SWAN
Captive Risk Financing –
A Structured Approach
• 38th Annual OESAI Conference
• 25 August 2015
Agenda
01
Rationale for Captive Structures
– Risk spend efficiency
– Risk / Cover flexibility
– Comparison to no insurance
02
Practical Approach
–
–
–
–
03
Risk Bearing Capacity
Risk Costing
Structuring
Testing
Captive Structure Options
– Types of vehicles and their advantages / disadvantages
– Suitability testing
04
Mauritius as domicile
– Local business
– (South) African business
– Other opportunities
05
Looking to the future
Rationale for Captive Structures
- 01
01 Rationale for Captive Structures
Risk spend efficiency
—
Insurers are profit-driven
—
Insurers require stringently controlled capital bases
—
Opportunity costs in various risk avenues to insurers
—
Captives (Risk finance) focused on cost of risk only
—
Reduced pooling, cross subsidies
01 Rationale for Captive Structures
Risk flexibility
—
Limited where reliance placed on reinsurance protection
—
Full retention provides highest flexibility
—
Cover of uninsurable risks and differences in conditions
or limits
—
Administratively complex structures easier to accommodate
—
Ease of amendment
01 Rationale for Captive Structures
Captive vs no insurance
—
No dedicated capacity, direct impact on operating results
—
Potential for double-whammy at worst possible time
—
No pooling or cross-subsidies possible
—
Higher (explicit) administration and cost component require
economy of scale
—
Potential reduction in risk management coincreasing TCoR.
ordination,
Practical Approach
- 02
02 Practical Approach
Approach – The RF Process
Own Data
Financial
Capacity
Risk
Profile
External Data
Exposure Analysis
-RBC
-Risk Appetite
-Risk Tolerance
-Update
-Amend
-Cost Profile
-Characteristics
RF
Structure
Retention vs
Transfer
-Options
-Limitations
-Cost / Benefit
-Economy of scale
-Risk characteristics
-Requirements
Conventional
Market
-Flexibility
-Price
-Security
TCo(I)R
-Optimise
-Allocate
-Manage
-Report
02 Practical Approach
Approach – The RF Process
Captives
Own Data
Financial
Capacity
Risk
Profile
External Data
Exposure Analysis
-RBC
-Risk Appetite
-Risk Tolerance
-Update
-Amend
-Cost Profile
-Characteristics
RF
Structure
Retention vs
Transfer
-Options
-Limitations
-Cost / Benefit
-Economy of scale
-Risk characteristics
-Requirements
Conventional
Market
-Flexibility
-Price
-Security
TCo(I)R
-Optimise
-Allocate
-Manage
-Report
02 Practical Approach
Approach – Captive Development
—
Understand client & requirements
—
Process
-
—
Risk Bearing Capacity
Risk Costing
Risk Structuring
Structure Testing
Captive type selection
Implement, Integrate, Manage, Update
Important to demonstrate value on on-going basis to
client
Approach – Risk Bearing Capacity
—
Estimate of ability to retain risk without
compromising key plans and operations
—
Effective risk budget of organisation
—
Considers all risk, need to assess and evaluate
comprehensive risk profile
—
Need to include all sources of RBC
contributions and drains
02 Practical Approach
Approach – Risk Bearing Capacity
02 Practical Approach
Approach – Risk Costing
—
Understand mathematical and operational drivers of
risk cost
-
Develop risk cost curves under all sensible
structural scenarios
Overlay operational and financial realities (MPL,
MFL, RBC etc.)
—
Integrate with market realities
—
Optimise overall TCoR
—
Integrate into risk management process and
reporting
02 Practical Approach
Approach – Risk Costing
Attritional Losses
Risk Retention
Losses
Excess Layer
Losses
Catastrophe
Losses
Loss Severity
02 Practical Approach
Approach – Risk Structuring
Line 2
Expected Cost
11,907,800
Assets Opt (5%, 10%, 85%)
Maximum
Worst Case
0
75,000,000
150,000,000
Expected Cost
11,907,800
Best Case
Worst Case
Stopper
Best Case
0
75,000,000
Expected Cost
0
Expected Cost
Best Case
0
0
Worst Case
0
Expected Cost
0
75,000,000
Expected Cost
Recommended Premium
9,631,900
18,277,600
Best Case
0
Breach Probabilities
Deductible Structure:
Inner
Individual
2.6%
Worst Case
Aggregate
0.0%
0
Best Case
0
Best Case
0
0
Worst Case
34,791,700
Worst Case
Expected Cost
57,872,000
Breach Probability
Best Case
12,300,700
Worst Case
45,000,000
No Limit
Aggregate
5.3%
129,467,300
02 Practical Approach
Approach – Risk Structuring
Ratios
P1 – 2.01
P2 – 1.47
P3 – 0.997 (IOP)
P4 – 0.481
P5 – 0.345
Transfer
Retained
Current SIR
IO
P
02 Practical Approach
Approach – Risk Structure Testing
RBC %
02 Practical Approach
Approach – Risk Structure Testing
Captive Structure Options
- 03
03 Vehicles & Structures
Approach – Captive Type Selection
Complexity, Flexibility
Low
High
Cost
Contingency
Policy /
RAC
Domestic
Captive
PCC
Group / Mutual
Captive
International
Captive
03 Vehicles & Structures
Approach – Captive Type Selection
Considerations
-
Premium volume & Risk exposure
Risk complexity, nature of (insurance) liabilities
Diversification / Concentration of Risk
Relative costs, including risk transfer costs
Planning horizon
Options available
Existing skills / cost of outsourcing
Capital requirements
Governance requirements
03 Vehicles & Structures
Approach – Captive Type Selection
Suitability testing
-
Is a structure possible that minimises TCoR?
Is the criteria for minimisation of TCoR defined and understood?
What structural options are available and what are explicit
costs of each?
Does retention structure create sufficient premium to
generate economies-of-scale on frictional costs?
Is market efficient / hardening / softening?
Does sufficient access to (re)insurance protection exist?
Options available
What internal capabilities exist? Is suitable training / recruitment
possible?
Mauritius as domicile
- 04
04 Mauritius as domicile
Mauritius as domicile
Regulatory Environment
-
Dedicated PCC legislation
Pro-(cell)captive solvency and administration
requirements
Geographic Location & Economic Environment
-
Proximity to (South) Africa, India and Pacific Rim
Small time differences
Stable socio-political environment
Currency flexibility
Cost & Expertise
-
Frictional expenses lower than many domiciles
Significant expertise available locally or with relative ease
04 Mauritius as domicile
Mauritius as domicile
Local Opportunities (on-shore insurers)
-
Limited economy
Some potential for PCC / Mutual structures
(South) African Opportunities
-
Significant spread of multi-national operations (Africa &
Pacific Rim)
Tax and other treaties
Reinsurance regulation under SAM (solvency relief)
Other regions
-
Multi-national companies in India, Malaysia & Pacific Rim
Internet / Virtual & related companies
Looking to the future
- 05
05 Looking to the future
Looking to the future
• Clients and risks are becoming more sophisticated and
complex, necessitating specialist input in order to
manage their TCoR efficiently.
• Governance requirements in most countries require risk
financing to be sensibly structured within relevant
framework of parent to be efficient, compliant,
transparent and properly integrated.
• Captives are a powerful business tool but should be
developed and managed as any other venture and held
to same requirements to remain relevant within
company.
Thank you