1. Captive Considerations What to know, What to avoid #[insert hashtag here]

2. Captive Considerations R. Wesley Sierk, III ARM, ACI, ChFC Author, Taken Captive 110 Pine Avenue, Suite #310 Long Beach, Ca 90802 P: 562.472.2846 x210 F:562.435.7886 M:310.993.9762 wsierk@riskmgmtadvisors.com #[insert hashtag here]

3. Captive Considerations Michael R. Mead, CPCU 2011 CICA Distinguished Service Award Winner Captive consultant, manager, broker President, Missouri Captive Insurance Association, www.mocia.org Vice President, Director, International Center for Captive Insurance Education, www.iccie.orgwww.iccie.org Director, Captive Insurance Council of the District of Columbia, www.cic-dc.org www.cic-dc.org Past Chair, Captive Insurance Companies Association, www.cicaworld.com www.cicaworld.com Past President, Director, Arizona Captive Insurance Association Expert Commentator,Captives irmi.com www.mrmeadandco.com mmead@mrmeadandco.com 312-316-5084

4. Captive Considerations Agenda – Basics – Uses – Challenges Ask questions at any time Presentation will be available on the WRCIC website, or AZ, MO, UT sites.

5. Captive Considerations What is a Captive?  Insurance company wholly owned and controlled by its insureds  Insurance company that insures the risk of the parent company

6. Captive Considerations Who has a captive? Over 50% of the commercial property/casualty market Virtually all of the Fortune 500 All energy companies, utilities and most hospitals Over 5000 globall y

7. Captive Consideration s Why a Captive?  Get control of the cost of insurance  Improve claims handling  Improve cash flow  Design coverage that will benefit their own business  Obtain income tax deductions  Potentially provide gift and estate tax free transfers

8. Captive Considerations Uses Workers compensation Pollution Terrorism Medical malpractice Directors and Officers/Fidelity General Liability

9. Captive Considerations What Problems Can a Captive Address  Unavailability of insurance  Insurance that is too expensive  Premiums that don’t match the company’s losses  Inflexible language  Inflexible terms  No tax benefit to retain the risk

10. Captive Considerations Types of Captives: Rent-A-Captive Protected Cell Captive Single Parent Captive Industry Captives Association Captives Risk Retention Group Captives Agency Captives Special Purpose

11. Captive Considerations What are the steps to form a Captive? Prepare Feasibility Study Actuarial Analysis Choose a domicile Choose a Captive Manager Determine structure Create the Business Plan Prepare Incorporation Documents Biographical Affidavits Complete the Application Submit to Commissioner Receive Certificate of Authority.

12. Captive Considerations Tax Issues Do you want a deduction? State versus Federal Risk Shifting Risk Distribution Facts and Circumstances

13. Captive Considerations IRS red flags FAS 113 Not finite risk Actuarial Study Surplus to premium ratio Paying claims Unusual coverage Purpose

14. Captive Considerations Feasibility Study Is a feasibility study the same as an actuarial report? What are the main purposes of a feasibility study? Who conducts the feasibility study? What does a feasibility study cost? Is a feasibility study required for getting licensed as an insurance company? How long does it take to complete a feasibility study? Should I be concerned about confidentiality?

15. Captive Considerations Elements of the Feasibility Study 1.Clarifying the objectives 2.Defining the risk 3.Measuring the risk Retained risk and loss projections Expense budget for the captive Tax impact U.S. (or other country) income tax Excise taxes Excess and surplus lines taxes Domicile premiums taxes Local premium taxes Other taxes/assessments Premium strategy

16. Captive Considerations More elements 3.Measuring the risk- Continued Premium strategy Capitalization Pro forma financial statements-These financials should include: 1.Income statements and balance sheets 2.Five-year pro forma results 3.Presentation of tax consequences 4.Financial assumptions (interest rates, growth rates, cost of capital, etc.)

17. Captive Considerations 4.Structuring strategy 5.Domicile choice 6.Operating the captive

18. Captive Considerations Key components of captive management – Underwriting – Claim management – Financial management – Compliance/reporting

19. Captive Consideration Reviewing and evaluating risk Setting premium rates Reviewing coverage applications Writing policies Create the underwriting policy – established guidelines that the underwriter should follow – Coverage review and require financial strength of the insured – Should cover how policy terminations or loss of coverage is handled. – It should also cover any target market or geographic restrictions.

20. Captive Considerations Claims Management Decide WHAT risk you will cover Then decide HOW to handle the claims that arise Claims Management Policy – Claims Team – Internal vs. External to the captive – Internal team to the parent organization? – Investigations – Settlement Authority – Other policy matters to consider: defining roles, responsibilities and authority levels for all those involved in the process; establishing case-reserve protocol; identifying and retaining the law firm that will handle litigation or other negotiations requiring legal expertise.

21. Captive Considerations Financial Management Understand the Purpose of the captive – Improve Risk management – Build and increase wealth Create board policies to address – signature/wire transfer authority, – cash management and other accounting policies, – risk limitation and operating ratios, – investment policy, – internal and external compliance communications, – contract signature authority

22. Captive Considerations Compliance Reporting Domicile and Type of captive specific Starts with the annual audit: – Opinion of Independent Certified Public Accountant – Report of Evaluation of Internal Controls – Accountant's Letter – Financial Statements – Certification of Loss Reserves and Loss Expense Reserves Organizational / Jurisdiction Review Risk Pool Certification / Compliance

23. Captive Considerations Advanced Issues Captives can be used for – Estate / Gift Tax Planning – Asset Protection Ownership succession Specific subsidiary issues

24. Captive Considerations Asset Protection

25. Captive Considerations

26. Captive Ca