University Of California
CAPTIVE 101
Risk Summit 2014
Captive Primer
What is a Captive?

A limited purpose, licensed insurance company, the main business purpose of which is to insure the risks of the
captive’s owners

A risk assumption vehicle

An insurance or reinsurance company

Specifically established to insure or reinsure the risks of its parent or associated third parties
Captive 101 UC Risk Summit 2014 | 1
Captive Primer
Risk Financing Continuum
HIGH
Self-Insured Trust
• Complete assumption of risk with limited
regulation
Single Parent Captive
• Complete assumption of risk
• Subject to Regulatory Oversight
Group Captive
• Pooling of Risk with Participants subject
to Corporate Governance
Deductible Policy
• Significant/complete risk assumption in exchange
for deductible credit
Retro Policy
• Assumption of limited risk in exchange for potential return premium
• Deferred “pay-in” premium
Guaranteed Cost
• Complete transfer of risk
• Commercial insurance with no deductible
LOW
HIGH
Financial Control
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Captive Primer
Factors Driving Captive Growth
 The unwillingness/inability of insurers to provide cost effective insurance
 The need for new capacity for certain risks
 The drive control to frictional and non-loss costs
 Lack of confidence in the traditional markets ability to differentiate and provide stable protection
 The enhanced focus on loss prevention and intelligent claims handling
 The opportunity to take risk and profit positions in affiliate business
 The opportunity to see favorable risk management, wealth and tax outcomes
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Captive Primer
Types of Captive Utilization
RETAINED RISK FINANCE



Infrastructure for
providing
transparency,
validation, and
rationalization of
retained risk
positions
Enhancing risk
management efforts
Mutualizing risks
across portfolios
RISK TRANSFER ARBITRAGE



Reinsurance market
cost of risk transfer
is less than
commercial retail
cost of risk transfer
Better use of capital
to retain risk than
transfer it
Managing total cost
of risk
THIRD PARTY BUSINESS
ACCESS TO CAPACITY

Federal programs
(TRIA)

Franchisee
programs

Reinsurance
capacity, which may
not be otherwise
accessible in
commercial retail
market (trade credit
risk, +10 yr
pollutions risks)

Consumer facing
insurance programs
(warranty, service
contract, point of
sale insurances, etc)

Affiliate business
(vendors, VAPs,
distributors, etc)

Agency captives

3rd party business
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Captive Primer
Captive Utilization and Lines Of Business
Certain lines of
business lend
themselves
more naturally
to certain
utilization
models
Line of
Business
Utilization
Model
 WC, AL, GL, EPLI,
 Governance, financial
Property, APD
 Uninsured Risks
Rationale
 Retained Risk Finance
 ERISA Benefits
optimization, and cost
reduction of retained
risk positions
Value
Proposition
 Reduced loss costs
thru visibility and
alignment
 Accelerated tax
deductions
 Self-Insured Medical,
STD, LTD, Exec. Life
 WC, AL, GL, EPLI,
Property, APD,
Products Liability,
Professional Liability
 Sharing risk provides
 Group Captive or
Pooling
 Medical Stop Loss
 Products Liability,
Professional Liability,
Environmental
Liability, E&O,
Terrorism, Trade
Credit, Cyber
for greater retention
capacity
 Gain control of
insurance framework,
costs, services and
profits
 Capacity and Rate
Arbitrage
 A captive facilitates
trading in the
insurance marketplace
as an insider
 Reduce cost of risk
 Access profitability of
insurance program
 Gain control of
infrastructure
 Access to broader,
more competitive
capacity
 Ability to take out any
commercial capacity
which is driving rate
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Fiat Lux Risk and Insurance Company
Why did UC form Fiat Lux?
 Help manage volatility in retained risk positions between silo’d trust infrastructure
 Provide coverage to stakeholders who don’t fit in self-insured trust mechanisms
 Support enterprise risk management efforts by building mutually beneficial insurance
infrastructures for various stakeholders
 Reduce cost of risk
 Capitalize on enterprise risk management expertise
 Support development of revenue generating insurance activities
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Captive Primer
Domicile Decision Factors
 Capitalization and surplus requirements
 Receptiveness of regulatory environment
 Quality of local infrastructure
 Availability of expertise
 Stability of regulatory environment
 Flexibility as respects investment portfolio
 Ease of doing business – in a suitably regulated environment
 Experience in business under consideration
 Efficient financial outcomes: tax, investment etc.
 Availability of relevant corporate structural options
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Captive Primer
Domicile Options
Onshore: (over 35 States!)
Offshore:

Vermont

Bermuda

Hawaii

Cayman Islands

District of Columbia

Barbados

South Carolina

Ireland

New York

Malta

Delaware

Channel Islands (Guernsey/Jersey)

Arizona

Gibraltar

Tennessee

Isle of Man

Nevada

Luxemburg

Utah

British Virgin Islands

Montana

Turks & Caicos

Puerto Rico

U.S. Virgin Islands
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Fiat Lux Risk and Insurance Company
Why did we domicile the captive in Washington DC?

California does not have captive enabling legislation… so we could not form it here

Washington DC has a very progressive captive law, allowing for the degree of structural and operational
flexibility we need in order to build a scalable captive o meet strategic needs

Washington DC allows for segregated captive facilities, which will assist in building diverse portfolios of
insurance business with differentiated insurance company partners and managing tax outcomes at the captive
and shareholder level

Washington DC provides for the corporate from we needed in order to have a captive and comply with CA
securities and insurance law

UC has a campus in DC – UCDC – leadership already has a purpose for visiting
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Fiat Lux Risk and Insurance Company
How is Fiat Lux governed? What service providers does it use and why?

Board of Directors
 Meets 3-4 times a year
 Comprised of:
 University President
 University CFO
 University CRO
 University General Counsel
 Outside directors

Captive Manager – Willis

Actuary - Bickmore

Auditor - PWC

Attorney – McDermott Will and Emory

Consultant – Willis

Reinsurance Brokers – various
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Fiat Lux Recap
Utilization Plans for UC Fiat Lux – Phase 1
RETAINED RISK FINANCE

Workers
Compensation

Auto Liability

General Liability

Professional
Liability

Employment
Practices Liability
RISK TRANSFER ARBITRAGE
ACCESS TO CAPACITY

Property Terrorism

Casualty Terrorism
THIRD PARTY BUSINESS

Small Vendor
Program
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Fiat Lux Recap
Utilization Pans for UC Fiat Lux – Phase 2
RETAINED RISK FINANCE

Workers
Compensation

Auto Liability

General Liability

Professional Liability

Employment Practices
Liability

Threat & Security
RISK TRANSFER ARBITRAGE
ACCESS TO CAPACITY

HPL

Property Terrorism

Provider Stop Loss
for Health Systems

Casualty Terrorism
THIRD PARTY BUSINESS

Small Vendor
Program

Student Tenant /
Gadget insurance

Affiliate Physician
Med Mal insurance
Program
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Fiat Lux Risk and Insurance Company
The Big Picture – Phase One
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Fiat Lux Risk and Insurance Company
What’s on the horizon for Fiat Lux?

Student insurances:
 Tenant / Gadget on-campus,
 Tenant / Gadget off-campus

Health Systems:
 Affiliated physician insurance programs (several target portfolios);
 Provider Stop Loss
 Conversion of HPL into captive with reinsurance program

General Liability & Property
 Weird Coverage
 Threat & Security

Commercialization of ERM expertise

Affinity programs serving several communities

Roll out of commercial programs to other systems (CSU, SUNY etc)
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Fiat Lux Risk and Insurance Company
The Bigger Picture
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Fiat Lux Risk and Insurance Company
Questions?
Q&A
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