1. Protecting Assets Through Cell Structure
Presenters:
Crosby Sherman Former Deputy Commissioner of Ins, VT and Former Chief of Captive Insurance, NJ
Mario Vitiello President, Risk Transfer Strategies LLC
Dianne Salter EVP, Corporate Insurance Services
President, Mountain Laurel RRG and Five Point Professional Liability Insurance Company

2. What is a Cell? A Means to segregate business Traditional Cell Captive
Will consist of Core and Cells
Core will manage Cells through participation agreements
Pure/single parent captive
Segregation of business risks
Sponsored/Group/Association captives
Segregate unrelated businesses
Condominium concept
-Master Association (Core Captive) with cells individual owners
Segregate by business line or geogrphically
Pure captive expanding into 3rd party business
"Core." The core holds the captive owner's contributed capital. Label each cell A, B, C, D, and E. These are unrelated companies. Each company must fund its cell with loss reserves and enough capital to cover its risk. This means that each cell must hold capital equal to an acceptable solvency ratio. For example, 5:1 premium-to-capital & surplus, is a common first-year solvency ratio. For every $5 of premium the cell needs $1 of capital & surplus.

3. Cell Evolution Started Offshore
Started as Rent-A-Captives
An Alphabet Soup of Different Structures
Different structures in different domiciles
US Cell Captives
Traditional cells provide liability/asset protection via captive statutes.
Incorporated cells, are governed by corporate law.
Sponsored cells, Protected cell; SegregatedCell; Incorporated Cell, Portfolio Insurance Companies, Series LLC
Each new structure attempting to provide certainty in segregation protection
NJ Sponsored Cell Statute

4. Popularity Increasingly Popular for Smaller Businesses Cost Effective
Risk management is becoming more sophisticated
Looking for ways to solve coverage gaps or tailor insurance coverage's
Cost Effective
Lower formation costs.
Quicker to set up.
More efficient.
Traditional Cell Captive
NJ Statute currently allows for protected cells.
Conversions

5. Lines of Business in Cells
Typical Property Casualty Lines
Medical Stop Loss
Recent Attention on Employee Benefits
Direct conduit to reinsurers, buy reinsurance at “wholesale’
You will hear from Mario and Dianne more on how they use the captives/cells

6. Mid Market Popularity Increasingly Popular Ideal for Smaller Companies
Recent Attention on Employee Benefits
Domiciles are Chasing the Movement
Direct conduit to reinsurers, buy reinsurance at “wholesale’
You will hear from Mario and Dianne more on how they use the captives/cells

7. NJ Formation Core/Parent Captive
Similar to pure captive
Cells are subject to NJ DOBI approval; possibly through a change in the Business Plan
Cells must stand on their own as to capitalization.
NJ likes the cell Risk Management Function to Reside at the Core Cell Level.
Capitalization minimum of $250,000 in NJ
"Core." The core holds the captive owner's contributed capital. Label each cell A, B, C, D, and E. These are unrelated companies. Each company must fund its cell with loss reserves and enough capital to cover its risk. This means that each cell must hold capital equal to an acceptable solvency ratio. For example, 5:1 premium-to-capital & surplus, is a common first-year solvency ratio. For every $5 of premium the cell needs $1 of capital & surplus.

8. Mario Vitiello, President, Risk Transfer Strategies LLC

9. Captive Insurance Group of New Jersey October 13, 2015
Medical Stop Loss Segregated Portfolio Cell Utilization.

10. Captive Overview Business Purpose
Administrator places in excess of $15 million in Premium with Stop Loss carriers for its clients.
Overall loss ratio is under 60%.
Mature look of business
Significant risk and profit sharing available

11. Overview Formation NJ domiciled Captive Company
“Cell” captive owned by Administrator for the benefit of clients opting into the strategy and structure. Specific agreements with cell govern the program
Clients participate in their own segregated cell
Risks are segregated in cells
High quality Carriers A.M. Best “A” Rated

12. Corporate Structure Parent Captive Client Cell 2 Client Cell 1
First $75,000 of any Specific Stop Loss Claim
Client Cell 2
First $50,000 of Specific Stop Loss Claim
Client Cell 3
First $100,000 of any Specific Stop Loss Claim
Captive

13. Example $150,000 $250,000 Specific Stop Loss Deductible
Excess risk retained by stop loss reinsurer
Specific Stop Loss Deductible
Excess risk retained by Cell (ceded by the stop loss reinsurer) on any individual
Claims under the specific stop loss deductible paid by the self-funded employer plan

14. Contractual Structure
Employer purchases Specific Stop Loss Insurance at targeted risk point (deductible)
Reinsurer writes the coverage on their policy
Client incorporates a cell in captive
Requires DOI approval and proper capitalization
Capitalization will be subject to a statutory minimum and increase as risk is assumed
Reinsurer cedes some risk to the cell along with a share of the premium
Cells are segregated from each other
Captive pays its share of claims from the ceded premium
Reinsurer may require cede premium to be held in a Reg. 114 Trust

15. Captive Cell owned by Client
Business Flow
Client
Stop Loss Carrier
Captive Cell owned by Client
Captive provides capital to Cell
Profits & losses from Cell Flow to Client
Client pays premium
Carrier reimburses stop loss calims to Client
Carrier cedes layer of risk premium to Captive Cell
Cell reimburses Carrier for share of claims

16. Why a Cell? Allows for a stable “fit” of risk transfer
More stability
Still Provides catastrophic protection
Helps to stabilize Stop Loss pricing year to year
Allows Client to benefit in another layer of risk if pursuing more aggressive care management strategies
Allows the profit and risk charges on the ceded layer to flow back to the Client over time

17. Challenges
Ensure a fair risk premium split for risk assumed by the captive
Administrator will work with the client, captive actuary and the carrier to ensure a fair deal
Meaningful risk transfer and critical mass in the cell
The layer assumed by the Cell is the most stable piece of the risk assumed by the carrier
More risk may be transferred cost effectively under this strategy
Lead time to make it happen- 3 to 6 months

18. Dianne Salter, EVP, Corporate Insurance Svcs.
President, Mountain Laurel RRG
President, Five Point Professional Liability Insurance Company

19. Why the Move to a Captive Program:
Unavailability of medical malpractice insurance for hospitals and physicians in Pennsylvania
Commitment to risk management and claims/ litigation management
Long term commitment of senior leadership to captive risk financing vehicle
Need to meet PA Statutory requirements for “approved” carrier
Acknowledgement of need for “appropriate” actuarially driven funding/premium

20. Strategic Advantages Creating value/evaluating performance
Adherence to risk management/claims management standards/policies and procedures
Continued emphasis on quality improvement/patient safety/risk management
Strategic direction/insight and coordination with claims management and risk management
Key leadership providing ongoing input and oversight
Long term view of the program
Coverage extensions/flexibility

21. Why Alternative Risk Financing
Why Alternative Risk Financing? Top 20 PA Medical Malpractice Insurer Groups – 2013
Carrier
Direct Premium Written ($mm)
Market Share
Type
1. Medical Protective Co
89,042
12.6%
Commercial
2. PMSLIC Ins Co
61,949
8.7%
3. Mountain Laurel RRG
55,339
7.8%
Hospital
4. Franklin Casualty Ins Co RRG
42,785
6.0%
5. Tri Century Ins Co
39,887
5.6%
6. Healthcare Providers Ins Exch
25,803
3.6%
Physician
7. Community Hospital RRG
28,172
3.3%
8. Community Health Alliance Recip RRG
19,427
2.7%
9. Cassatt RRG Inc
18,737
2.6%
10. Broadline RRG Inc.
17,167
2.4%
Carrier
Direct Premium Written ($mm)
Market Share
Type
11. Professional Casualty Association
15,443
2.2%
Commercial
12. Preferred Professional Ins Co
14,340
2.0%
13. Central PA Physicians RRG Inc
13,685
1.9%
Physician
14. Proselect Ins Co
13,002
1.8%
15. Lexington Ins Co
11,846
1.7%
16. Darwin Select Ins Co
11,588
1.6%
17. Steadfast Ins Co
11,541
18. First Medical Ins Co RRG
11,105
Hospital
19. American Cas Co of Reading PA
10,240
1.4%
20. St Lukes Hlth Ntwrk Ins Co Recip RRG
9,383
1.3%

22. Keys to Successful Captives
Sense of urgency – problem to solve
Good spread of risk; good business plan
Understanding of loss volatility and the need for prudent funding
Long-term commitment – discipline to “stay the course” through market cycles
Strong business partners – manager, claims service, actuary, banking and investment, auditors and legal
Commitment and involvement of senior management
Open dialogue with Regulators

23. Five Pointe Professional Liability Insurance Company
CORE CELL
GENERAL ASSETS
MLH PC
(includes Riddle)
MAGEE PC
TJUH PC
(includes TJU & JUP)
Board of Directors
Sets up Protected Cells
Sets Actuarial Funding Levels/Discount Rates
Sets Dividend Distribution Capital Contribution

24. About Five Pointe:
Established to support the risk management programs of its Member Organizations:
Main Line Hospitals
Thomas Jefferson University Hospitals
Riddle Memorial Hospital
Magee Rehabilitation Hospital
The assets, liabilities and operations of the domiciled segregated portfolio company were domesticated to Delaware in June 2007.
Formed as a sponsored captive insurance company as a vehicle designed to segregate and protect the interests of its Member organizations: 9 hospitals and approx. 1,500 physicians/residents covered in the program.
Five Pointe is a non-stock, non-profit corporation recognized as an exempt organization by the IRS. Company provides primary claims-made professional liability reinsurance coverage. Per medical incident limits range from $500,000 to $1MM.

25. Requirements of Five Pointe:
Assets/liabilities and income/expenditures of each PC must be kept separate from the general assets and assets from any other PC.
Assets of PC will only be available to meet the liabilities of that PC and will be protected from creditors of any other of the PCs.
If the assets of any one PC are insufficient with respect to its liability, the general assets would then be available to satisfy the PC’s liability. In no case will the liability of one PC extend to any other PC’s assets.

26. Professional Liability Program
Five Pointe Professional Liability
Insurance Company (“Five Pointe”)
Reinsurance vehicle for the primary professional layer of coverage provided by Mountain Laurel Risk Retention Group (“MLRRG”)
Incorporated in January 2006; approved by IRS as a 501(c)(3)
Domiciled in Delaware
Funded based on actuarial projection of losses based on 65% confidence level and 3% discount factor; mature claims-made program
As of 6/30/15 combined cell assets of approx. $258MM
Direct writer for the Umbrella/Excess coverage:
100% reinsured by domestic, Bermuda and European commercial reinsurance carriers
Separate excess policies for Magee, MLH and TJU
As of December 13, 2014, dividend distributions of $181MM

27. Five Pointe Committee & Membership
Audit and Finance Committee Charge
To make recommendations to the Board regarding the appointment and engagement of the Company’s independent audit firm;
To serve as the Company’s liaison to the Company’s independent audit firm;
To review the results of the annual audit report and the audited financial statements to the full Board;
To review with the independent audit firm, the Company’s internal financial controls, internal auditing procedures and other questions of accounting policy and financial risk exposure;
To review the annual certification of losses and loss reserves by the Company’s independent actuary and to review any premium study or recommendations made by such independent actuary;
To review and make recommendations to the Board regarding budgets, investments, financings and such other matters as the Board requests; and
To receive periodic reports from internal auditors.

28. Higher Quality Lowers Costs