1. THE RATIONALE FOR CAPTIVES
2017 Fall Education Forum
October 2, 2017
Baltimore Maryland

2. SPEAKERS Megan Ogden, Director Captive Management
JLT Insurance Management
Tim Averill, Executive Director
SET SEG Property/Casualty Pool
Michael Rebeleati, Finance/Operations
Nevada Public Agency Insurance Pool
Michael Rhyner, Executive Director
Michigan Municipal Risk Management Authority

3. Overview of Captive Basics
PART ONE
Overview of Captive Basics

4. WHAT IS A CAPTIVE INSURANCE COMPANY?
A captive insurer is generally defined as an insurance company that is wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer’s underwriting profits.
Captive insurance is utilized by insureds that choose to put their own capital at risk by creating their own insurance company, working outside of the commercial insurance marketplace, to achieve their risk financing objectives.
Captives are essentially a form of self-insurance whereby the insurer is owned wholly by the insured. They are typically established to meet the risk-management needs of the owners or members.
Captive insurance companies have been in existence for over 100 years

5. Worldwide Number of Captives
CAPTIVE STATISTICS
Worldwide Number of Captives

6. 2016 NEW CAPTIVE STATISTICS
Number of Captives by Location
All numbers include new cells/SBU’s

7. TYPES OF CAPTIVES Type Ownership Pure/Single Parent
Wholly owned by one parent company
Insures the risks of its parent, subsidiaries and affiliates
Group
Owned by multiple non-related organizations
Insurers or reinsurers the risks of the group/owners
Association
Owned by members of a common industry or trade association
Insurers or reinsurers the risks of the group or association
Branch
Division of an existing off-shore captive formed in the US
Allows companies to access to TRIA and US employee benefit coverages that are required to be in a US domicile

8. TYPES OF CAPTIVES Type Ownership Risk Retention Group
Owned by policy holders and members
Regulated under US federal legislation, licensed in domicile, and allowed to register to operate in all 50 states
Sponsored/Cell Captives
Owned by 3rd party sponsor
Insurers participants in the various cells
Agency Captive
Owned by insurance agents
Allows agency to share in underwriting profits and investment income of its book of business
Special Purpose Financial Captive
Created for a limited purpose of entering into a SPFC contract
Allows securitization transactions by a captive insurance company, transferring insurance risk to the capital markets

9. CAPTIVE ADVANTAGES & OPPORTUNITIES
Reduce Insurance Costs:
Retention of underwriting profits
Claims settlements
Premium advantages
Risk Management
Customize Coverage
Claims Management
Loss control and monitoring
Balance Sheet Preservation
Asset Protection
Owner control of captive
Flexible ownership structure
Investment Opportunities

10. COMMON CAPTIVE COVERAGES
Workers’ Compensation
General Liability
Products Liability
Auto Liability
Property, including wind and quake
Professional Liability
Product or Service Warranty
Environmental
D&O Liability
Employment Practices Liability
Construction Exposures
Trade Risk
Excess Liability
Intellectual Property
Medical Stop Loss
Punitive Damages
Terrorism

11. Increased Accessibility
WHY SHOULD A POOL USE A CAPTIVE?
Premium
Commercial rates not competitive
Combined premium is advantageous
Operational
Commercial coverage not available
Provided coverage that the pool is statutorily unable to provide
Proof of insurance needed
Seeking formalized risk funding and loss control monitoring
Good loss ratios and risk management protocols
Investment income
Desire for a potential profit center
Desire for a regulated environment
Protection from political risk
Access to Capacity
Federal Programs (TRIA)
Reinsurance otherwise not accessible in commercial market
Secure
Profitable
Regulated
Increased Accessibility

12. CAPTIVE DEVELOPMENT PROCESS
Review Current Insurance Program & Risk Appetite
Formal Feasibility Study
Decision to Proceed
Business Plan Development
Captive Application, License, Incorporation & Capitalization
Commence Operations

13. CAPTIVE FEASIBILITY STUDY
Identify core objectives
2. Data collection
Exposure
Loss history
Financial statements
Policies
3. Actuarial loss analysis
Project losses under various scenarios
Decide how much risk to retain
Determine amount of capital
Groups: consider underwriting structure
4. Program design & organizational structure
5. Domicile selection
6. Regulatory, tax and legal analysis
Identify Objectives
Collect Data
Analyze Actuarial Loss
Design Program & Structure
Select Domicile
Analyze Regulations, Taxes & Legal Implications

14. DOMICILE SELECTION CRITERIA
Statutory Capitalization and surplus requirements and solvency ratios
Receptiveness of regulatory environment
Quality of local infrastructure
Availability of expertise
Stability of regulatory environment
CRITERIA
Flexibility as respects investment portfolio
Ease of doing business – in a suitably regulated environment
Experience in business under consideration
Efficient financial outcomes: tax, wealth, investment etc.

15. DOMICILE SELECTION CRITERIA
Quick and efficient procedures for organizing and activating a captive
Taxation
Operation cost relative to other domiciles
Compatibility of language, currency and customs
CRITERIA
Time zone convenience
Strategic location
Where does the owner conduct significant portion of its business?

16. Regulatory Requirements
REGULATORY, TAX & LEGAL CONCERNS
CAPTIVE STRUCTURE
Type of Captive
Ownership
Tax Implications
Underwriting
Class of Stock
Voting Shares
Regulatory Requirements

17. NEXT STEPS FOR CAPTIVE FORMATION
Internal client meeting to review feasibility study results
Approve captive formation
Finalize structure/coverages/corporate governance
Engage captive manager to manage the captive and prepare the application
Engage attorney to form company
Meet with the domicile insurance department
Captive manager to file application to domicile insurance department
Capitalize captive
Commence business

18. CAPTIVE APPLICATION PROCESS
Captive Owner
Meeting with DOI
Service providers
Board of Directors
Biographical affidavits
Start up fees
LICENSE
Attorney
Name reservation
Article of Incorporation
Bylaws
FEIN
Corporate Agreements
Captive Manager
Captive Application
Business Plan
Application assembly
Task manager
Domicile
Insurance
Department
Actuary
Loss/Funding Projections
Financial Forecasts

19. OPERATING A CAPTIVE
Board of Directors oversees the captive, typically parent company management and/or a mix of professionals
Board of Directors appoints local service providers for banking, management, auditing, and captive management
Captive management company performs the operational functions on behalf, including insurance and financial expertise

20. Department of Insurance
OPERATING A CAPTIVE – SERVICE TEAM
Client
Actuary
Banker
Insurance Brokers
Department of Insurance
Captive
Manager
Auditor
Claims
Administrators
Tax
Advisors
Legal Counsel
InvestmentAdvisors 20

21. COST OF A CAPTIVE Costs:
Formation & feasibility
Ongoing operations
Capitalization
Costs depend on the complexity of the structure and insurance program
Pure captives are often less expensive to form and operate than Group captives or Risk Retention Group
Captives with several lines of coverage are often more expensive to operate than smaller programs
Premium taxes are based on the amount of premium written
Capitalization requirements vary by domicile and type of captive

22. ESTIMATED COST OF PURE OR ASSOCIATED CAPTIVES
Formation & Feasibility - $35k to $55k
Includes actuary study, legal fees for formation, fees for application preparation & domicile fees
Ongoing Operations - $100k to $150k
Includes captive management, actuary, audit, legal, travel & meetings, premium taxes & license fees
Capitalization – $250k to $500k (minimum)
In the form of cash, marketable securities or irrevocable letter of credit

23. PART TWO
Captive Case Studies

24. Tim Averill, Executive Director
MASB-SEG PROPERTY/CASUALTY POOL
Tim Averill, Executive Director

25. MASB-SEG PROPERTY/CASUALTY POOL
Created in 1985
514 Members
Michigan Public Schools
Intermediate School Districts
Community Colleges
Property and Liability
Auto liability
Auto physical Damage
Cyber Liability
Educators Legal Liability
General Liability
Property

26. MASB-SEG REINSURANCE LIMITED
Association Captive
Wholly owned and controlled by MASB-SEG Property/Casualty Pool
Domiciled in Cayman Islands
$5.0 million capitalization
Interlocking boards
Officially licensed – May 1981

27. PRIMARY REASONS TO FORM THE CAPTIVE
Comply with statutory aggregate excess requirements
Strengthen our negotiation position with reinsurance partners
Offer protection from increasing regulation
Ensure greater stability by providing an alternative to the commercial market
Broaden our offerings outside the scope of the Pool’s primary coverage
Potential to turn Pool reinsurance expense into future member surplus

28. EVOLUTION OF RISK MASB-SEG REINSURANCE LIMITED 1985 Aggregate Excess
Annual Aggregate Property Deductible
2010 Employee Dishonesty Bonds
Auto Liability, General Liability, Educators Legal Liability, Property
Property & Liability Quota Share
Future Growth: Medical Stop Loss, Cyber Liability

29. MASB-SEG REINSURANCE LIMITED
Current Programs and Coverages:
Statutory Aggregate Excess Coverage
Property and Liability Excess Coverage
Employee Dishonesty Bonds
Participation in the Pools Quota Share Property and Liability Reinsurance Programs
Future Programs and Coverages:
Cyber Liability
Medical Stop Loss

30. Mike Rebeleati, Operations Manager
NEVADA PUBLIC AGENCY INSURANCE POOL
Mike Rebeleati, Operations Manager

31. WHY THE NEVADA POOL/PACT FORMED TWO PURE CAPTIVES
Flexibility in coverage design, scope and retentions for underlying pools
Flow of capital to captives supported access to reinsurance and higher retentions
Investment income opportunities are not as restricted as for public agencies and helps reduce costs over time
Nevada Premium tax savings 3.5% plus Surplus lines fees 0.4% vs. reinsurance tax 0.25%
Open Meeting Law and Public Records Laws do not apply to captives, but do to pools

32. PUBLIC RISK MUTUAL
Formed and Capitalized by Nevada Public Agency Insurance Pool (POOL)
A non-profit pure captive mutual insurance company
Granted Certificate of Authority from Insurance Division on July 25, 2004
Capitalized with $1,000,000

33. PUBLIC COMPENSATION MUTUAL
Formed by Members of Public Agency Compensation Trust (PACT)
A non-profit association captive mutual insurance company
Granted Certificate of Authority from Insurance Division on July 1, 2007
Initial Capitalization $5,000,000

34. RELATIONSHIPS OF NPAIP/PACT
Nevada Public Agency
Insurance Pool
(POOL)
Public Agency
Compensation Trust
(PACT)
Insurance Captive
Public Compensation Mutual
(PCM)
Public Risk Mutual
(PRM)
Administration & Governance
Public Agency
Compensation Trust
(PACT)

35. NPAIP – LLOYD’S 2017-2018 PROPERTY STRUCTURE

36. NPAIP 2017-2018 LIABILITY STRUCTURE GRAPH
UE’s participation decreased to 75% and PRM’s participation increased to 25%
GEM
35%
Brit
40%
PRM
25%
$10M
PRM 25%
Schools
PRM 25%
Schools
UE 75%
Schools
CRL 70%
Municipalities
PRM 30%
Municipalities
$3M
$500K
NPAIP $500,000 SIR

37. Michael Rhyner, Executive Director
MICHIGAN MUNICIPAL RISK MANAGEMENT AUTHORITY
Michael Rhyner, Executive Director

38. MICHIGAN MUNICIPAL RISK MANAGEMENT AUTHORITY
Created in 1980
400 members
Cities
Counties
Townships
Special districts
Community colleges
Property and Liability Only
Auto Liability
Auto Physical Damage
General Liability
Law Enforcement Liability
Public Officials Liability
Property

39. PRIMARY REASONS TO FORM THE CAPTIVE
Provided coverages where MMRMA lacks statutory authority
Expand product offerings which are not part of MMRMA’s core coverage
Provide an alternative to commercial reinsurance for long-term predictability and stability
Provide a traditional vehicle for direct partnerships and alliances with other insurance companies
Create a “profit center” to benefit members
Manage regulations and potential interference

40. DEVELOPMENT PROCESS
Feasibility Study
Decision to Proceed
2015
Selection of Domicile
Business Plan & Application Preparation
2016
Application Approved, License Issued, Incorporation & Capitalization
Commence Operations
2016

41. Association Captive
Wholly Owned and Controlled by MMRMA
Domiciled in Michigan
$10 Million Capitalization
Interlocking Boards
Board of Managers Appointed August 2016
Officially Licensed – December 2016

42. Programs and Coverages:
Tax Collection Bonds for Michigan Counties
Statutory Aggregate Excess Coverage for Pools
Participation in MMRMA’s Quota Share Casualty Reinsurance Program
General Liability Coverage for Other Pools
Workers’ Compensation Excess Coverage for Self-Insureds

43. THE RATIONALE FOR CAPTIVES
2017 Fall Education Forum
October 2, 2017
Baltimore Maryland