thomas miller risk management (uk) ltd alternative risk transfer 21 may 2004
TRANSCRIPT
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Alternative Risk Transfer
21 May 2004
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Current Issues• Uncertain market
• Insurers have to make profit for shareholders
• Insistence on good RM
• Unwillingness to differentiate
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Why Retain Risk?
Choice - To take advantage of benefits
Necessity - Risk transfer (e.g. insurance)
is not available
Ignorance - Risk is not identified
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Cost of Insurance
Elements of Insurance Premium
Cost ofPredictable Claims
CatastropheProvision
PortfolioSubsidy
StateTax
(X%)
Loading forExpenses,
Commission & Profit (30%?)
x x
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Cost of Risk Retention
Cost ofPredictable Claims
CatastropheProvision
PortfolioSubsidy
StateTax
(X%)
Loading forExpenses,
Commission & Profit (30%?)
x x
THOMAS MILLER RISK MANAGEMENT (UK) LTD
The Insurer’s Objective
Premium
Time
Break-Even
Profit
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Object of Risk Retention
InsurancePremium
Time
Retained RiskPremium
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Why look for an alternative?
• To control your risk transfer programme – take that control away from insurers.
• To reduce money ‘lost’ to insurers
• To cost-effectively finance retained risk
These, and other benefits, can be achieved with an
appropriate captive
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Types of Captive
• Traditional (single parent)
• Rent-a-captive
• Association
• Mutual
• PCC
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Captive - benefits 1
• Tax efficient smoothing of retained risk
• Reduced insurance costs
• Retention of:
• Underwriting profit
• Investment income
• Access to reinsurance markets
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Captive - benefits - 2
• Uninsurable risks - capacity and flexibility
• Reduced dependence on insurance market uncertainties:• Restricted cover
• Claim declinatures
• Insurer security
• Formal risk management focus
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Captive - disadvantages
• Retention of underwriting losses
• Capital committed to non-core business
• External expenses:
• Management
• Regulatory
• Management time
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Cell A
Cell E
Cell C
Cell G
CellB
Cell D
CellF
Cell H
PCCOwner(Core)
PCC STRUCTURE
THOMAS MILLER RISK MANAGEMENT (UK) LTD
PCC/SAC Features - 1
• Established under Guernsey Protected Cell Company Ordinance 1997 Bermuda 2001
• Single company with one:• Board of Directors
• Memorandum and Articles of Association
• Assets and liabilities of each cell separated by statute
THOMAS MILLER RISK MANAGEMENT (UK) LTD
PCC/SAC Features - 2
• Solvency test for main PCC - also for cells if reliant on cellular capital
• Requires licensed insurance manager
• Requires only one set of accounts
• Documentation in name of PCC - not individual cells
THOMAS MILLER RISK MANAGEMENT (UK) LTD
PCC/SAC - Advantages Over Traditional Captives
• Reduced capital requirement
• Lower running expenses
• Reduced management time
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Potential Applications (inter alia)
• Funding insurance deductibles
• Funding excluded/uninsurable risks
• Public/Products Liability - Recall
• Environmental Impairment/Pollution
• Regulatory Changes - Effects on e.g. decomissioning costs
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Establishment Requirements
• Good loss experience
• Good risk management
• Effective risk identification and assessment
• Financial ability to retain risk
• Senior management commitment
THOMAS MILLER RISK MANAGEMENT (UK) LTD
PCC as a possible solution for AURIMS members?
PCC will allow
• Each member to retain risk at own level
• Loss records to be ring fenced
• Reduced reliance on insurance
• Real reward for improved RM
and will also provide an opportunity for an aggregated Reinsurance purchase, with resultant economies of scale
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Programme Objectives
Low Frequency –High Severity
Medium Frequency –Medium Severity
High Frequency –Low Severity
Loss Type
Transfer (Insurance?)
Finance
Retain
Treatment
Catastrophe
level
Capable
of self funding
Controlled by operating deductibles
THOMAS MILLER RISK MANAGEMENT (UK) LTD
2,000 1,000 7502,5003,000
Retained at Operating Level
THOMAS MILLER RISK MANAGEMENT (UK) LTD
2,000 1,000 7502,5003,000
600 K400 K
800 K 700 K
300K
Retained at Operating Level
Cell Retention
THOMAS MILLER RISK MANAGEMENT (UK) LTD
2,000 1,000 7502,5003,000
600 K400 K
800 K 700 K
300 K
10m6m
16m12m
4m
EML Reinsurance Need
Retained at Operating Level
Cell retention
THOMAS MILLER RISK MANAGEMENT (UK) LTD
2,000 1,000 7502,5003,000
600 K400 K
800 K 700 K
300 K
10m 8m
16m12m
9m
16m+12m= 28 EML
Reinsurance Purchase
EML Reinsurance Need
Retained at Operating Level
Cell retention
THOMAS MILLER RISK MANAGEMENT (UK) LTDToo late to do anything?
THOMAS MILLER RISK MANAGEMENT (UK) LTD
Len Hanning
Managing Director
Miller & Associates
Email [email protected]
02 9262 5555
Chris Charman ACII ACI ArbManaging DirectorThomas Miller Risk Management (UK) LtdEmail: [email protected] +44 (0) 20 7204 2567
Who to contact for further advice?