Captive Insurance
CAGNY
June 1, 2005
New York City
Derick A. White, CPA, CFE
Director of Captive Insurance
Vermont Department of Banking, Insurance,
Securities and Health Care Administration
What is a Captive?
“formalized self-insurance”
wholly owned subsidiary
licensed in a state (or country)
a regulated insurance company with
a limited license
Why form a Captive?
Obtain Coverage
Control Cost
Focus on Risk Management
Manuscript Policy
Pre-loss funding
History
Bermuda during the early 1970’s
Colorado, Georgia, Tennessee
Vermont in 1981
Hawaii in 1986
Recent States
Types of Captives
Pure
Industrial Insured
Association
Risk Retention Groups
Sponsored (Rent-A-Captives)
Reciprocal
Branch
Some Coverages Currently Written
with Captives
General Liability
Product Liability
Workers Comp
Auto Liability
Auto Physical Damage
Property
Business Interruption
Marine & Cargo
Terrorism
Environmental
Impairment
Credit
Professional Liability
Political/War Risk
Aviation
Strike
Employee Benefits
D&O
Trends
Medical Malpractice
Terrorism
Redomestication
Vermont’s Captive
Industry Profile
numbers (over 700 licensed
companies)
management firms (14 active)
service providers (CPA’s, banks,
actuaries)
Vermont Captive Insurance
Association
Total Number of Vermont
Captive Licenses Issued
732
1981
1985
1989
1993
1997
2001
2005
2004 Financial Results Vermont
Premium Written
$ 10.6 billion
Net Income
$ 8.6 billion
Total Assets
$ 85.7 billion
Capital & Surplus
$ 51.2 billion
Role of the Actuary





Feasibility Study
Annual Opinion
Financial Projections
Actuarial Review of applications
Examinations
Current Events
Title/mortgage insurance
Risk transfer
GAO-risk retention groups
NAIC accreditation
Captive Insurance Companies
William D. Motherway
Executive Vice President
Tishman Realty & Construction Co., Inc.
A Brief History
Historical Review
 Most early captives were wholly-owned ‘50s.
 By 1960 there were approx.. 100 captives in operation
including some groups

80’s-90’s – Rent-A-captives and Cells
Critical factors for development of the industry





Availability of coverage problems
Pricing inequity - swings from soft to hard markets leaving
good risks with “Hats in Hand”
Lack of flexibility with insurance coverage and wording
Regulatory Responsiveness by Domiciles
Changing Owner Needs
Current Trends & Key Opportunities
Property Programs Getting Fresh Look
Return to Deductible & Retention Captives
Hard Reinsurance Market – Lack of Support &
Underwriting
Contractors
Nursing Homes
Medical Malpractice
D&O
Property
Many Others
Terrorism Risk Insurance Act of 2002
Group Program Proliferation in Stressed Classes of
Business
Controls and Flexibility
“Reasons for a Captive:
 Internalize
 Unbundle
 Access
insurance program underwriting profits
insurance services, reduce insurance costs
to the reinsurance markets
 Enhance
premium funds, cash flow and investment income
 Leverage
markets, greater control, enhance strategic
partnerships
 Policy
design flexibility, specific to insured’s risk profile
The Stage is Set
All forms of Captives are subject common
attributes:
Financial
Regulatory
Control
Flexibility
What is a Captive and Who Uses them?
Single-Owner (Pure) Captives - insure only the risks of the
owner or the owner’s subsidiary operations (Exception controlled unaffiliated business)
Companies with predictable attritional losses (high frequency.
low severity)
Companies with better than market average loss experience
Companies with poor loss experience but committed to
improved risk management
Companies with uninsured risks
Companies that wish to consolidate global programs
Companies able to sell insurance products to their customers
Key Financial Considerations
 Risk
retained within the “economic” family
 Program loss sensitivity
 Additional fixed costs of captive operations
 Investment and liquidity
 Capital commitment (Cash , LOC’s, other)
 Tax deductibility (paid losses vs. loss reserves)
 Income and Local Taxes
 Each Structure discussed contains some or all of these
Typical Design Structures
 Direct Writing Captive
 Retain
all Risk or Cede Risk to a Reinsurance Partner
 Reinsuring / Assuming Captive
 Assumes
risk from a fronting carrier or another ART
vehicle
 Retains or retro-cedes to a reinsurance carrier
Captive - Operating as a Direct Writer
Insured
Capitalization
Insurance
Premiums
Captive Insurance Company
(Owned by Insured)
Claim
Settlements
Claimants
Shareholder
Dividends
Captive - Operating as a Reinsurer
Insured
Shareholder
Dividends
Security to
Guarantee
Reimbursement
of Losses
Insurance
Premiums
Policy
Issuing
Company
Premium Less
Fronting Fee &
Excess Insurance
Capitalization
Claim
Settlements
Reimbursement of
Losses
Captive Insurance Company
(Owned by Insured)
Claimants
Risk Retention Group
An RRG is an insurance entity owned and controlled by two
or more non-affiliated organizations insured by the RRG.
Homogeneous and insure similar types of businesses risks
or Heterogeneous and insure risks of several types of
organizations.
RRGs in the United States are licensed to issue policies
and and operate under the Federal Risk Retention Act of
1986.
They are stock, reciprocal or mutual in organizational form.
Association Captive
An Association Captive is an insurance company owned and
controlled by two or more non-affiliated association insured by the
captive.
Homogeneous and insure similar types of businesses risks or
Heterogeneous and insure risks of several types of organizations.
Association Captives in the United States are licensed by a
domiciliary state (VT for example) and use a fronting carrier.
They are stock, reciprocal or mutual in organizational form.
Ownership
Are insureds owners of the entity? In what way and how
much?

Joint and Several liability?

Assessable policy?

Withdrawals?

Other?
Management and Governance
Board of Directors
Officers
Shareholders
Professional Managers
Investments
Regulatory and Tax Issues
State insurance regulation
Possible use of a fronting carrier
Liability Risk Retention Act of 1986
Financial responsibility laws
Tax treatment of group captives
Dividend distribution
Service Providers
Front carrier (if applicable)
Reinsurance (specific and aggregate)
Management
Underwriting
Claims and Loss Adjustment
Actuarial
Banking
Investment Management
Auditors
Legal Counsel
Benefits
Better member service
Lack of coverage and capacity fears eased
Price no longer total market driven
Long term relationship with knowledgeable partners
Protection against competition
Protection against market instability
Profit driven



Captive Forms - Rent-a-captive/
PCC
A non-owned facility
Clients do not contribute capital but instead rent it from the rent-acaptive sponsor
Usually located off shore, e.g. Bermuda, Barbados, Guernsey or
Cayman

PCC law offers protection to rent-a-captive participants

Affordable and quick option for most smaller companies

Company selection criteria - cost of risk greater than $1m and net
worth greater than $25m
TRIMCO Insurance Company
Overview
Parent Company - Tishman Realty & Construction Co., Inc.
Industry:

Construction

Hotels and Realty

Real Estate
TRIMCO Insurance Company
Overview
Details of Vermont Captive

Licensed - December 2001

Operational - January 1, 2002
Program Structure:


Direct Deductible Reimbursement - (Premium = $5.0M )

Workers Compensation

General Liability
No Loss Portfolio Transfer
TRIMCO Insurance Company
Overview
Key Operational Components

Start-up costs $25k

Operational/Administrative Costs - $90k annually
The Future

Program Changes
The floor is open for Questions