30/05/20161 Captives How they work *Please note; This presentation is used as an information aid and interprets the essentials of captives and protected cells. It does not purport to be a definitive regulatory and legal amalgam of Captives and Protected Cells. It provides information on a Guernsey Captive. Other jurisdictions are similar.

30/05/20162 Risks - Options for Insurance financing Self Insure Insurance Captives/Protected Cell

30/05/20163 Traditional Insurance Corporate Corporate pays premium to insurer – Claims are allocated Claim Deduction Excess Risk Insured Risk Premium AssetsIncome Investments Insurer sets premium rate (including expenses), Coverage and deductibles and retains the investment income. Corporate agrees to cover first part of claim i.e. the deductible Insurer agrees to cover risk up to a certain level. Corporate is exposed to any excess over the insured Risk Insurer

30/05/20164 Traditional Insurance Issues Advantages Known Premium Known Deductible Known Exposure Up to Insured Limit Disadvantages Insurers price on average claims penalising better than average companies Insurers prices fluctuate due to the vagaries of the Insurance market Insurers can lower their exposure and costs via the reinsurance market place Insurers control prices, coverage and terms & conditions Insurers retain investment Income, and manage cash flow.

30/05/20165 Captive Insurance Captive Insurer A captive is a fully incorporated and licensed Insurance company. The corporate is owned and controlled by the Corporate. The corporate is primarily the Insured. The owners participate in the Underwriting, claims and Investment decisions of the captive. The Captive has direct access to the Reinsurance market OwnerCaptive Investments Assets Income Reinsurer Re Premiums Re Claims Premiums Claims Dividends Capital

30/05/20166 Why Choose a Captive? Reduce Cost Stabilise Cost Obtain underwriting Profit Obtain income investment on reserves Direct access to the reinsurance market Increase capacity Broader coverage –can insure the difficult risks Better control of insurance process Claims control Considerable cash flow advantages Cost, Coverage & Profit Lessen impact of Market cycles

30/05/20167 Captive Structure (Guernsey Captive) Owner Captive Minimum Capital £100,000 Board of Directors Management Company Investment Manager Service Providers Any Asset Managers Company established in Guernsey Actuaries, auditors, legal etc Captives operate in a similar fashion to traditional Insurance companies Captives issue policies to Insured or Reinsure Fronting insurers Captives collect premiums, pay claims, set aside reserves, pays operating expenses Management Company responsible for all operational aspects

30/05/20168 Criteria for Captive or Protected Cell Company Who should consider a Captive? Major Corporations Medium Corporations Multinationals Charities Medium sized companies Public/NGO’s Premium Expenditure If greater than £500,000 – captive best option If greater than £200,000 – protected cell option Claims Record Should have better than average claims For example, less than 50% over last 2-3 years Important considerations Important considerations Numbers Analysis of past premiums and claims Projections of future claims Expenses Should be lower than commercial insurer Should be below 20% premium Understanding Owners line managers need to understand the risks being written Operational feasibility –backing of owners Senior Management Risk Management Control of risks by owners is imperative “ over 5000 captives exist worldwide”

30/05/20169 Captive Accounts Income Income Premium Outgoing Outgoing Claims Reinsurance costs Operating expenses Underwriting Profit Underwriting Profit income less Outgoing Total Profit Underwriting profit plus investment income less taxes income less taxes Profit gained from: Lower acquisition costs Lower operating expenses Tighter risk control Tighter claims control Investment income

30/05/ Why Guernsey? World class offshore finance centre Europe's premier offshore finance centre Independent stable political environment Highly respected pool of legal, actuarial and accounting services Legislation Insurance Business – (Bailiwick of Guernsey) Law 2002 Supervision Director of Insurance Reports to Financial Services Commission Accounting Annual accounts in accordance with UK Gaap or IAS “ over 620 Captive insurance entities and 67 PCC’s (incorporating 239 Cells)”

30/05/ Establishing a Captive Simple Application Process Co-ordinated by Insurance managers and local law firm Detailed Business Plan Application Form Personal questionnaires on Directors Information on beneficial owners At least one local Director A local Management company Process takes about 4 weeks Regulatory fees £3,535 for captive (£1050 for PCC) Other fees—Legal etc dependent on work involved Capital £100,000 Minimum Solvency 18% of Net earned premium Admissible Assets 90% of assets in approved asset Reinsurance and Assets with ‘connected Persons’ generally not allowed Risk Gap Gap is difference between exposure and the premium plus capital Regulators need to verify how this gap is covered