1. James Trundle – CIMA Ron Sulisz - SRS Linda Haddleton – Kane Regulation and Industry Developments

2. 2 Agenda James Trundle - CIMA Goals of Insurance Regulation Risk-Based Regulation Corporate Governance & the Rule on Risk Management

3. 3 The Goals of Insurance Regulation Insurance Core Principles (ICP) issued by IAIS – ICP 1 section 1.3 states: “the principal objectives of supervision promote the maintenance of a fair, safe, and stable insurance sector for the benefit and protection of policyholders.”

4. 4 The Goals of Insurance Regulation Insurance Core Principles (ICP) issued by IAIS – ICP 1 section 1.3.1 states: “all insurance supervisors are charged with the objective of protecting the interests of policyholders.” How?

5. 5 The Goals of Insurance Regulation Laws and Regulations Ongoing monitoring and supervision Solvency standards Corporate governance Risk management Intervention

6. 6 Approaches to Insurance Regulation Compliance Based Regulation Application of the Law regardless of the material risk of the licensee Focus on insurance, market and credit risk Resource Intensive Does not easily incorporate non-prudential risk e.g. operational Easy to administer

7. 7 Approaches to Insurance Regulation Risk Based Regulation Adoption of “proportionality” i.e. size, nature and complexity. Resource Efficient Requires constant reassessment of risk Encompasses all risk including operational risk Solvency II ???

8. 8 Corporate Governance Revised ICPs now available: http://www.iaisweb.org/ICP-material-adopted-in-2011-795 Corporate Governance is now ICP 7 rather than ICP 9 “The supervisor requires insurers to establish and implement a corporate governance framework which provides for sound and prudent management and oversight of the insurer’s business and adequately recognises and protects the interests of policyholders.”

9. 9 The Rule on Risk Management Companies already consider their risk environments but CIMA want licensees to document their processes to evidence: – Board Strategy – Risk Appetite – Appropriate Controls Not interested in necessarily reducing risk. Taking risk is acceptable as long as it’s monitored and controlled.

10. 10 The Rule on Risk Management Rule and risk management framework should be a useful tool for captive boards and management to assess and management captive’s risk Focus of Rule and risk management framework follows range of risk management issues identified in ICP 16 - Enterprise Risk Management for Solvency Purposes “The supervisor establishes enterprise risk management requirements for solvency purposes that require insurers to address all relevant and material risks.”

11. 11 The Rule on Risk Management All insurance companies have adopted a RMF appropriate to their size and complexity that will be made available to CIMA at their request. Key words: – Size – Complexity

12. 12 The Rule on Risk Management For Class B insurers writing the risks of their parent or parents: 1.The Board to discuss and minute their tolerance for risk. 2.The Board to make a statement…… to be minuted……. that “given the size and complexity of their Company, the Board do not feel that any further formal documented process is required”. For Class B insurers writing unrelated party risks: 1.CIMA will be expecting the Board of Directors to ensure that protocols on key risks are implemented effectively and can be periodically reviewed by CIMA. This includes the process of discussing the Boards tolerance for risk, quantification of risk and processes to identify, assess, mitigate and monitor risk.

13. 13 The Rule on Risk Management Key risks to be considered: – Credit risk – Insurance underwriting and reinsurance risk – Investment risk (including use of derivatives) – Market risk (including liquidity risk) – Strategic and tactical risks from the business plan – Concentration risk – Compliance risk – Operational risk

14. 14 The Rule on Risk Management RMF must be appropriate having regard to the size and complexity of the insured, and the nature of its risk exposure (section 5.1.2) RMF must include identification and adherence to appropriate tolerance level or risk limit for material sources of risk (section 5.1.5) Depending upon size and complexity of insurer and nature of exposures, RMF should include periodic qualitative and quantitative analyses (e.g., stress tests) (section 5.1.7)

15. 15 The Rule on Risk Management RMF must include regular surveillance of market environment to identify and respond to changes in operating environment that may adversely impact insurer’s business (section 5.1.6) RMF must include effective and comprehensive review by independent functions, e.g., auditors, actuaries, risk and compliance services and insurance managers (section 5.2)

16. 16 Agenda Ron Sulisz - SRS Captive Investment Policy – An Overview The Competition – Global Captive Market Statistics, Comparative Differences and Niche Markets Developments in the Cayman Captive Industry

17. 17 Captive Investment Policy CIMA Statement of Guidance (SOG) “Asset Management & Investment Strategy For Insurance Companies” General Guidance Accounting Issues – Unrealized Losses

18. 18 Statement of Guidance www.cimoney.com.ky – Regulatory Framewor k Index of Regulatory Measures – Insurance – Index of Measures Rules, Statements of Guidance (SOG), Regulatory Policy (RPY), Regulatory Procedures (PRP) and Forms (F). Subheadings for Licensing, Business Conduct, Prudential Standards, Reporting and Anti Money Laundering

19. 19 Statement of Guidance Statement of Objectives Asset and Liability Management Segregation of Assets The Investment Process The Investment Strategy Operational Issues Monitoring and Control Audit

20. 20 Statement of Guidance The Investment Strategy – 5.1 – Asset mix – 5.2 – Any limits on geographical area, markets, sectors, counter-parties and currency. – 5.3 – Overall approach to the selection of individual securities; and consideration to risk profile of Company and its liquidity needs. – 5.4 – Any restrictions on assets. – 5.5 – Details of any derivatives and/or structured products. – 5.6 – If actively managed, the scope of investment flexibility through quantitative asset exposure limits.

21. 21 Statement of Guidance The Investment Strategy – 5.1 – Asset mix In general, no more than 20% of the actuarially determined reserves should be invested in equities without prior approval. In addition, no P&C insurer should cover their technical reserves with short-term liquid assets.

22. 22 General Guidance Balance Sheet Investments$10 million Actuarial Reserves$ 7 million Net Worth$ 3 million 20% of $7 million = $1.4 equities 100% of $3 million =$3.0 equities TOTAL$4.4 equities

23. 23 General Guidance The Investment Strategy – Asset mix The Board of Directors has adopted a formal investment policy which maintains a strategy which utilizes short term, intermediate term and longer-term investment components consistent with the liability profile developed in the annual actuarial report. The investment guidelines and asset allocation, which allows for “30% equities with a range of + and – 5%”; under the condition that no more that 20% of the actuarial reserves will be invested in equities.

24. 24 Accounting Issues – Unrealized Losses At times accounting net worth has been less than the minimum net worth regulatory net worth. CIMA takes into consideration more than just balance sheet net worth into consideration for regulatory net worth. Other considerations include: – Retrospective provisions in the insurance program; and – Confidence level funding of reserves.

25. 25 Accounting Issues – Unrealized Losses Balance Sheet Investments (at market)$ 6 million Total Reserves $ 7 million Net Worth$ (1) million * Retrospective insurance program doesn’t include the unrealized gains or losses on investments so a $4 million receivable can not be booked; however CIMA knows that when investment gains or loss are realized the premium will be collected from the Shareholder/Insured. Also Shareholder/Insured has ability to pay $4 million assessment.

26. 26 Accounting Issues – Unrealized Losses Balance Sheet Investments (at market)$ 6 million Total Reserves (at 90% c.l.)$ 7 million Net Worth$ (1) million Not a retrospective insurance program but: Reserve @ 90% c.l. = $7.0 Reserve @ expected c.l.=$5.0 Difference$2.0

27. 27 The Competition – the Global Captive Market Estimated over 5,000 captive worldwide. Use the database of Business Insurance for 7 years for our analysis today which had 5,390 captives for the calendar year ending 2009.

28. 28 Introduction Breakdown the global captive statistics by geographical areas – Caribbean & Bermuda, USA and Rest of World. Explain niche markets in certain domiciles. Illustrate recent trends.

29. 29 Statistics - Overall What Country is the largest captive domicile?

30. 30 Statistics - Overall What Country is the largest captive domicile? However, each state has its own captive legislation, therefore each should be evaluated independently as they are domicile in their own right.

31. 31 Statistics - Overall Caribbean & Bermuda – 2,629 or 49% USA – 1,666 or 31% Rest of World 1,095 or 20%

32. 32 Statistics – Largest Domiciles Bermuda – 885 Cayman Islands – 780 Vermont - 560 (Top 3 Represent 41% of Global Market)

33. 33 Bermuda – Brief History Largest International Domicile. Established in the 1950’s when US companies needed to create more capacity than the commercial marketplace had available. Reiss conceived wholly-owed insurance company. Companies also found they could: – Reduce their net premium costs for property insurance and other tariff rated coverages, – Offer coverages that were not available in the commercial marketplace and – Enjoy the freedom of a regulatory environment that welcomed the captive structure.

34. Cayman Islands - Brief History Second largest International Domicile In the 1970s, when litigation exploded and jury awards became increasingly more onerous, coverage availability for medical malpractice became more difficult to obtain. It was during this time that the Cayman Islands established itself as a captive domicile by accepting Harvard's medical-malpractice captive. The Cayman Islands has since become the largest domicile in the world for healthcare captives with 266 medical malpractice captives as of June 30, 2010. 2nd niche is CAT Bonds and 3 rd Group captives.

35. Statistics – Caribbean & Bermuda (From Business Insurance Published March 2010) Domiciles2003200420052006200720082009 Bermuda1,1501,000987989958960885 Cayman Islands644694733740765777780 British Virgin Islands307350380400409332285 Barbados248290242235219230225 AnguillaN/A 200209 Turks & Caicos159164166169173182203 Bahamas18192226281615 Netherlands Antilles18 161715 14 Panama8344455 Puerto Rico0010005 U.S. Virgin Islands7796633 Total2,5592,5452,5602,5862,5772,7202,629 Year to Year Growth-0.55%0.59%1.02%-0.35%5.55%-3.35% Excluded Nevis estimated 60+ and Tortula estimated 60+. 3% ↑ since 2003

36. Statistics – Caribbean & Bermuda (From Business Insurance Published March 2010) In the 6 years there was a decrease of 23% in Bermuda and a decease of 7% in BVI; while the Cayman Islands saw an increase of 21%. Domiciles2003200420052006200720082009 Bermuda1,1501,000987989958960885 Year to Year Mvmt-13.04%-1.30%0.20%-3.13%0.21%-7.81% Cayman Islands644694733740765777780 Year to Year Mvmt7.76%5.62%0.95%3.38%1.57%0.39% British Virgin Islands307350380400409332285 Year to Year Mvmt14.01%8.57%5.26%2.25%-18.83%-14.16% Bermuda was 25% of world market in 2003. In 2009 only 16%.

37. Statistics – Caribbean & Bermuda Fourth largest – Barbados – 225 – Historical tax treaty with Canada however recent TIEA’s with other domiciles in the region (i.e. Bermuda, Cayman Islands, others) with no tax environments. – Other domiciles in region will try to compete on service levels and geographical advantages. Fifth largest – Anguilla – 209 – Grown at the expense of BVI. – Mainly 832(b) captives. Sixth largest – Turks and Caicos – 203 – Known for niche hybrid reinsurance companies (PORC’s) – Auto dealer warranty captive.

38. 38 Vermont – Brief History The largest USA captive domicile and 3 rd largest in the world In 1981, the Vermont Legislature passed the Special Insurer Act which was designed to provide a unique and attractive statutory framework for captive formation. These landmark regulations had become the model of captive regulation in USA. The captive insurance industry has received universal and enthusiastic support from the governors and state legislators. Vermont's Infrastructure.

39. Statistics – USA (From Business Insurance Published March 2010) Domiciles2003200420052006200720082009 Vermont507524542563567557560 Hawaii122147158160163165162 South Carolina67106122146158156161 Utah22153092122148 Nevada19395895108123126 District of Columbia204059707790116 Kentucky056103167105 Arizona183953839410699 Delaware4556184149 Montana9101321303547 New York18283339445047 Georgia1614151714 18 Colorado111098666 MissouriN/A 36 Alabama0001235 Tennessee4433334 MichiganN/A 12 Arkansas1111111 Illinois3333211 Kansas0111111 Oklahoma0011111 South Dakota1111111 Rhode Island10000N/A ConnecticutN/A LouisianaN/A MaineN/A VirginiaN/A West VirginiaN/A Total USA8239791,0981,2591,4131,5471,666 Year to Year Growth18.96%12.16%14.66%12.23%9.48%7.69% 102% ↑ since 2003

40. 40 Statistics USA Vermont - 560 South Carolina – 161 DC – 116 Kentucky - 105 Hawaii - 162 Utah – 148 Nevada – 126 Arizona - 99

41. 41 Statistics USA Vermont - 560 South Carolina – 161 DC – 116 Kentucky - 105 Hawaii - 162 Utah – 148 Nevada – 126 Arizona - 99 WestEast

42. Statistics – USA (From US Captive magazine 2010 Edition) Domiciles2009LegislationNiche Details by SectorGroup captives Vermont5601981 42 of Fortune 100 / RRG's Manufacturing 107 / Healthcare 8921% Hawaii1621986 Japanese/West Coast USA Construction 47 / Healthcare 2810% South Carolina1612000RRG's25% Utah1482003831b's Real Estate / Property Mgmt / Const0% Nevada1261999Group Captives Healthcare / Construction56% District of Columbia1162000n/aHealthcare31% Kentucky1052000n/aDiverse11% Arizona992001n/a Health 31 / Construction 2222%

43. Statistics – Rest of World (From Business Insurance Published March 2010) Of the largest 4 European domiciles, Luxembourg is the only one that has grown since 2003, and the major reason was the good year in 2008 (42 new captives). Domiciles2003200420052006200720082009 Guernsey383379382381368370355 Luxembourg216219208 210262251 Isle of Man173175165161155156145 Dublin205214154 131 114 Singapore495760 6263 Switzerland345048 42 Labuan21 2926313032 New ZealandN/A 2022 British Columbia12131518201718 Gibraltar12 14 19 17 Mauritius13 12 VanuatuN/A 1610 Malta1085579 Jersey151315 553 Hong Kong2222222 Guam11111N/A 1,1371,1691,1141,1061,0701,1531,095 Year to Year Growth2.81%-4.70%-0.72%-3.25%7.76%-5.03%

44. 44 Statistics Rest of World Guernsey – 355 Luxembourg – 251 Isle of Man – 145 Dublin - 114

45. Statistics – Overall (From Business Insurance Published March 2010) USA (102% 6 year growth) is growing at a faster pace than Caribbean & Bermuda (3% 6 year growth) as well as the Rest of World (-4% 6 year growth). Domiciles200420052006200720082009 World3.85%1.68%3.75%2.20%7.11%-0.55% Carribbean & Bda-0.55%0.59%1.02%-0.35%5.55%-3.35% Carribbean w/o Bda9.65%1.81%1.53%1.38%8.71%-0.91% USA18.96%12.16%14.66%12.23%9.48%7.69% Rest of World2.81%-4.70%-0.72%-3.25%7.76%-5.03%

46. Statistics – Overall – Insurance Managers ManagerCaptives Under Mgmt%Cum % Aon1,22223% Marsh *1,12021%43% Willis2986%49% USA Risk Group2344%53% International Advisory Services *2004%57% HSBC Insurance Management1944%61% Atlas Insurance Management1703%64% Alta1302%66% Beecher Carlson1042%68% AMS1002%70% Tribeca Strategic Advisors972%72% Strategic Risk Solutions952%74% Chartis Insurance Management872%75% R&Q Quest Management832%77% Global Captive Management791%78% JLT Insurance Management781%80% Wealth Management Solutions751%81% Artex Risk Solutions601%82% Utah Captive Insurance581%83% Alternative Risk Management521%84% Risk Services501%85%

47. Statistics – Overall – Insurance Managers In 7 of the top 10 domiciles, all but BVI Marsh and Aon are of a significant presence. The broker affiliated managers tend to be in multiple jurisdictions. Of the independent managers only USA Risk Group, HSBC, and Strategic Risk Solutions are in more than one jurisdiction with a significant percentage of their presence in the top 3 jurisdictions.

48. Overall Positive Observations International Domiciles provide value by supporting innovation. – Segregated Cell Companies started in Guernsey – Catastrophe Bonds started in Cayman Islands – Sidecars started in Bermuda Captive Consultants favour International Domiciles when recommending third-party risk coverages due to their flexibility. International Domiciles provide an opportunity to operate in a more cost-effective environment (i.e. no premium taxes).

49. Overall Positive Observations International Domiciles have strong infrastructures for captive insurance with immense intellectual talent, that will continue to be as innovative in the future as they were in the past.

50. Overall Negative Observations International Domiciles are receiving negative press. Political pressure from state authorities to domicile a captive in the US.

51. 51 Cayman Developments Insurance Law 2010 Regulation on Capital and Solvency Insurance Business Symposium 2010 – Ten Recommendations

52. 52 Insurance Law 2010 www.cimoney.com.ky – Regulatory Framework Laws and Regulations – Insurance Law (2008 Revision) – Insurance Law, 2010 – Insurance (Forms) Regulations (2003 Revision) – Insurance (Variations of Fees) Regulations, 2009 Published with Gazette No. 21 on 11 October 2010 but is not “in force”. Transitional provisions in the Schedule for Section 42(1).

53. 53 Regulation on Capital and Solvency “Soon Come”. Split between Class A, B, C and D. – A – Domestic Insurance Company – B – Captive Insurance Company – C – Special Purpose Insurer – D – Open Market Reinsurance Company

54. 54 IBS 2010 – Top Recommendations  Consider Incorporated Cell Legislation.  Industry “Fact Sheet”.  www.imac.ky – Members – Cayman Islands Captive Industry  Development of a Statistical Domicile Comparison Model.  www.imac.ky – Members – Domicile Comparison  Expand Captive Owners to new geographical and industry segments.  Attendance at CRIMS in September 2011