GROUP CAPTIVESA Risk Financing Alternative
May 7, 2015
David Bubb
Senior Vice President
Marsh Inc.
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Group CaptivesToday’s Discussion Points
• Introductions
• The Basics of a Group Captive
• Captive Structure
• Loss Examples
• The Differentiators
• Next Steps
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Value Proposition
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Group CaptivesValue Play
WC, GL & Auto
$500k Premium
WC, GL & Auto
$500k Premium
WC, GL & Auto
$540k Premium
WC, GL & Auto
$530k Premium
WC, GL & Auto
$530k Premium
$0
$1mm
$350k
Year 1 Year 2 Year 3 Year 4 Year 5
$100 k Losses
$100 k Losses
$100 k Losses
$100 k Losses
$500 k Losses
5 Year Premium: $2,600,0005 Year Losses: $ 900,000Loss Ratio: 34%
GROUP CAPTIVE BASICS
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Methods of Managing Risk
Conventional Insurance
Transfer All
Losses
Limited Benefits
Risk Management
Retain Predictable Losses
Transfer Catastrophic Losses
Majority of Insured Marketplace
Non-Insure
Retain All
Losses
Uninsurable Risks
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An insurance company
controlled by its owners.
that provides insurance to and is
What is a Captive?
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Group Captives Benefits
• Cost control, cost efficiency and cost smoothing
• Premiums paid to insurance entity that Members own
• Member shares in the underwriting and investment profits
• Superior loss control and claims handling
• Control – You own it!
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Service Provider
Captive Management Marsh—Cayman
Actuarial Services Pinnacle Actuaries
Auditors PricewaterhouseCoopers
Banking Royal Bank of Canada
Third Party Administrator Gallagher Bassett
Investments Royal Bank of Canada
Loss Prevention Risk Consultants, Inc
Reinsurance AIG
Fronting Carrier AIG
Best In Class PartnershipThose Who Make It Work
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Coverages ProvidedWC, AL, APD, GL and Excess Liability
• Workers’ CompensationExcludes Monopolistic States - ND, OH, WA, WY
Statutory Employers’ Liability
• Automobile Liability Physical Damage
• General Liability
CAPTIVE STRUCTURE
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Captive StructureHas the exact look as traditional insurance
Captive Retention
$0
$ 1,000,000
Umbrella / Excess
Work
Comp
General Liability
Automobile
Umbrella / Excess
Same mechanics for:
Certificates of InsuranceInsurance PoliciesUmbrella
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Captive StructureA Reinsurance Company behind a Quality Fronting Company
Captive Retention
$ 350,000
$0
$ 1,000,000
Basket & Clash Coverage
Umbrella / Excess
Work
Comp
General Liability
Automobile
Umbrella / Excess
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Captive StructureHow is the Captive Protected
A Fund
B Fund
Possible Assessment
Specific Protection
Aggregate Protection
$ 0
$ 350,000
Specific & Aggregate Protection
$ 1,000,000
Excess
$125,000
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Sample Member
Loss forecast = $ 500,000Pay in = $ 746,000
B Fund(Captive Shock Loss Layer)
A Fund(Captive Frequency Loss Layer)
$ 400,000$125,000
$350,000
$ 100,000
Reinsurance
$1,000,000
$ 246,000
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Operating Costs:
Operating CostsDetails
Reinsurance 97,732 13.10%
Front 21,262 2.85%
Premium Tax 36,556 4.90%
FET 6,565 0.88%
Claims 31,707 4.25%
Risk Control 7,460 1.00%
Broker 11,191 1.50%
Off Shore Exp 26,112 3.50%
Variable Exp 7,460 1.00%
246,046 32.98%
LOSS EXAMPLES
ANTICIPATED YEAR OF LOSSES
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$100,000 Beginning balance
A Fund
B Fund
Reinsurance
Loss Example #1Anticipated Loss Year
B Fund Accounting
A Fund Accounting$400,000 Beginning balance - 190,000 Total claims less than $125,000$210,000 Remaining balance
$190,000 of total claims - All losses less than $125,000
$125,000
$350,000
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“Anticipated Year” Results Accounting
$210,000 A Fund
+100,000 B Fund
+ 25,000 Estimated interest
$ 335,000 Estimated return
CATASTROPHIC CLAIM YEAR
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$100,000 Beginning balance
A Fund
B Fund
Reinsurance
Loss Example #2Catastrophic Loss Year
B Fund Accounting
A Fund Accounting
$190,000 of total claims – all claims less than $125,000 and a $1,000,000 catastrophe claim
$125,000
$350,000
$400,000 Beginning balance - 190,000 Total claims less than $125,000$210,000 Remaining balance
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$100,000 Beginning balance- 100,000 $0 Ending balance
A Fund
B Fund
Reinsurance
B Fund Accounting
A Fund Accounting
$190,000 of total claims less than $125,000and a $1,000,000 catastrophe claim
CatastropheClaim:
$225,000 - 100,000 $ 125,000
shortfall
$125,000
$350,000
Loss Example #2Catastrophic Loss Year
$400,000 Beginning balance - 190,000 Total claims less than $125,000- 125,000 1st $125,000 of catastrophic claim$ 85,000 Remaining balance
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$100,000 Beginning balance- 100,000 $0 Ending balance
Reinsurance
B Fund Accounting
A Fund Accounting
$190,000 of total claims less than $125,000and a $1,000,000 catastrophe claim
CatastropheClaim:
$225,000 - 100,000 $ 125,000
-$85,000$40,000
$125,000
$350,000
Loss Example #2Catastrophic Loss Year
$400,000 Beginning balance -190,000 Total claims less than $125,000-125,000 1st $125,000 of catastrophic claim$ 85,000 Remaining balance - 85,000 Add’l for catastrophic loss 0 Remaining balance
A Fund
B Fund
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$100,000 Beginning balance- 100,000 $0 Ending balance
Reinsurance
B Fund Accounting
A Fund Accounting
$190,000 of total claims less than $125,000and a $1,000,000 catastrophe claim
CatastropheClaim:
$225,000 - 100,000 $ 125,000
-$85,000$40,000
$125,000
$350,000
Loss Example #2Catastrophic Loss Year
$400,000 Beginning balance -190,000 Total claims less than $125,000-125,000 1st $125,000 of catastrophic claim$ 85,000 Remaining balance - 85,000 Add’l for catastrophic loss 0 Remaining balance
Shared Risk
A Fund
B Fund
HIGH FREQUENCY YEAR
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$100,000 Beginning balance
A Fund
B Fund
Reinsurance
Loss Example #3High Frequency Year
$400,000 Beginning balance
B Fund Accounting
A Fund Accounting
- 550,000 - 150,000 150,000 A Fund Experience Adjustment 0 Ending balance
$550,000 of total claims - All less than $125,000 each
$125,000
$350,000
Experience Adjustments & Collateral
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Year 1 Year 2 Year 3 Year 4
Frequency Fund Exceeded
Original Funding by $150,000.
50% of Experience
Adjustment Due.
$ 150,000
- 75,000
$ 75,000 (remaining
balance due)
30% of Experience
Adjustment Due.
$ 75,000
- 45,000
$ 30,000 (remaining
balance due)
20% of Experience
Adjustment Due.
$ 30,000
- 30,000
0 (remaining
balance due)
Frequency Fund Adjustment (Assessment)Example
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Collateral
Collateral
Cash
Letters of credit
Collateral Functions
Member to member obligations
Capitalizes the captive
Collateralize policy-issuing carrier
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Collateral Requirements
Year 2
2/3rds of A Fund 2nd year
Total = 2 X average A Fund
Year 1
2/3rds of A Fund 1st year
Year 3
2/3rds of A Fund 3rd year
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Collateral Requirements
Total = 2 X average A Fund = $792,000
Assume A Equals $400,000 Each YearAssume A Equals $400,000 Each Year
$264,000 $264,000 $264,000
Year 2
2/3rds of A Fund 2nd year
Year 1
2/3rds of A Fund 1st year
Year 3
2/3rds of A Fund 3rd year
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Group Captives How does the Captive Do Business?
• 2 Offshore Board Meetings per Year
• Every Member has an equal vote
• Committee Structure – Underwriting, Investment, Finance, Loss Control
• Control – You own it!
Thank You!
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