1. What brokers need to know about Captives BIBA 2011, fringe session, Wednesday 11th May Mike Johns Alternative Risk Management Limited mjohns@arm.co.gg Paul Eaton Heritage Paul.Eaton@heritage.co.gg
3. Guernsey’s finance industry • Insurance, Banking, Funds and Trust • No.1 European Captive Domicile • 675 insurance entities • £3.4bn of GWP • 40% of the FTSE100 captives • Pioneer of Protected Cell legislation
4. Presentation agenda • What is a Captive? • The different types • How and why are Captives used? • Pure Captives: Case Study • Broker Captives: Case Study • Why Guernsey?
5. What is a Captive? • An insurance company • Usually formed for a specific purpose, primarily self insurance • Called ‘Captives’ as often only provides insurance to its owner • Often formed in a offshore domicile • Captures both premium and risk
6. Captive Insurance Structures Reinsurance Captive Direct-writing captive Ownership Parent Subsidiary Sweden Subsidiary Belgium Subsidiary UK Parent Cover Premiums Ownership Premiums Ownership Fronting Company (conventional / locally based insurer) Premiums Captive Insurer Cover Captive Reinsurer Premiums Cover Reinsurer Illustration of how Captives are used
7. Illustration of how Captives are used ownership REINSURANCE CAPTIVE DIRECT-WRITING CAPTIVE ownership Parent Parent Subsidiary Sweden Subsidiary Belgium Subsidiary UK premiums premiums cover Fronting Company Conventional / locally based insurer Captive Insurer ownership ownership premiums premiums cover cover Captive Reinsurer Reinsurer
8. Types of Captive facility • Wholly owned company (subsidiary) • PCC Cell • ICC Cell
10. How and why are Captives used? PURE Captives • Used by your clients as a mechanism to manage self insurance • Can underwrite various risks of the owner • Control over the unpredictable market cycle • Optimise the insurance purchase • Cost of risk based upon actual performance • Leverage with the insurance market • Focal point for awareness of risk management • Flexibility in cover and innovative approach possible
11. How and why are Captives used? THIRD PARTY Captives • Can be used by brokers, MGAs or clients • A way of creating more value from existing profitable business • Earn additional revenue • Maximise control • Flexibility and Bespoke coverage
12. PURE Captive: a case study • Accountancy Practice purchases PI cover • £10mn limit purchased from the traditional insurance market • Layered programme with total premium spend £675,000 split: Primary £1mn: Annual Premium £350,000 £4mn excess £1mn: Annual Premium £200,000 £5mn excess £5mn: Annual Premium £125,000 • 5 year claims history good other than 1 large loss of £750,000 • Insurance market seeking to increase rates • Client believes he has excellent risk management in place • Interest in taking some of the risk exposure • Creates a captive
13. PURE Captive: a case study Advantages: • Potential for underwriting profit • No fronting insurer required – first party insurance only • Over time premium can be geared to actual loss experience • Positive cash flow/investment income on premiums and reserves • Possible greater control over claims • Influence over policy coverage • Potential leverage on overlying insurers at subsequent renewals Disadvantages: • Capital requirements • Exposure to losses
14. PURE Captive: a case study ACCOUNTANCY PRACTICE £10mn PI insurance £675,000 Premium Spend Share Capital £650,000 Broker CAPTIVE INSURANCE COMPANY Insurer 1 Insurer 2 £4mn xs £1mn £200,000 £5mn xs £5mn £125,000 Primary £1mn £350,000
15. PURE Captives for your clients Reasons why you might suggest this to your clients and the benefits for you? • Offering best ‘risk financing’ advice • Better client retention • A less adversarial insurance purchase • Stability of insurance placement • Remuneration?
16. THIRD PARTY Captives, Why are Brokers setting up Captives? • Good quality business – low claims ratio • Underwriting profit – maximise revenue stream from Portfolio • Possibility of Insurers reducing commissions • Hedge against a hardening market • Pricing and cover flexibility • Access to reinsurance markets
17. An example of a Broker Captive Customers Underwriting Risk Commissions Underwriting Input Insurance Broker/ MGA Profit Commission Claims Input Insurer 1 Insurer 2 Insurer 3
18. Commissions Underwriting Input Profit Commission Claims Services An example of a Broker Captive Customers Insurance Broker/ MGA Insurer 1 Insurer 2 Insurer 3 Agreed reinsurance arrangement Broker Captive Underwriting Profit Optional reinsurance protection, if required Reinsurance Programme
19. An example of a Broker Captive: simple number illustration Assumptions on Portfolio: • Portfolio Size: GWP £5mn • Current commission: 35% • Historic claims experience: 30% (based on net premium) • No losses > £50k Assumptions on Captive Solution: • No change in upfront commission • Captive reinsurers the insurer for £50k eel with an aggregate limit equal to 115% of net captive premium • Split in net premium: Insurer 40% and Captive 60%
20. An example of a Broker Captive: simple number illustration • Capital required for structure: £292,500 • Return on Capital: 300%+ • Capital can be subscribed as cash or letter of credit
21. Why Guernsey? • Europe’s No.1 captive domicile • Mature financial infrastucture • Excellent reputation • Highly skilled workforce • Convenient location and good travel links • Capitalisation requirements: No solvency II equivalence
