The Principles of Risk Financing Including Captive Insurance Companies

1. The Principles of Risk Financing � Including Captive Insurance Companies Presented by Advocate Michael Kruger- A Gert Cruywagen Signature Presentation

2. Where do we Start? Official Definition of Risk Management Goals: The reduction in the probability and severity of disasters, incidents and loss producing events, with adequate financial provision for the consequences of such occurrences, should they happen The reduction in the total cost of risk

3. ACTIONS TO ACHIEVE GOALS The effective identification, quantification and evaluation of actual and potential risks The comprehensive control of risk exposure through the implementation of pro-active, preventative, protective and recovery measures The financing of losses, should they occur, through:the maximum use of own funds, within the framework of conservative financial practice and shareholder protection and the use of safe and secure insurance and reinsurance markets to insure catastrophic losses, as well as those losses outside of the company�s self-insurance capabilities

4. RISK ASSESSMENT � The First Step The systematic identification of undesired events and their causes, analysing their likelihood of occurrence and potential consequences in order to make a value judgement as to the acceptability or tolerability of the risk.

6. Risk Mitigation Generally accepted Risk Mitigation Strategies: The 4 T�s Treat Terminate Tolerate Transfer

7. RISK FINANCING OPTIONS Self-insurance External insurance Statutory insurance Alternative Risk Transfer (ART) Combinations

8. RISK FINANCING OPTIONS Self-insurance Unwitting and unplanned Structured Excesses and deductibles Aggregates

9. RISK FINANCING OPTIONS Self-insurance Structured: Captive Insurance Companies Rent-a-captive Cell captives

10. RISK FINANCING OPTIONS External Insurance Assets (Property) Insurance Liability (Casualty) Insurance Marine classes of insurance Crime classes of insurance Credit Insurance Political Risk Insurance Peripheral insurances

11. RISK FINANCING OPTIONS Statutory Insurance WCA MVA UIF

12. RISK FINANCING OPTIONS Alternative Risk Transfer (ART) Spread loss Finite risk FinRe Risk Bond

13. RISK FINANCING PROGRESS First Stage Totally un(self)-insured Second Stage Unplanned self-insurance with some external insurance

14. RISK FINANCING PROGRESS Third Stage Structured self-insurance with planned external insurance Fourth stage Structured self-insurance with planned external insurance to planned level with ART on top

15. RISK FINANCING PROGRESS Final Stage Maximum us of own funds with utilisation of own insurance captives, utilisation of variety of ART with external insurance only for those exposures outside your own self-insurance capabilities and catastrophic losses With optimum protection of share-owners� funds and within bounds of conservative financial practice

17. The Captive Definition: A Captive Insurance Company is an insurance company formed by an Enterprise to insure some, or all, the risks of its parent. The shareholder or parent is not normally in the insurance business.

18. Comparative Advantages of Own Captive Full ownership Full control over the ownership Full control over appointment of Directors (within legal guidelines) and Captive Managers. Full control over the captive and its assets. Full control over the direction and mission of the captive company. Full control over decisions regarding classes of insurance, insureds, other participants, etc. Full control over the final redemption of capital on termination.

19. Comparative Advantages of Own Captive Full control over the information Lots of opportunity for savings due to efficiencies. Full control over investment policy (within framework of insurance law). Full investment leverage on premiums, premium reserves, capital, claims provisions and statutory provisions through sharing of capital reserves and investments with parent

20. Comparative Advantages of Own Captive Premiums fully deductible Free access to local and international re-insurance markets Earns reinsurance commissions and insurance overrider commissions Facilitates building of reserves and provisions Full freedom to write unpopular and uninsurable risks

21. Comparative Advantages of Own Captive Funds will be built up through: Investment income from improved cash flow Investment income from timing differences, By receiving commissions from reinsurers and By retaining excess premium from good loss years.

22. Strategic Advantages of Own Captive It facilitates the achievement of risk management goals The captive can reward risk management performance Premiums can be tailor made to reflect each Department�s exposure in terms of Estimated Maximum Loss Values, total value risk, risk control measures and loss record Covers can be tailor made to suit the own requirements Reductions in losses make the captive more profitable, enhancing its appeal to reinsurers Participation in a captive sharpens the focus of management in respect of their risk management goals

23. Strategic Advantages of Own Captive The captive can insure unpopular or expensive risks The captive can insure risks that are normally not insurable (trade risks, maintenance risks, pollution risks or business risks) The captive will eliminate frustrations due to non-insurance matters Contributions to self-insurance provisions are now turned into premiums

24. Financial Advantages of Own Captive Separate profit center Eliminates the fragmentation of insurance purchasing (consumes up to 30% of the premium in administration costs) Eliminates overheads of the conventional insurance markets (retail brokers, local front insurers, wholesale brokers, overseas insurers, reinsurance brokers) Lower cost of insurance (premiums in terms of loss performance instead of general loss statistics) Fluctuations in commercial insurance conditions minimized Access to wider range of reinsurance markets (captive an insurer in its own right). The captive will attract the reinsurance commission (20%)

25. Financial Advantages of Own Captive Investment income normally only available to the insurance companies, Improved cash flow Contingent profit commission (underwriting profits) Self-insurance provisions handled much more effectively -duplication eliminated.

26. The Disadvantages and Risks Solvency/ capitalization requirements Licensing and establishment costs Applications to Financial Services Authority. Reinsurance Failure: Inadequate funding: Bad investment policy. Bad directors� decisions.

27. Thank You. A Gert Cruywagen Signature Presentation