1. Community Webinar www.insurancecommunitycenter.com Captives: The class will begin at the top of the hour. There is no sound at this time. This class is being recorded. The recording can be found in the Community at Webinars Archive You can ask questions at anytime, type them into the chat box. Check your chat box for links to upcoming classes. This class is not approved for CE credit. Some things you should know:

2. www.InsuranceCommunityUniversity.com Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state jurisdiction. The instructional materials provided by The Insurance Community Center and its authors is intended as a general guideline and any interpretations provided by The Community do not modify or revise insurance policy language. Information which is copyrighted and proprietary to Insurance Services Office, Inc. (“ISO Material”) is included in this publication. Use of the ISO Material is limited to ISO Participating Insurers and their Authorized Representatives. The Insurance Community Center assumes neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional materials provided. Insight Insurance Consulting laurie@insurancecommunitycenter.com marjorie@insuranceacommunitycenter.com www.insuranceacommunitycenter.com Copyright 2012© 2

3. www.InsuranceCommunityUniversity.com  Presents Monthly Webinars Free to Community Members.  Community webinars are archived on the Community homepage under the right hand tab titled: Webinar Archive 3

4. www.InsuranceCommunityUniversity.com  In addition the community has unique business networking opportunities.  Enjoy the Weekly Newsletter on a specific topic with a tip of the week; claim; quiz flash and articles 4

5. www.InsuranceCommunityUniversity.com  One Flat Fee per Office includes  Monthly webinars approved for CE many states  Test and Learn  Audio Presentations on insurance topics  Checklists  Power point presentations for client and/or peer training 5

6. Marjorie L. Segale, AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR Insurance Community Center, LLC Director of Education 6

7. www.InsuranceCommunityUniversity.com  Captive Basics  Why a client would consider forming a captive  Broker’s role 7

8. Captive Basics 8

9. www.InsuranceCommunityUniversity.com  A captive insurance company is a company established to insure the risks of organizations affiliated with its owner(s)  Traditionally, a captive insurance company is formed with the permission of regulatory authorities in the insurer's home territory (its domicile) 9

10. www.InsuranceCommunityUniversity.com There are 5,000± captive insurance companies in the world Most by US companies Bermuda leading domicile Cayman second Majority incorporated outside the US 10

11. www.InsuranceCommunityUniversity.com Newer captives, particularly those for small business are being formed within the US VermontUtahVermont 11

12. www.InsuranceCommunityUniversity.com Captive insurance planning is an alternative risk management and risk financing technique that can be used to accomplish several purposes including insuring the hidden risks of its insured's. 12

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14. www.InsuranceCommunityUniversity.com Market cycles Insurance Availability Adverse impact Pricing Stability Inability to tailor coverages for specific needs Lack of Coverage Flexibility Possibility of coverage not being honoured Claim Denials 14

15. www.InsuranceCommunityUniversity.com Discover hidden risks inherent in their business venturesPredictability of insurance costs Risks can be insured through tax-deductible premium dollars to cover the funding of that insurance company Risks can be insured through their own insurance company with significant tax advantages through a captive 15

16. www.InsuranceCommunityUniversity.com Improve cash flow and provide investment income Create an asset base to finance risk Implement a corporate-wide risk management/financing strategy Focus management attention on loss control and risk financing 16

17. www.InsuranceCommunityUniversity.com Often not used to replace insurance The correct approach is to insurance through the Captive areas of risk there the client is bare Shifting the bare risk to Captive does not increase the client’s risk profile If loss occurs – pays for the loss with pre-tax dollars If loss does not occur – owner retains underwriting profits 17

18. www.InsuranceCommunityUniversity.com Can cover Large deductibles / retentions Excluded coverages Excess liability 18

19. www.InsuranceCommunityUniversity.com Single-owner Captives Insures its own risks as well as those of its subsidiary companies, known as a pure captive Can provide coverage for non- affiliated companies as well 19

20. www.InsuranceCommunityUniversity.com Group Captives Owned by multiple, unrelated policyholders Often sponsored by a trade association Homogenous groups 20

21. www.InsuranceCommunityUniversity.com Agency Captives Owned by insurance agents/brokers Insure some portion of the insurance exposures 21

22. www.InsuranceCommunityUniversity.com Rent-a-Captives Provides insurance for unrelated parties for a fee Typically issues preferred shares and the business then purchases insurance from the Captive Excess earnings above underwriting losses distributed by way of dividends paid to the preferred stock owners less fees for the captive services 22

23. www.InsuranceCommunityUniversity.com Segregated Portfolio Captives Established by legislation in some countries The assets and liabilities are segregated from other assets and liability of the insurance company If one cell suffers underwriting losses, it affects only that cell and does not affect the other cells A variation of the Rent-a-Captive concept 23

24. www.InsuranceCommunityUniversity.com Protected Cell Captive Owned by an insurance company that insures risks of separate participants through the use of protected cell captives 24

25. www.InsuranceCommunityUniversity.com  Initial analysis and completion of a formal feasibility study  Domicile selection and applications including multi-year financial forecasts for the proposed captive  Design and implementation of captive ownership structure  Formation and organization of new corporate entities 25

26. www.InsuranceCommunityUniversity.com  Maintenance of proper corporate records and adherence to good corporate housekeeping  Work with banks to set up new accounts  Underwrite and manuscript insurance policies  Verification of policy pricing with third party underwriters and risk managers  Completion of regulatory filings 26

27. www.InsuranceCommunityUniversity.com  Payment of regulatory fees  Contract with and compensate all third party consultants  Arrange third party reinsurance  Arrange reinsurance pooling of risks otherwise retained by the captive 27

28. www.InsuranceCommunityUniversity.com  Preparation of standard financing documents  Work with lenders to coordinate loans from the captive with the prospective borrower's existing financing  The timeline for this can run from 3-6 months.  The cost runs from $50,000 - $150,000 with a typical 831 (b) formation around $75,000 28

29. www.InsuranceCommunityUniversity.com  Prepare regulatory filings  Interacts with Captive’s manager, IRS or other tax agencies  Quarterly financial statements, bank reconciliation, monitor loan activities  Record maintenance  Pay All Regulatory and Audit Fees 29

30. www.InsuranceCommunityUniversity.com  Loss Handling/Claims Processing  This can be sub-contracted out to third party administrators for their specific expertise  Underwrite and manuscript insurance policies  Verify pricing with 3 rd party underwriters/ risk managers  Arrange reinsurance  Solvency analysis  Loss reserve analysis 30

31. www.InsuranceCommunityUniversity.com  Provide independent 3 rd party auditor for the domicile  Work with insured’s CPA and prepare captive’s tax returns  Contract with and Compensate All Third Party Consultants  Update and comply with legislative and regulatory decisions / announcements 31

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33. www.InsuranceCommunityUniversity.com Parent Company Operations Funds Captive Gains Tax Deduction $1.2 mn 831.(b) Captive Receives $1.2 mn Premium Pays No Tax on Premiums 33

34. www.InsuranceCommunityUniversity.com An insurance company formed under FCR 28 U. S. C. sec 831(b) Funds less than $1.2 million in premium each year Insurance company is taxed on investment income only 34

35. www.InsuranceCommunityUniversity.com Congress provided this as an incentive for the formation of new companies and have more money out in circulation. The premiums paid by the parent company into the 831(b) formed insurance company may still be deducted 35

36. www.InsuranceCommunityUniversity.com Must actively insure risk Must be an actual insurance company managed for profit Risk must be evaluated and quantified That is a benefit of the Captive – not the goal Cannot treat the Captive as a tax deferral system 36

37. www.InsuranceCommunityUniversity.com  Make yourself a part of the solution team  Attend meetings with the client and Captive team  Work with the Captive manager as well as the actuary team  Identify exposures not covered by insurance ▪ Necessary or excluded coverage lines ▪ Large deductibles  Provide a copy of the insurance coverages 37

38. www.InsuranceCommunityUniversity.com  Hearing that a client is thinking about setting up a Captive can be disconcerting  Does NOT mean that you will lose the account  Any professional Captive manager (usually an attorney) will ALWAYS tell your client that the Captive should not be used to substitute for normal insurance coverages, particularly for smaller companies 38

39. www.InsuranceCommunityUniversity.com  Laurie Infantino  laurie@insurancecommunitycenter.com laurie@insurancecommunitycenter.com  714 803 5830  Marjorie Segale  marjorie@insurancecommunitycenter.com marjorie@insurancecommunitycenter.com  714 206 9583 39

40. www.InsuranceCommunityUniversity.com  Community Lecture  February 9 th  5 Hiring Mistakes: Hire the best!  The Link is in Your Chat window Now  University CE  January 25 th. Commercial General Liability  February 8 th. Builder’s Risk  February 14 th. Voluntary Benefits 40