1. Now you have a captive, what do you do? 17 June 2008, Tuesday

2. Speakers Panellists: Traver Alexander, Research Officer, Bermuda Monetary Authority (BMA) Brad Adderley, Partner, Insurance Team, Appleby Gina Smith, Actuarial Services, Bermuda Monetary Authority (BMA) William Noonan, Vice President, Risk Management, Structure Tone, Inc. Moderator: Khim Chia, Assistant Vice President, Business Development Marsh Captive Solutions - Bermuda

3. Agenda 1.Overview of Bermuda Captive Market – BMA Review 2.Ongoing Compliance 3.Actuarial Report: What is BMA looking for? 4.Case Study:  Now I have a captive, what do I do?  Challenges faced by Risk Manager  If I can start all over again, would I do it differently?

4. Overview of Bermuda Captive Market Traver Alexander, Research Officer Bermuda Monetary Authority (BMA) talexander@bma.bm

5. Sources: Statutory Financial Returns Annual Market Survey on Captives Administered jointly by the BMA and BIMA, the Bermuda Insurance Managers Association * Preliminary figures for year-end 2007

6. Gross Written Premiums a) Rates of Retention b) Percentage of Business Assumed c) Geographical Location of Risk Types of Insurance Coverage a) Main Property Lines of Business b) Main Casualty Lines of Business Asset Composition

7. 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 3 rd party risk up to 20% of GWP Class 3 Captives Captives with allowance to insure 3 rd party risk over 20% of GWP

17. Largest domicile in respect to gross written premiums and captive formations High rates of retention Growing geographical diversity in the location of risk Casualty leads Property in insurance coverage Strong balance sheet positions with 2/3 of assets in cash and quoted investments

18. Ongoing Compliance Brad Adderley, Partner, Insurance Team Appleby badderley@applebyglobal.com

19. Companies Act 1981 Directors, Officers and Residency Annual Government Fee Annual Declaration Annual General Meeting Dividends and Other Distributions

20. Insurance Act 1978 Dividends and Distributions Requirements of Controllers Powers of Bermuda Monetary Authority Controller Obligations of Insurer Punishment Recourse

21. Companies Act 1981 / cont. Directors and Officers Minimum – Directors Minimum – Officers Residency

22. Companies Act 1981 / cont. Annual Government Fee Assessable Capital – US$Fee – BDA$ 120,000 4,070 120,001 – 1,200,0006,275 1,200,001 – 12,000,0008,360 12,000,001 – 100,000,00010,455 100,000,001 – 500,000,00018,670 500,000,001 or more31,120

23. Timing Prepared and signed by whom Confirmation … – Business –Authorised Capital –Share Premium –Currency Companies Act 1981 / cont. Annual Declaration

24. Timing Extension Sanction Board Meetings Companies Act 1981 / cont. Annual General Meeting

25. Audited Financials Auditors and Fee Size of Board Directors Alternate Directors Fees Companies Act 1981 / cont. Annual General Meeting

26. Companies Act 1981/ cont. Dividends and other Distributions (a)the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b)the realisable value of the company’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts

27. Class 1Class 2Class 3 Minimum Share Capital$120,000 (General Business) $370,000 (Composite) Minimum Capital and Surplus$120,000 (General Business) $370,000 (Composite) $250,00 (General Business) $370,000 (Composite) $1,000,000 $1,250,000 (Composite) Minimum Solvency Margin Greater of: (a) $120,000; (b) Premium Test – First $6 million net premium written (“npw”): 20% plus – Excess of $6 million npw: 10%; or (c) Loss Reserve Test: 10% Greater of: (a) $250,000; (b) Premium Test – First $6 million npw: 20% plus – Excess of $6 million npw: 10%; or (c) Loss Reserve Test: 10% Greater of: (a) $1,000,000; (b) Premium Test – First $6 million npw: 20% plus – Excess of $6 million npw: 15%; or (c) Loss Reserve Test: 15% Liquidity RatioRelevant assets must equal 75% of relevant liabilities Relevant Assets must equal 75% of relevant liabilities Reduction of Statutory CapitalApproval by the Authority required for any reduction in total capital of 15% or more below that included in previous year’s financial statements Insurance Act 1978 Dividends and Distributions

28. Insurance Act 1978 / cont. Requirements of Controllers Controllers to be “fit and proper” Multiple controllers (at least two) of corporate vehicles Oversight to include non-executive directors Business conducted in a “prudent manner” with appropriate levels of “integrity and skill” BMA shortly to publish interpretive statements regarding the minimum criteria BMA may cancel the registration of a registered person if it feels the minimum criteria are not, or are no longer, being met

29. Insurance Act 1978 / cont Powers of Bermuda Monetary Authority Powers to enable BMA to investigate unregistered activity Persons involved protected against self-incrimination Legal privilege respected BMA can obtain a search warrant if there is non-cooperation or fear of destruction of documents

30. Insurance Act 1978 / cont Powers of Bermuda Monetary Authority BMA may exercise its powers of intervention: –If the minimum criteria are not met –If a person becomes a controller of a private company insurer without BMA permission or remains as one in spite of BMA objections BMA may direct the removal of a controller or officer as part of its intervention BMA may cancel the registration of an insurer

31. Insurance Act 1978 - cont. Controller “Controller” includes “shareholder controller” Obligations arise when the following thresholds of voting control are crossed: 10%, 20%, 33% and 50% of voting control of insurer or its parent company Various summary/ indictable offences outlined for contravention of shareholder controller’s obligations

32. Insurance Act 1978 – cont. Obligations of Controller If insurer/parent is a private company, obligation on shareholder controller to notify BMA in advance and receive BMA’s “no objection” (prospective permission) BMA must be satisfied that shareholder controller is “fit and proper”

33. Insurance Act 1978 / cont. Obligations of Insurer Registered Person must give notice of any changes to any controller to the BMA within 45 days of the registered person becoming aware of the fact Company’s obligations encompass more than simply changes to shareholder controllers - failure to give notice is a summary offence

34. Insurance Act 1978 / cont. Punishment Sanctions imposed on controllers who continue after notice of objection served BMA powers to restrict shares/order sale of shares where controllers continue in position after similar to that described above for shareholder controllers BMA can object to existing controllers of a registered person (including but not limited to shareholder controllers) if it considers they are no longer “fit and proper”

35. Insurance Act 1978 / cont. Recourse What may be appealed and by whom: –Canceling of registration or directing the removal of a controller by registered person to a tribunal –Affected individuals may appeal in certain instances –Notices of objection may be appealed by the person on whom the notice is served Tribunals to consist of a chairman and two other members; panel of nine persons to be appointed by MoF Points of law may be appealed to Court

36. Actuarial Considerations for Bermuda Captives Gina Smith, ACAS, MAAA, CPCU Assistant Director, Actuarial Services Bermuda Monetary Authority (BMA) gsmith@bma.bm

37. Agenda Introduction BMA’s Actuarial Services Team Actuarial Considerations for Captives within our Regulatory Framework

38. Introduction Captives represent a significant proportion of Bermuda’s international insurance industry Diverse Bermuda market BMA is a risk-based regulator Actuarial analyses also risk-based

39. The Actuarial Services Team Director - Rick Shaw, FIAA, BSc. Hons. Assistant Director - Gina Smith, ACAS, MAAA, CPCU (Re)Insurance experience spanning: –Consulting –International policy and regulation –Mergers and Acquisitions –Property Catastrophe Pricing & Reserving –Capital adequacy issues

40. The Actuarial Services Team Our Function Proportionality Principle – Risk-based – Consistent with international standards Key Stakeholder risks –Threaten the security of policyholders –Threaten the overall solvency position of the company –Threaten Bermuda’s reputation Distinction between regulation of captives versus commercial insurers

41. Actuarial Considerations Licensing & Authorizations Assess nature, scale and complexity of new applicants and their related risk Evaluate appropriateness of key actuarial & capital adequacy assumptions Evaluate key issues –Know Your Customer (KYC) –Loss reserve specialist approvals –Shareholder related validations –Due diligence procedures Regulatory & economic capital resource analysis

42. Actuarial Considerations On-Sites and Compliance Provide on-going support to supervisory teams Captive Manager On-Site Programme Broader On-site Programme –Start-up assessments of newly licensed entities –On-going site assessments of mature companies Evaluate Adequacy of technical provisions including loss reserve levels, unearned premium provisions, premium deficiency reserves and economic capital levels

43. Actuarial Considerations Run-Off & Restoration Provide support to Restoration & Run- Off team Policyholder protection is foremost priority Evaluation of suitability of valuation methods for technical provisions and other balance sheet items

44. Actuarial Services Role Industry Consultation BMA – continuous review and enhancement of framework Industry consultation critical to regulatory development process Recent consultations –Financial guarantee valuation of liabilities –Internal capital models

45. Now You Have a Captive, What Do You Do? An Owner’s View William B. Noonan, CRIS Vice President – Risk Management Structure Tone, Inc

46. Risk Manager’s Checklist Captive Business Plan Captive Administrator Legal / Regulatory Parent Company Executive Management Finance / Accounting / Audit / Tax Expectations Insurance Carriers New Programs For Your Captive

47. Business Plan Read your Business Plan again (even if for the 100 th time) Read your Feasibility Study again. Do the above at intervals (90 Days, 6 Months, a year after being approved). Are you sticking to your Business Plan? Are you doing what you told the BMA you planed to do?

48. Captive Administrator Selecting the right team that fits your business and your Risk Management team. Reporting, does it work for your company and meet your needs? Check your ego (My Ego). An administrators “Gold” is there experience across all facets of a captive. Take advantage of their “Lessons Learned”.

49. Legal / Regulatory Does your Business plan match your license? Making sure all legal partners understand your Business Plan and Feasibility Study (Captive lawyer, Parent Company General Counsel, Outside Counsel, Tax Counsel) Making sure everyone is working off the same page and plan!

50. Parent Company Executive Management Do they fully understand the Business Plan? After you form your Captive, have key members read the Business Plan and Feasibility study again (They may not remember what was decided a year ago). Make sure they understand how the Captive may change “cash flow” requirements at your annual renewal.

51. Finance Have all Financial Reports been changed to report on Captive performance inside your organization. 953 D Election, are your auditors on the same page as you? Have you looked at all possible exposures and cash flow impacts as a result of owning a captive? Has your organization developed a plan for any new “cash flow” requirements or the changes compared with past requirements.

52. Expectations (Parent Company) Resist the temptation to change your Business Plan or speed it up. Stay the course, and speak up. Make sure all those who propose change are familiar with the Business Plan and Feasibility Study, or re-acquaint them with both. Be on the watch for the tendency of others to believe that all risk issues and exposures can be solved with the captive.

53. Insurance Carriers Once your captive is formed, make sure you hold a face to face meeting to go over your future plans. Make sure your underwriter understands the changes and differences now that you own a captive (Don’t think they know just because they’re an underwriter). Carrier “Credit and Captive Departments”. Make sure you fully understand their rules and guidelines.

54. New Programs Are they in your Business Plan, and on the same time line as your Business Plan. Does the program make sense for your Captive? Due diligence on the new program. Make sure Legal, Finance, and Tax implications have been studied. Does your Administrator have experience with this type of program in a captive?

55. Closing Comments Do not forget to use good old “Common Sense”. The common theme in all the advice I have received from successful captive owners is the age old advise of “Walk Before You Run” and “Crawl Before You Walk”.

56. Thank You