuaries and other service providers, provision of financial services– Preparation of Financial Statements and Forecasts – Year end audits (independent approved auditor,
assisted by Captive Manager)– Statutory filings
• Treasury Service Activities – Financial transactions (Captive Manager and
Investment Manager)– Monitoring and processing cash and investment
activities – Assist implementing of collateral requirements
Day-to-Day operations - Captive Manager Continued
• Insurance Services– Policy documentation – Mid-term endorsements – Claims handling (TPA with reports to captive manager)
• Business Development– Periodic reviews of captive utilization and development
possibilities (Captive Manager/Consultant/Broker)
– Implementing new programs
Day-to-Day operations - Captive Owner• Provide leadership
• Determine the strategic use of the captive
• Set and Manage operational expectations
• Be the ultimate decision maker
• Approve filings
• Approve financials
• Provide necessary data
The Renewal Process
Pre-renewal planning• When should the captive enter the renewal
discussions? As early as possible!
• Who should be involved? Broker and insured with ‘skin in the game’
• Review objectives
• Primary in captive and excess as insurance?
• Full limits in captive and excess as reinsurance?
• What is the best form of collateral?
• Policy writing and issuance. Standard or customized?
• Do not be afraid to forego use of the captive when capacity is cheap and security is good!
Captive renewal pricing• Three usual methods of calculating premium
1. Market rates2. Experience rating3. Other premium pricing techniques
Market Rates
Advantages
Evidence of “arms length” pricing
Usually produces higher premium – good if trying to build war chest
Remove the need for captive to calculate
Accepted by Captive Regulators
Disadvantages
Hard to persuade insurers to give rates/quotes each year
May take more funds out of operational use than necessary
Take into account industry data, not just insured data
Include substantial administrative loadings
Can be difficult to obtain in writing
Can be far more volatile
Experience Rating
Advantages
Based on own experience, not industry
Addition of “overhead” is usually much lower than commercial
Premiums more palatable to insureds
Gives better long-term cash flow
Disadvantages
Do not usually allow for profit margin, although can do
Usually rely on investment income to address any adverse development.
May not have sufficient data – revert to industry data.
Other Premium Pricing Techniques• Mean (or Expected) Loss + Expenses
• Loss Ratio (using mean loss estimate, pricing to achieve a desired loss ratio)
• Targeted Return on Equity (pricing required to achieve targeted ROE, considering mean loss + expenses)
• Mean Loss + Risk Premium (percent of standard deviation)
• Confidence level
• Last year +/- inflation/growth percentage
The Audit
Commencement of Audit• Audit planning meeting several months in advance
• Agree upon timeline and how this will be achieved
• Ensure other service providers agree with the timeline
• Prepared by Client customized request list issued well in advance
• Inform auditors of any major changes in the program or in the process
• Have documentation supporting the main processes
• Avoid Material Weaknesses or Control Deficiency
Completion of Audit• Be ready for the start of the audit and ensure items
requested are available to the auditors
• Inform the auditors of any changes between planning and field work
• Early completion means less ‘subsequent events’
• Recommend frequent communication with auditors to ensure the audit is progressing smoothly
Statutory Financial Return Filing• Specialized reporting format required by domicile
• Required 4 months or 6 months after fiscal year end depending on class of license
• Must be opined upon by an approved auditor
• May require a Loss Reserve Specialist Opinion prepared by an approved actuary depending on class of license
Other Activities/Actions
Financial Reporting – Actual vs. Budget• Compare written premium closely to actual cash received
• If exposure changes , issue addendum to policy and associated invoice
• Are expense deductions taken by the front company the same as appears in the contract? Check carefully!
• As premium is recorded and earned, adjust IBNR so budgeted loss ratio is achieved
• As claims and reserves are recorded, adjust IBNR
• Compare claims with expected and take action!
• Is cash being received in a timely manner?
• Interest income in-line with expectations?
• Are general and administrative expenses in line with budget? If not, why not?
Board Meeting• Get it on everyone’s calendar early
• Consider special invitees such as:– regulator, investment managers, claims, auditor,
actuary, reinsurance broker, etc
• Present the important topics such as premium, claims, investments, dividends, etc.
• Encourage meaningful debate
• Review compliance check-list and ensure adherence
• This may be a once a year opportunity to make an impression – don’t waste it!
• Afterwards….. Have fun!
Business Plan Changes• Material changes to business written, limits, reinsurance,
may require prior approval from regulators
• Capital reductions, change in certain investments (loan backs) may require prior approval from regulators
• Such actions are best recorded as Board decisions
• Rationale for changes should be documented
• Material impact on the captive’s financials require revised projections and revised business plan
• Captive manager should make the risk manager aware of these requirements
Captive Review• What measures are available to review performance?
• Review of service providers – how have they performed?
• Things learned for next year
Types of Review
Utilization
GovernanceReview
FinancialPerformance
Ratios
FullAnalyticalReview
IntegratedWith
ParentFinancialImpact
The Ovation
•Questions and Answers