Title Slide JUN 8 – 10, How Captives Are Supposed To Work

Speakers: Karl Klockars, former EVP & General Counsel, Covenant Ministries of Benevolence, Chicago and President Emeritus Covenant International Insurance Company, Ltd. Cyril H. Whitter, Jr., President & CEO, Independent Management, Ltd. Laurel Bowar, Risk Management Analyst, FAC Re Ltd. Moderator: Page Rouse, President Two Rock Insurance Management Ltd.

Formation questions –What is the nature of the insured –What is the geographical spread of risk –What is the risk appetite of the owner How Captives Are Supposed To Work

What are the factors prompting formation –Coverage availability –Pricing –Flexibility –Control your own destiny How Captives Are Supposed To Work

Captive Advantages –Long term control –Loss control / prevention –Claims management –Saving on insurer and reinsurer profit margin –Retained underwriting and investment income –Access to reinsurance markets –Coverage availability and stability –Smoothing insurance market cycles –Control of retentions and quota share opportunity How Captives Are Supposed To work

Captive disadvantages –Underwriting loss –Operational costs and oversight time commitments –Mandatory loss control and claims management costs (advantage & disadvantage) –Initial start up costs including: Feasibility study, actuarial study, legal fees, initial capital, domicile selection, time invested in formation, possible fronting needed, collateral requirements How Captives Are Supposed To Work

Domicile selection –Capital required –Solvency requirements –Investment restrictions –Taxes/fees –Banking choices –Management/audit/legal services availability How Captives Are Supposed To Work

Why Bermuda –Sophistication of domicile –Excellent service availability –Strong links to insurance & reinsurance market –Solid infrastructure –Stable government –Skilled professionals, management companies, attorneys, auditors, banking and investment services –No currency risk –Welcoming to new ideas How Captives Are Supposed To Work

Operational factors –Offshore mind and management –Offshore board quorum –Long term commitment to risk management, safety, claims handling –Investment decisions: Asset selection, take risk on underwriting not investments, manager who understands captives How Captives Are Supposed To Work

Conclusion: Is it worth it? –Advice and opinions from: FAC Re Covenant International Insurance, Ltd IML & Two Rock Questions? How Captives Are Supposed To Work