november, 2003
DESCRIPTION
Captives – Alternative or Obstacle. Captive Primer Presented by John Yonkunas. November, 2003. Captive. Unfunded Self Insurance. Deductible Plan. Retro Plan. Guaranteed Cost. Risk Financing Continuum. Captive Defined. A closely held insurance company controlled by its owners … - PowerPoint PPT PresentationTRANSCRIPT
November, 2003
Captive PrimerPresented by
John Yonkunas
Captives – Alternative or Obstacle
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Risk Financing Continuum
Unfunded Self
Insurance
Captive
DeductiblePlan
Retro Plan
GuaranteedCost
3
Captive Defined
A closely held insurance company controlled by its owners…
... offering insurance products or reinsurance support to its owners as the principal beneficiaries...
...and the owners-policyholders actively participate in decisions influencing underwriting, operations and investments.
4
Historical Growth of Captives Worldwide
0
1000
2000
3000
4000
5000
6000
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: Captive Insurance Company Reports and Best’s Captive Directory
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4,837 Captives Worldwide (Year-End 2002 Figures)
Guernsey 408Luxembourg 280Ireland 209Isle of Man 173Singapore 51Switzerland 41All other 40
Total 1,202
Bermuda 1,426Cayman 642BVI 269Barbados 207Turks & Caicos 74Bahamas 25U.S. • Vermont 454• Hawaii 102• Colorado 20• Georgia 16• Illinois 14• South Carolina 12• Tennessee 10 • Arizona 10• New York 9• Other U.S. states/domiciles 140Other 205
Total 3,635
WESTERN HEMISPHEREDOMICILES
EASTERN HEMISPHEREDOMICILES
Source: Best’s Captive Directory
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2002 New Captive Formations by Domicile
Domicile
Cayman Islands
Bermuda
Vermont
Guernsey
British Virgin Islands
South Carolina
Barbados
Ireland
Hawaii
Others
Total
2002 Captive Formations
97
79
70
49
45
20
19
18
16
49
462
Source: Best’s Captive Directory
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Number of Captives by Type
Type of Captive
Pure Captive
Connected Business
3rd Party Business
Association Captive
Multi-Owner Captive
Risk Retention Groups
Rent-a-Captives (incl. Agency, Sponsored, and PCC)
Number of Captives
2003 vs. 2003
1366 1087
214 188
218 180
206 201
78 63
96 73
294 241
Source: Best’s Captive Directory
Pure Single Parent
Related Business Single Parent
Unrelated Business Single Parent
Captive of Insurer
Association Captive
Multi-Owner Captive
Healthcare Captive
Life Insurer Single Parent
Rent-a-Captive
Risk Retention Group
Self Insurance Groups
Reciprocals
Agency Captive
Special Purpose Vehicles
Protected Cell Captive
Producer Owned Rented Captive
Types of Captives
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Categories of Captives
Ownership & Control Single Parent
Group/Risk Retention GroupRent-A-Captive/Protected Cell
Captive
Transaction – Offshore & OnshoreDirect
Fronted
StructureStock/Mutual
Reciprocal
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Ownership & Control Categories
10
11
Single Parent
Insures the risk of the parent and sister companies
Includes predictable exposures & working layer
Offers unusual or uninsurable coverages Punitive Damage
TerrorismBusiness Risks
Assets Controlled by TreasuryLoan-Backs
Commercial Paper
Highly Leveraged
12
Group
Insures the risk of the members/policyholders
Includes predictable exposures for casualty coverages at low retentions
Does not typically offer unusual or uninsurable coverages
Assets Managed by Investment Manager
Moderately Leveraged
Higher Regulatory Scrutiny
Risk Retention Group – Federally authorized licensed carrier
13
Rent-a-Captive
Reinsures the risk of members - Fronted
Includes predictable exposures
No unusual or uninsurable coverages
Assets Controlled by Sponsor/Owner
Ownership/Governance Limited
No Direct Capital – Indirect Capital for “gap” exposure
Protected Cell Captive – legal segregation of assets and liabilities
14
Rent-a-Captive Insurance and Reinsurance Transactions
AGENT
FrontingCompany
Rent-a-Captive
INSURED
INSURANCEAGREEMENTSINSURANCE
AGREEMENTS
SHAREHOLDERAGREEMENTS
SHAREHOLDERAGREEMENTS
REINSURANCEAGREEMENTSREINSURANCEAGREEMENTS
InsurancePremiumsInsurance
Policy &Claim Payments
InsurancePremiums
Primary LayerReinsurance Premiums
Primary Claim Recovery
PreferredDividends
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Transaction Categories
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Captives are Established to EitherInsure or Reinsure Risk
… direct insurance
Corporation CaptivePremiums
Coverage
Corporation InsuranceCompany
Captive
… reinsurance
Premiums
Coverage
Fronting Fee
Reinsurance
Insurance
Agreement
Captive
Agreement
Reinsurance
Carrier
Deductible/SIR Indemnification
Agreement
Excess
DED/SIR
ExcessExcess
DED/SIR
Owner/Policyholder
Captives as part of an integrated and complex risk financing program
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Structure Categories
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19
Structure Category
Stock/Mutual Stockholders/Members Board of Directors Officers Taxable at Captive level
Reciprocal Subscribers Subscriber Advisory Committee Attorney-in-Fact Subscriber Savings Accounts - Assigned
Surplus Taxable at Captive and Subscriber levels
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Captive Trends
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Trend 1: Continued Strong Interest in Captives
New captive formations
Expansion of existing captives
Effects of hard market Fronting insurance capacity diminishing and
fees increasing Higher reinsurance rates
22
Trend 2: Unrelated Business
Captives are increasingly insuring risks unrelated to the owners for: Risk diversification Tax deductibility Profit potential
Examples Suppliers or independent contractor P/C risks Customers (warranty, credit life) Employee benefits
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Trend 3: Employee Benefits
Opportunity areas U.S.: disability, life, deferred compensation,
SERPs, retiree medical Non-U.S.: reinsurance of multinational
pooling, internationally mobile employees
Columbia Energy’s DOL ruling and ADM’s recent application for an exemption