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Captive Insurance For

Global Risk Management

JLT Barbados

Moderator:

Ricardo Knight

President & CEO

Ray Mattholie

Thomas M. Jones

Partner

Toronto, Tuesday, March 7, 2017

1 Captive Formations

Key Drivers to

Formation

Feasibility Studies

Setup Steps &

Timeline

Capitalization &

Operating Costs

2 Operational

Considerations

Regulation

Corporate

Governance

Best Practice

Financial

Performance

3 Program Structures

ROI, Fronting

Pricing

Methodology

Lines of Business

Retention &

Structure Examples

Presentation Overview

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OR

Commercial Insurance • Self-Insured

Retention

(SIR) Program

• Large Deductible

Program

• Captives

Self-Insurance Mechanisms

Risk Transfer Solutions

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Captive Insurance Programs…

…wholly owned subsidiaries of

all types of entities typically

writing the risks of its owner

and/or affiliates…

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Profile of the Captive Insurance Market

• 6,939 captives globally

• In 70+ domiciles (… and in 35 States in the U.S. comprising

of 44.6% of global captives)

• $300B of the global insurance premium of $4,554B

• Over 75% having an association with the U.S.

• Over 90% of the Fortune 500 Companies

• 50% of the Global Property and Casualty Premium written

through captives

• 236 Captives in Barbados

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Profile of the Insurance Market

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Leading Captive Domiciles

Rank Domicile 2015 2014

1 Bermuda 797 800

2 Cayman Islands 708 759

3 Vermont 596 587

4 Utah 450 422

5 Delaware 323 333

6 Anguilla 319 379

6 Guernsey 319 321

8 Nevis 268 282

9 Barbados 236 231

10 Luxembourg 217 224

- Captive Insight

Profile of the Insurance Market

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The nature of the mining of natural resources means:

• Operations in remote and inhospitable areas and susceptible to natural catastrophe

• Impact of climate change

• New technological advancements

• Economic and other uncertainties in operating countries that also affect the supply of key consumables

• Debt Financing and the global financial Crisis

Corporate Balance Sheet Dynamics

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COST SAVING:

• Stabilization of premium using capacity and retained earnings during hard markets

• Insulates owner from withdrawal of market capacity

• Long term consistency

• Use as a profit center

CAPACITY:

• Remove “uninsurable” risk exposures from parent’s Balance Sheet

• Management of Deductibles and retention limits

• Create capacity (via direct insurance, act as a reinsurer)

• Strategic layer completion

CONTROL:

• Corporate focus on own Risk Management

• Corporate control of own premiums & claims

• Influence program design & cost

• Centralized access to loss data

• Claims handling

Benefits of Captives

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• Stability of Cost - insulates the group from insurance market volatility

• Placement of Special risks - where coverage is not available; where there is minimal information available; or where the cost of risk transfer is prohibitive

• Reinsurance Market Access – given their specialized nature it is important that R/I can be accessed directly by the insured

• Funding of the Retained Risk - this remains the primary use of captives for large companies generally for those high frequency, low severity exposures

• Deductible Rationalization – in larger mining companies with many business units, captives can harmonize corporate risk retention while maintaining local affiliate deductibles

• Capturing Profit – captures underwriting profit and investment income on premiums paid to the captives w.r.t. the reserves established for claims

• Tax Efficiency - u/w profits derived from non-Canadian risks may be classed as “Exempt Surplus” and may not be subject to Canadian tax on consolidation

Benefits of Captives to Mining Companies

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When is a Captive the Right Fit?

QUANTITATIVE

• Premium Volume – To justify frictional costs. US$1M net premium retention is a benchmark

• Risk Retention Level – sufficient capital required should there be a requirement to retain risk

• Loss Ratios – 80% or lower is adequate to generate a return for short tailed risks

• Timing of Settlement – the type of program allows for the use of cash while claims adjustment is in progress. For longer-tailed risks the cash is accessible for a few years

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When is a Captive the Right Fit?

QUALITATIVE

• Premium/Risk Distribution – Not one exposure in one location, but rather with different exposure across locations

• Commitment– initial buy in from CFO and Risk Manager where quantitative and qualitative factors must make sense and then ultimately the board of directors

• Loss Control – focused attention to keep losses to a minimum by making loss control a priority

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Road Map to Captive Formation

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Risk Identification

• What specific risks does the sponsor believe will fit within a captive structure?

• Are these currently placed in the commercial market?

• Are these “uninsurable” risks?

• What are the regulatory issues?

• Fronting required?

Risk Quantification

• Collection of data

• Loss history (minimum of 5 years)

• Exposures, limits, territories, etc.

Setup – Feasibility Study

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Vital to show how the captive’s performance will be measured.

• Pro forma financial projections 5yrs

• Detailed analysis of program structures

• Regulatory compliance (solvency / liquidity calcs)

• 3rd party business (as applicable)

• Directors & Officers – detailed bios

• Identify & appoint service providers

Setup – Business Plan

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Cost Item Service Provider Low High

Incorporation and Licensing

Manager 10,000 20,000

Government Fees

Regulator 740 740

License Fee Regulator 10,000 10,000

FATCA Tax 1,800 2,500

Audit Certification

Chartered Accountant

1,000 2,500

TOTAL 23,540 35,740

Set up Costs for Stand-Alone – US$

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• Set-up cost associated with cell rental is the minimum capital of

US$12,500 plus the manager’s one-off set up fee

Cost Item Service Provider Low High

Management Manager 40,000 150,000

Audit Auditor 15,000 45,000

Corporate Administration

Secretary 2,500 10,000

License Regulator 10,000 10,000

Actuarial Actuary 5,000 25,000

Director Fees Local Executive 2,500 5,000

Miscellaneous Misc. 3,000 5,000

TOTAL 78,000 250,000

Annual Operating Costs for Stand-Alone – US$

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• Annual fee for a cell rental is either a % of premium or a fixed fee to at least

cover the expenses attributable to the rented cell

Captive Domicile Snapshot – Barbados / Bermuda

BERMUDA BARBADOS

Number of captives/managed insurance companies 797 236

SCC Legislation Yes Yes

ICC Legislation No Yes

Applicability of Solvency II Yes No

Minimum Capital - Insurance Captive $120,000/$250,000 $125,000

Minimum Capital - Reinsurance Captive $120,000 $125,000

Minimum Solvency Margin 20% NWP 20% NWP

Migration/Re-domiciliation legislation Yes Yes

Loan-back to parent company permitted Yes Yes

Loan-back to parent company admissible asset Yes restricted Yes restricted

Audited Financial Statements required Yes (Statutory only) Yes

Corporate Income Tax 0% 0%

Annual License fees - Captive $5,000 $10,000

License Application Timeframe 1 month 1 month

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Barbados - Regulatory Environment

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Barbados - Regulatory Environment

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“…The process by which the Captive makes and executes management decisions…”

Captive

Compliance Standards Confirmation to the regulator

that the company complies in

all material aspects with the

requirements of the

governance code

Competence, capability, honesty, integrity and technical soundness of members and their attendance and eligibility to vote at meetings

Composition of Board of Directors

The extent to which there is a deviation from the defined risk and the process by which this is handled

Risk Review

Practice directives from regulator stating the minimum requirements for governance

Legislative Oversight

Corporate Governance

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Insurance

Management

Services.…

The role of the captive manager is very different to the one of the broker

Essentially, the manager is the staff of the captive insurance company

What to expect from a full service manager:

• Financial reporting

• Insurance services

• Business planning

• Treasury management

• Optimized I.T. systems

Operations Best Practice

The captive manager is the gate-keeper to maximum success through coordination and team facilitation

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• Increase retentions in existing U/W structure

• Optimize investment risk/returns

• Enter new lines of related business

• Enter new lines of (controlled) 3rd party

business

• Loan-backs to related entities

• Dividend back to the parent

How best to deploy surplus capital...

Operations Best Practice

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The Direct Writer Captive

Reinsurer 1

Reinsurer 1 Reinsurer 2

Captive (Barbados)

Reinsurer (excess of loss)

Premium

First-party losses

Third-party

losses

Premium Losses

The Barbados captive directly insures the risks of the operating

subsidiary.

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Local, Regional or International

Operating Subsidiary

Parent Co. Inc.

Local, Regional or International

Operating Subsidiary

The Reinsurer Captive

Reinsurer 1

Reinsurer 1 Reinsurer 2

Parent Co. Inc.

Gross

premium

First-party losses

Third-

party

losses

Captive (Barbados)

Reinsurer (excess of loss)

Premium

Losses

Fro

nt

Com

pany

Losses

Letter of credit

The Barbados captive reinsures the admitted insurance carrier (i.e.

fronting company), that insures the operating subsidiary.

Net premium

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• RETURN ON INVESTMENT:

• Challenging?

• Investment income to offset underwriting results can be challenged

• FRONTING:

• Onshore regulators require that certain risks such as WC and 3rd Part

businesses use admitted carriers

• There are few strong fronting companies hence market share

monopoly has affected pricing and hence captive margins

• Also requirement for fronting companies to guarantee the payment

of claims

• Risk sharing with Captives or 100% of risk is ceded back to captive

• In addition to their fees, fronting companies require captives to

collateralize their expected liabilities through LOC or to do so

with other assets.

• LOC Can sometimes cost more than income generated from

Investments

ROI and Fronting Considerations

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Utilize commercial market techniques to develop bespoke pricing

methodology:

• Stability of Cost - Stability in the cost of risk over the long-term.

• Viable Underwriting Premiums - Ensure that the captive underwrites

to a profit/breakeven in the long term, and maintains sufficient

premium for expected attritional losses.

• Ensure Risk Transfer - Pricing in line with risk retention and

expected loss ratios.

• Strong Governance - In establishing a bespoke pricing methodology,

the captive can demonstrate a consistency in its approach and

demonstrate that key decision making functions are undertaken

within the captive at an arms length from the shareholder.

•

Pricing Methodology

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• Fronting for reinsurance

capacity

• Primary retention/deductible

funding

• Property/Time Element

• Large retentions

• Casualty

• Primary casualty funding

• Professional liability

• Marine cargo and transit

• Employee insurance products

• Group life and disability

• Terrorism

• Bonding

• Punitive damages ‘wraps’

• Filling gaps in excess

programmes and DIC

• Dealing with ‘uninsurable’

risks

Typical Lines of Business

Captive

Solutions

DIC/DIL

wraps Loss

portfolio

transfers

and

ADC’s Excluded

perils write-

back

protection

Costs cap

collars

Reinsurance

(excess of

loss and

quota share) Commutation

and

Novations

Finite

Risk

Single

and multi-

line

aggregate

stop loss

Second and

subsequent

loss event

protections

Retention

buy-downs

Natural

catastrophe

buy-outs

Risk

Incubation

Swing

premium

protections

Capacity

boosters

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Retention Strategy and Growth (e.g. Startup)

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Retention Strategy and Growth (e.g. maturing)

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Innovation

Retention Strategy and Growth

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• Heavy investment in mining assets

• Political Risk and K&R activity in remote regions

• Nationalization of mineral assets

• Handling of hazardous substances/waste disposal and control

• Environmental Impairment

• Natural Disaster (e.g. earthquake and floods)

• Climate Change/Water Scarcity

MINING EXPOSURES

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• A Mining Co’s captive can participate in a U.S.WC program

• This requires licensed paper in all states thus preventing the captive from issuing a direct policy.

• The Deductible Buy Down policy would provide guaranteed cost cover for the deductible and the benefit of the tax deduction on the premium paid to the captive.

Common Risks - Workers Compensation

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Common Risks - Surety

• Surety can be used as a like-for-like replacement for LoC

• Frees up banking lines lowering cost of capital

• Create additional capacity for guarantee requirements

• The surety bond is a direct replacement for a letter of credit, with the bond amount equating to the letter of credit amount

• The bond obligation is a pure on-demand mechanism

• Surety typically doesn’t require reserves to be raised

Insured

Commercial Insurer(s)

Captive

3rd Party

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Common Risks – Employee Benefits Structure

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Common Risks - Employee Benefits - Traditional vs. Captive

Fully Locally Insured Utilizing Captive

Premiums Premiums set by local commercial market based on wider market experience as well as previous specific claims experience with no global pricing influence.

Premium rates set by the captive based on an organizations individual loss history rather than the wider insurance market, thereby protecting the company’s local operations from external negative factors and removing insurer expenses and profits.

Financial Volatility

Commercial insurers will react to market conditions and so premiums will have volatility e.g. zika virus, terrorist threats.

The captive allows companies to enjoy smoothed premiums as it will look to charge the right risk premium based on personal not market experience.

Dividends All underwriting profit retained by each local insurer with limited exceptions where local with-profit terms may apply.

Investment income from premiums and any underwriting profit are retained by the captive/ parent company.

Claims Insurers will only pay claims that are consistent with policy terms and conditions.

The captive involvement allows companies full discretion to make decisions regarding claims

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Fully Locally Insured Utilizing Captive

Risk Management – Policy Exclusions and Limits in Cover

Subject to commercial insurance market approaches to policy exclusions and limits e.g. passive war & terrorism, AIDS, suicide etc.

Ability to provide cover for risks excluded and limits imposed in local commercial insurer markets.

Tailored Cover Subject to commercial insurance market approaches to “uninsurable risks” or overages that would otherwise be too costly e.g. sky diving hobbies.

Ability to provide flexibility by making exceptions and provide specific cover when required e.g. a local Executive with a sky diving hobby that could still be covered

Broking Model Typically a local broking/servicing model may apply: • Annual/bi-annual market review and

rebroking exercise • Intermediated administration services These services will be funded by way of commission and/or fees.

In addition to the potential for savings on the local commission/fees that could be achieved, further savings can be achieved through the change in service model: • Triennial risk/admin charge

benchmarking exercise for captive • Intermediated administration

services

Common Risks - Employee Benefits - Traditional vs. Captive

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Conclusions

Summary: • Captives tried and tested

• Mining companies should seek to utilize Captive

structures

Next Steps: • Will this work for me?

• Pre-feasibility assessment performed by JLT

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Ricardo O. Knight, FCCA, FCA

CEO & President

JLT Insurance Management (Barbados) Ltd.

Phone: (246) 432-4000 ext. 3238

Mobile: (246) 823-0400

E-mail: ricardo_knight@jltgroup.bb

Contact

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