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Financing Retained Risk

Financing Retained Risk. Peter Willitts. Structure – What is a Captive?. Insurance subsidiary of a commercial/financial company, or a consortium or an association of individuals

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Financing Retained Risk

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  1. Financing Retained Risk Peter Willitts

  2. Structure – What is a Captive? • Insurance subsidiary of a commercial/financial company, or a consortium or an association of individuals • Formed to primarily insure, or reinsure the risks of its parent, or of a number of parties with risks in common or unrelated risk • Usually formed in a specialized environment or “domicile” – “onshore” or “offshore”

  3. Why are Captives Formed • Reduce Risk Financing costs • Solve problems • Profit center

  4. Reducing Risk Management Costs • Controlling destiny through progressive retentions • Access to Reinsurance • Reduced Dollar Swapping • Improved Loss Control incentive • Tax savings

  5. Tax • Acceleration of deduction • Humana • Non-Related • Arbitrating U.S. Tax Rate • 953(d) Election • Pooling • Premium Tax

  6. Solving Problems • Coverage • e.g. • D&O • E&O • Product Recall • Administrative • Consolidation of Programs • Rationalization of Deductibles

  7. Profit Center • Customer Programs • Warranty • Disaster Recovery • Cell Phone • Credit Life • Other • Suppliers • Contractors

  8. Structure – Types of Captives • Single Owner • Multi-owner or Association • Rent-a-Captive – multiple non-owner • Protected or Segregated Cell Captive (PCC, SPC, SAC) – any of the above

  9. Association Captives • Generally a hard market phenomenon • Commitment to feasibility essential • Risk Sharing must be understood • Most effective when solving a common problem • Homogenous or Heterogenous

  10. Rent-a-Captives • Sponsored by insurers or brokers • Rent-a-Captive vs Segregated Cell • Relationship established through Shareholders Agreement • Indemnity Provision • Dividend distribution process

  11. Decision Making Process • Level of Retention • Form of Retention • If captive, which domicile • Feasibility study should address all 3

  12. Domicile Comparison

  13. Why Bermuda • Why not? • Experience • The Insurance and Reinsurance Market • Geography • Flexibility

  14. Bermuda Incorporation Procedure • Select a Law firm • Select a Manager • Select a Name • Submit Shareholder information for approval • Submit Pre-Incorporation information • Submit Form 1B for registration together with confirmation capital is paid in

  15. Typesof Business • Related • Unrelated • Connected • Affiliated

  16. Established License Classes • Established “Classes of Insurers” • Class 1 – Single Parent Captive • Class 2 – Association Captive/20% unrelated • Class 3 – Catch all – “third party company” • Class 3 A - 50% Unrelated, less than $50M • Class 3 B – 50% unrelated, more than $50M • Special Purpose Insurer • Class 4 – CAT Companies/Publicly listed companies

  17. FLIP.

  18. Captive Running Costs

  19. Servicing Infrastructure SECRETARIAT INTERNAL AUDIT LEGAL TREASURY . TAX CEO ACCOUNTS INSURANCE $ • Risk control • Broker • Insurer • Claims administration • RI Broker • RI Captive Manager CAPTIVE BANKS ACTUARIES AUDITORS REGULATORS LAWYERS

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