Alternative Risk Transfer 21 May 2004 AURIMS THOMAS MILLER RISK MANAGEMENT (UK) LTD

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

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

THOMAS MILLER RISK MANAGEMENT (UK) LTD Cost of Insurance Elements of Insurance Premium Cost of Predictable Claims Loading for Expenses, Commission & Profit (30%?) State Tax (X%) Catastrophe Provision x x Portfolio Subsidy THOMAS MILLER RISK MANAGEMENT (UK) LTD

THOMAS MILLER RISK MANAGEMENT (UK) LTD Cost of Risk Retention Cost of Predictable Claims Loading for Expenses, Commission & Profit (30%?) State Tax (X%) Catastrophe Provision x x Portfolio Subsidy THOMAS MILLER RISK MANAGEMENT (UK) LTD

The Insurer’s Objective Premium Profit Break-Even Time THOMAS MILLER RISK MANAGEMENT (UK) LTD

Object of Risk Retention Insurance Premium Retained Risk Premium Time 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

THOMAS MILLER RISK MANAGEMENT (UK) LTD Types of Captive Traditional (single parent) Rent-a-captive Association Mutual PCC THOMAS MILLER RISK MANAGEMENT (UK) LTD

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

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

THOMAS MILLER RISK MANAGEMENT (UK) LTD PCC STRUCTURE Cell A Cell B Cell H Cell G PCC Owner (Core) Cell C Cell F Cell D Cell E THOMAS MILLER RISK MANAGEMENT (UK) LTD

THOMAS MILLER RISK MANAGEMENT (UK) LTD 25/03/2017 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

THOMAS MILLER RISK MANAGEMENT (UK) LTD 25/03/2017 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 25/03/2017 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) 25/03/2017 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 25/03/2017 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

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

Controlled by operating deductibles Programme Objectives Loss Type Treatment Low Frequency – High Severity Catastrophe level Transfer (Insurance?) Capable of self funding Medium Frequency – Medium Severity Finance High Frequency – Low Severity Controlled by operating deductibles Retain THOMAS MILLER RISK MANAGEMENT (UK) LTD

THOMAS MILLER RISK MANAGEMENT (UK) LTD 25/03/2017 Retained at Operating Level 2,000 1,000 3,000 2,500 750 THOMAS MILLER RISK MANAGEMENT (UK) LTD

THOMAS MILLER RISK MANAGEMENT (UK) LTD 25/03/2017 Cell Retention 800 K 700 K 600 K 400 K 300K 2,000 1,000 3,000 2,500 750 Retained at Operating Level THOMAS MILLER RISK MANAGEMENT (UK) LTD

THOMAS MILLER RISK MANAGEMENT (UK) LTD 25/03/2017 EML Reinsurance Need 16m 12m 10m 6m 4m Cell retention 800 K 700 K 600 K 400 K 300 K 2,000 1,000 3,000 2,500 750 Retained at Operating Level THOMAS MILLER RISK MANAGEMENT (UK) LTD

THOMAS MILLER RISK MANAGEMENT (UK) LTD 25/03/2017 16m+12m = 28 EML Reinsurance Purchase EML Reinsurance Need 16m 12m 10m 8m 9m 800 K Cell retention 700 K 600 K 400 K 300 K 2,000 1,000 3,000 2,500 750 Retained at Operating Level THOMAS MILLER RISK MANAGEMENT (UK) LTD

THOMAS MILLER RISK MANAGEMENT (UK) LTD Too late to do anything? THOMAS MILLER RISK MANAGEMENT (UK) LTD

Who to contact for further advice? 25/03/2017 Who to contact for further advice? Len Hanning Managing Director Miller & Associates Email lenh@miller-associates.com.au 02 9262 5555 Chris Charman ACII ACI Arb Thomas Miller Risk Management (UK) Ltd Email: chris.charman@thomasmiller.com  +44 (0) 20 7204 2567 THOMAS MILLER RISK MANAGEMENT (UK) LTD