www.bermudacaptive.bm JUN 2 - 4, 2014 Fronting – U.S. and Global What you need to know Fronting – U.S. and Global – What you need to know Fronting Programs Moderator: • M. Page Rouse, Chief Operating Officer, Granite Management Limited Speakers: • John J. Saur, Underwriting Manager, L&F Holdings Limited • Ray Mattholie, Group Risk Management Adviser, Jardine Matheson Limited • Brian McNamara, Senior Vice President, AIG Global Risk Solutions Fronting – U.S. and Global – What you need to know Why use a Front? • Admitted coverages written (e.g., WC, Auto, employee benefits) • Need for rated paper • Policy issuance and claims handling services • Broad range of in-house expertise, including tax, insurance, legal, and regulatory • Enable clients to retain an element of risk, anywhere in the world, via any financing method Fronting U.S. AndStructures Global Fronting Programs Typical Captive Structure Owner/Insured Fronting Insurer Fronting Carrier Retains: > Fronting Fee > Taxes > XOL Coverage Premium (optional) Reinsurance e.g., dividend payments Captive Retrocession Captive Retains: > Underwriting Profit > Investment Income Premium Claims Captive Manager Retrocessionaire Collateral e.g., LOC, Trust XOL coverage, e.g., cat cover Fronting Structures Example 1: Deductible Coverage Without a Captive With a Captive $1,000,000 $100,001 $1,000,000 $100,001 Insured Layer Paid by Carrier $100,000 $0 Deductible Layer Paid by Insured Insured Layer Paid by Carrier Deductible Layer Paid by Insured and Reimbursed by Captive $100,000 $0 Fronting Structures Example 2: Net Line Captive Insurer cedes to the captive only the portion of risk the captive wants to retain > Owner buys XOL cover from Insurer: $50M per occurrence & in the aggregate. > Insurer cedes $400K per occurrence, $800K in the aggregate to the captive (i.e., net line captive) and retains anything above this. Owner/Insured Fronting Insurer Premium Claims Captive Fronting Structures Example 3: Gross Line Captive Insurer cedes 100% of the risk to the captive > Captive retains some risk. > Excess is ceded to retrocessionaire. Fronting Insurer 100% QS Captive XOL Retrocessionaire $90M xs $5M Fronting Structures Example 4: Group Captive OWNERS (unrelated) Company A Company B Company C Fronting Insurer Company D Lines of business ceded (e.g. , PI, EL) Captive (owned proportionately) (Reinsurer) L&F Holdings Limited L&F Holdings Limited John J. Saur Underwriting Manager L&F Holdings Limited • Captive group wholly owned by PwC network • Formed in 1998 following the merger of PW and C&L • Provides PII cover to all PwC network firms • No third party business • Monoline insurer (professional indemnity) PwC at a glance • World’s largest professional services network – provides Assurance, Tax and Advisory services • Global network of individual member firms which are separate and independent legal entities • 184,000 employees • 157 countries • US$32.1 billion revenues in FY13 Headcount by region L&F fronting arrangements • Global fronting arrangement with multinational insurer • Reinsurance of local risk • Fronted policies in 80 territories • Annual reviews to determine where fronts are required • Utilization of AXCO Fronting challenges • Negotiations with local insurers – Local retentions – Fronting fees • Premium payments – Timely payment of premiums – Cash before cover – Transfer of reinsurance premiums – FX fluctuations Fronting challenges • Transmittal of signed documents • Accuracy review of signed policies • Wording issues • Claims handling issues • Foreign language translations Fronting challenges • Financial strength of local insurers – Are direct premium payments allowed? – Are direct claims payments allowed? • Dispensations – Local brokers can assist – Evergreen? Fronting solutions • Centralized team to implement process globally • Utilization of brokers – Local – International • Communication Ray Mattholie Global Fronting - an Asian Perspective Ray Mattholie Jardine Matheson - Group Risk Management Adviser Lockhart Insurance Company Limited - Director Jardine Matheson Group Today Jardine Matheson Group Lockhart Insurance - Key Facts • 1977 Lockhart Insurance incorporated in Bermuda Company Ltd. • 1997 Lockhart converted to a Segregated Cell structure • Lockhart has a Bermuda Class 3 license. Lockhart Core and Segregated Cells Jardine Matheson Group Lockhart Insurance Company Ltd. *Core Business A Business B Business C Business D Business E Business F Cell Cell Cell Cell Cell Cell Lockhart PD BI Program US$x00M Reinsurance Panel excess $yM Lockhart fronted US$y0M AIG fronted Lockhart retained combined annual aggregate BU(1) $xM per occ. BU(2) $yM per occ. BU(3) $yM per occ. BU(4) BU(5) $zM per occ. $zM per occ. Various local deductibles BU(6) $zzM per occ. BU(7) $yyper occ. Jardine MathesonFronting as part of Risk Financing strategy • Captive ‘Core’ Fronts for XS Program • Flexibility in choice of insurers • UK ‘Pool Re’ Terrorism • Special covers • The ‘Virtual Team’ - working with the Broker and Captive Manager The role of the broker • Comprehensive knowledge regulations for every territory of local requirements and • Choice of Fronter to best meet Global footprint: – Ability to meet insured’s requirements – Past performance and ‘track record’ – Form of representation in key territories, i.e. Subsidiary, Branch office or ‘Partner’ • Creating Competition • Prepare a platform for communications, procedures, tracking reports etc. The role of the broker and Captive Manager • Ensuring Performance Levels are maintained – Know when and how to escalate issues • Documentation – Reinsurance Agreements – Local policies • Evolving the Program to meet changing needs – Risk profile – Local regulations • Resolving problems as they arise • Money Flow Hot Topics 1. Money Flow 2. Collateral 3. Local issues in Asia • Tariff rating • Cessions • Reserves • Cash before cover 4. Pure Front v Lead Market as Front 5. Continuity v Competition - Building long term relationships AIG Global Risk Solutions Global Risk Solutions (GRS) Global Risk Solutions Global Risk Solutions (GRS) (GRS) Your Global Partner for Non-Traditional Solutions to Unique Risks Brian McNamara Senior Vice President, Global Risk Solutions Global Fronting The Businesses of Global Risk Solutions AIG Property Casualty – Global Footprint • 42,000 employees who serve clients worldwide • 51% of premiums written outside of the U.S. and Canada in 2013 • Over $100 million average claims paid each business day in 2013 Global Fronting - Facts • 400+ multinational clients, predominantly in US, Global Europe and UK GlobalRisk RiskSolutions Solutions(GRS) (GRS) • Estimated $4.5 billion in gross premium • A business AIG has been in for over 50 years • 41 GRS staff in Bermuda