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Captive Reinsurance Practical Applications

Example 1. Major German industrial companyIn-house broker/direct writing captivePD/BI programme placed directlyCaptive takes 25% quota share line and then approaches R/I market via GCFac and Continental European brokerWHYCaptive wants ?skin in the game"Access to R/I market via specialists. Ex

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Captive Reinsurance Practical Applications

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    1. Captive Reinsurance Practical Applications September 20th, 2006

    2. Example 1 Major German industrial company In-house broker/direct writing captive PD/BI programme placed directly Captive takes 25% quota share line and then approaches R/I market via GCFac and Continental European broker WHY Captive wants “skin in the game” Access to R/I market via specialists

    3. Example 1 Expiring Structure

    4. Layers written on a “difference between” basis SIR is reduced to 20m and limited to 2 losses Significantly reduce the captive exposure Security Axis Hannover Re Mitsui Lloyds Everest Re QBE Mapfre Axa Re

    5. Example 2 Major UK plc Elected to move to a direct writing captive for following reasons:- Direct access to R/I market Elimination of security requirements of fronting Insurers – eg. LOC’s Flexibility to underwrite portfolio throughout the EU Removal of fronting costs Greater control over programme administration Retention of premium within the company Reduced volatility – cross class aggregate Control of claims “Skin in the game”

    7. Example 3 Major Scandinavian conglomerate Constant M&A activity throughout 1990s Result - 3 Captives Rationalisation and LPT (loss portfolio transfer) Reduce captives to 1 “onshore” and 1 “offshore” Novate liabilities from 1 captive to another Buyout older liabilities with TP insurer Buyout liabilities for activities that had been disposed of

    8. Example 3 Process

    9. Example 3 Resulting Structure

    10. Example 4 Major UK company - privatisation from government New venture capital investor Government were indemnifying historical liabilities including environmental but wanted the client to accept a large retention when new investment made New investor wanted protection Conventional market not attracted to risk – client believed risk very remote – classic dichotomy Solution – use captive for primary layer – “skin in the game” – reinsure excess layer with large profit commission Cover for agreed term only – 5 years – after which client (+ investor) happy that residual risk unlikely

    11. Example 4 Structure

    13.

    16. Conclusion Some Recurring Themes Captive ability/willingness to have “skin in the game” Reduced insurance costs Risk funding Tailored/broader coverages Reduced financial costs Improved cash flow Profit centre The widest choice of markets

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