Transcript The Bermuda Market in 2005

Captive 201
After the Feasibility and Implementation
Captive 201
After the Feasibility and Implementation
Presented by:
Kathleen Bibbings, EVP, Aon Insurance Managers (Bermuda) Ltd.
Traver Alexander, Research Officer, Policy, Research and Risk Assessment
Department, Bermuda Monetary Authority
Craig S. Melnick, Manager, Global Insurance, Eaton Corporation
Robert Paton, EVP, Aon Insurance Managers (Bermuda) Ltd.
Agenda – After the Feasibility and Implementation
•
Overview of the Bermuda Captive Insurance Market
•
Review – Feasibility and Implementation
•
Day-to-day Captive Operations
– Captive owner
– Captive manager
•
The Renewal process
– Pre-renewal planning
– Captive renewal pricing
•
The Audit
– Commencement of audit
– Completion of audit
– Statutory financial return filing
•
Other Activities/Actions
– Financial reporting - actual vs. budget
– Board meeting
– Business plan changes
– Captive review
Overview of the Bermuda Captive
Insurance Market
Sources
• Annual Market Survey on Captives
– Administered jointly by:
• Bermuda Monetary Authority
• Bermuda Insurance Managers Association
• Statutory Financial Returns
• All figures for 2008 are provisional
Bermuda Captive Insurer Classification
System
• Class 1 Captives
– Single parent Captives insuring only the risk of
that parent or affiliate
• Class 2 Captives
– Single parent or multi-owner captives with
allowance to insure 3rd party risk up to 20% of
NWP
• Class 3 Captives
– Captives with allowance to insure 3rd party risk
over 20% but less than 50% of NWP
Topics
• Gross Written Premiums
– Regional location of underlying risk
– Property and Casualty coverage overview
• Main lines of business written
• Balance Sheet Size and Composition
– Asset side overview
• Quoted investment detail
– Liability side overview
• Profitability Indicators
Bermuda Captive Market Premiums
Bermuda Captives: Gross Written Premiums (US$ billions)
25
20
21.5
19.8
19.4
7.11
6.94
19.4
7.71
15
6.07
16.7
6.79
10
8.26
9.03
8.08
8.66
5.77
5
4.41
4.41
4.78
4.7
4.09
2008
2007
2006
2005
2004
0
Class 1
Class 2
Class 3
Premiums by Region of Underlying Risk
Bermuda Captives: Geographical Distribution of Underlying Risk
Insured (2008)
All Captives
13%
Class 3
58%
10%
Class 2
Europe
18%
72%
21%
9%
54%
Class 1 5%
0%
8%
43%
20%
North America
9%
4%
40%
7%
14%
43%
60%
Caribbean and South America
80%
Global
100%
All Other Regions
Assumed Premiums by Region of
Underlying Risk
Bermuda Captives: Geographical Distribution of Underlying Risk
Assumed from Insurance Carriers (2008)
All Other Regions
3%
Europe 10%
Global 34%
Caribbean and
South America
4%
North America
48%
Types of Coverage
Bermuda Captives: Types of Business Written (2008)
All Captives
32%
Class 3
30%
Class 2
Class 1
0%
65%
3%
63%
29%
7%
70%
40%
1%
2%
59%
20%
40%
Property
Casualty
60%
Financial and Other
80%
100%
Major Property Lines of Business
Bermuda Captives: Main Property Lines of Business (2008)
11%
All Captives
6%
64%
6%
2%
Class 3
9%
81%
3%
Class 2
13%
14%
60%
1%
Class 1
0%
11%
49%
20%
40%
Marine Hull and Cargo
Property Damage and Business Interruption
All Other Lines
17%
60%
80%
Auto P D
Aviation Hull and Cargo
100%
Major Casualty Lines of Business
Bermuda Captives: Main Casualty Lines of Business (2008)
31%
All Captives
9%
29%
11%
3%
45%
Class 3
Class 2
Class 1
0%
14%
13%
31%
29%
46%
20%
18%
26%
9%
40%
General Liability
Workers Compensation/Employers Liability
All Other Lines
5%
60%
5%
80%
Medical Malpractice
Professional Liability (other)
100%
Bermuda Captive Market Assets
Bermuda Captives: Assets (US$ billions)
100
84.1
75
25.44
88.8
72.1
26.39
65.0
65.3
13.46
16.63
38.77
35.4
33.66
16.96
50
40.59
45.1
25
18.09
17.29
16.37
16.15
15.04
2008
2007
2006
2005
2004
0
Class 1
Class 2
Class 3
Assets Detail
Bermuda Captives: Asset Composition (2008)
All Captives
19%
2%
45%
12% 4%
Class 3
2%
5%
23%
50%
20%
Class 2
20%
48%
5%
13% 5%
1%
28%
Class 1
0%
20%
Cash
Quoted Investments
Premium Receivables
33%
30%
40%
60%
80%
6%
100%
Unquoted Investments
Investment in/Advances to Affiliates
Other Assets
Inside Quoted Investments
Bermuda Captives: Quoted Investment Profile (2008)
All Captives
80%
Class 3
13%
86%
Class 2
6% 8%
77%
Class 1
18%
82%
0%
20%
Bonds and Debentures
40%
Equities
7%
10%
60%
80%
6%
8%
100%
All Other Quoted Investment
Liabilities Detail
Bermuda Captives: Liability Composition (2008)
7%
All Captives
Class 3
43%
9%
3%
44%
6%
37%
34%
4%
2%
Class 2 5%
48%
12%
32%
1%
Class 1
0%
8%
31%
20%
56%
3%
40%
60%
Unearned Premiums
Loss and Loss Expenses Provisions
Insurance and Reinsurance Balances Payable
Statutory Capital and Surplus
Amounts due to Affiliates
Other Liabilities
80%
100%
Profitability Indicators
Bermuda Captives: Profitability Indicators (2008)
11%
All Captives
16%
Class 3
80%
11%
Class 2
Class 1
71%
74%
7%
0%
51%
20%
Expense Ratio
40%
60%
Loss Ratio
80%
100%
Highlights
• Small growth in gross written premiums in 2008
– Continued regional diversity in the location of
risk
• Stability in balance sheet positions
– Nearly two-thirds of assets in cash and quoted
investments
– Capital and surplus positions well in excess of
regulatory requirements
• Bermuda remains the largest captive domicile
Review – Feasibility and Implementation
Captive Feasibility
•
Sell to senior management the business reasons for the captive
•
Get approval to do feasibility study
•
Partner with a good consultant
•
Demonstrate the advantages
•
Optimal ownership structure
•
Select your insurance or reinsurance markets
•
Domicile
•
Service providers
•
Capitalization and form – cash vs. LOC vs. assets
•
Obtain approval to implement the captive
Captive Implementation
•
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•
•
•
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•
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•
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Select name – not as easy as it sounds!
Identify directors and officers
Obtain latest actuarial study
Get market quotations to derive pricing
Prepare proformas
Complete the narrative Business Plan
Select law firm to incorporate the entity
Complete the captive application
Attend pre-application meeting
Always be honest and forthright with the regulators
Submit application
Obtain license
Finalize arrangement with insurer or reinsurers
Commence business
Day-to-Day Operations
Day-to-Day Operations
•
Who is responsible for what
•
Claims management/TPA management
•
Claims reserve setting (actuaries)
•
Receipts and payables
•
Reporting requirements (monthly/quarterly)
•
Investment management
•
Operations Manuals – what should be included?
Roles and Responsibilities –
Document in Procedures Manual
CONTENTS CONTINUED…
CONTENTS
Page No.
Page No.
1 INTRODUCTION
4 RESPONSIBILITIES
Purpose of Manual
Role of ESM Reinsurance Limited
Queries or Unusual Circumstances
Manual Pages Filing Instructions
4
4
6
7
2 GENERAL CORPORATE DATA
Company Information
Registered Office and Details of Incorporation
List of Current Directors
List of Current Officers
Legal Counsel
Auditors
Agents
Committees & Members
Risk Management Consultant
Investment Managers
Investment Custodians
Banking Information
TPA Details
Letter of Credit Issuer
8
9
10
11
11
11
11
12
12
12
13
13
13
14
3 POLICY – SUMMARIES (Examples)
Primary Property Damage / Business Interruption
Policy
Primary General Liability Reinsurance Policy
Transit Risks Policy
-
15
21
24
Purpose
Chair
Manager
Claims Committee
Underwriting Committee
Investment Committee
26
26
26
28
29
31
5 UNDERWRITING PROCEDURES
Purpose
32
6 INTERNAL CLAIMS PROCEDURES
Purpose
Notification of claims
33
34
7 FINANCIAL REPORTING PROCEDURES
Purpose
Responsibilities
Processing of Premium Cessions
Collection of Cash for Premium Cessions
Processing of Reinsurance Policies
Payment of Reinsurance Premiums
Reporting and Paying Claims
Day to Day Operations of Financial Services
Reporting Financial Results to ESM Reinsurance Limited.
43
-
40
40
40
40
41
41
42
40
Day-to-Day operations - Captive Manager
• Act as Principal Representative in Domicile
• Co-ordinate activities of Domicile legal representatives,
brokers, actuaries and other service providers, provision of
financial services
– Preparation of Financial Statements and Forecasts
– Year end audits (independent approved auditor,
assisted by Captive Manager)
– Statutory filings
• Treasury Service Activities
– Financial transactions (Captive Manager and
Investment Manager)
– Monitoring and processing cash and investment
activities
– Assist implementing of collateral requirements
Day-to-Day operations - Captive Manager
Continued
• Insurance Services
– Policy documentation
– Mid-term endorsements
– Claims handling (TPA with reports to captive manager)
• Business Development
– Periodic reviews of captive utilization and development
possibilities
(Captive Manager/Consultant/Broker)
– Implementing new programs
Day-to-Day operations - Captive Owner
• Provide leadership
• Determine the strategic use of the captive
• Set and Manage operational expectations
• Be the ultimate decision maker
• Approve filings
• Approve financials
• Provide necessary data
The Renewal Process
Pre-renewal planning
•
When should the captive enter the renewal
discussions? As early as possible!
•
Who should be involved? Broker and insured with
‘skin in the game’
•
Review objectives
•
Primary in captive and excess as insurance?
•
Full limits in captive and excess as reinsurance?
•
What is the best form of collateral?
•
Policy writing and issuance. Standard or customized?
•
Do not be afraid to forego use of the captive when
capacity is cheap and security is good!
Captive renewal pricing
•
Three usual methods of calculating premium
1. Market rates
2. Experience rating
3. Other premium pricing techniques
Market Rates
Advantages
Evidence of “arms length” pricing
Disadvantages
Hard to persuade insurers to give
rates/quotes each year
May take more funds out of operational
use than necessary
Usually produces higher premium – good if
trying to build war chest
Remove the need for captive to calculate
Take into account industry data, not
just insured data
Include substantial administrative
loadings
Can be difficult to obtain in writing
Accepted by Captive Regulators
Can be far more volatile
Experience Rating
Advantages
Based on own experience, not
industry
Disadvantages
Do not usually allow for profit
margin, although can do
Addition of “overhead” is usually
much lower than commercial
Premiums more palatable to
insureds
Gives better long-term cash flow
Usually rely on investment
income to address any adverse
development.
May not have sufficient data –
revert to industry data.
Other Premium Pricing Techniques
• Mean (or Expected) Loss + Expenses
• Loss Ratio (using mean loss estimate, pricing to
achieve a desired loss ratio)
• Targeted Return on Equity (pricing required to achieve
targeted ROE, considering mean loss + expenses)
• Mean Loss + Risk Premium (percent of standard
deviation)
• Confidence level
• Last year +/- inflation/growth percentage
The Audit
Commencement of Audit
• Audit planning meeting several months in advance
• Agree upon timeline and how this will be achieved
• Ensure other service providers agree with the timeline
• Prepared by Client customized request list issued well in
advance
• Inform auditors of any major changes in the program or in
the process
• Have documentation supporting the main processes
• Avoid Material Weaknesses or Control Deficiency
Completion of Audit
• Be ready for the start of the audit and ensure items
requested are available to the auditors
• Inform the auditors of any changes between planning and
field work
• Early completion means less ‘subsequent events’
• Recommend frequent communication with auditors to
ensure the audit is progressing smoothly
Statutory Financial Return Filing
• Specialized reporting format required by domicile
• Required 4 months or 6 months after fiscal year end
depending on class of license
• Must be opined upon by an approved auditor
• May require a Loss Reserve Specialist Opinion prepared
by an approved actuary depending on class of license
Other Activities/Actions
Financial Reporting – Actual vs. Budget
•
Compare written premium closely to actual cash received
•
If exposure changes , issue addendum to policy and
associated invoice
•
Are expense deductions taken by the front company the
same as appears in the contract? Check carefully!
•
As premium is recorded and earned, adjust IBNR so
budgeted loss ratio is achieved
•
As claims and reserves are recorded, adjust IBNR
•
Compare claims with expected and take action!
•
Is cash being received in a timely manner?
•
Interest income in-line with expectations?
•
Are general and administrative expenses in line with budget?
If not, why not?
Board Meeting
•
•
Get it on everyone’s calendar early
Consider special invitees such as:
–
regulator, investment managers, claims, auditor,
actuary, reinsurance broker, etc
•
Present the important topics such as premium, claims,
investments, dividends, etc.
•
Encourage meaningful debate
•
Review compliance check-list and ensure adherence
•
This may be a once a year opportunity to make an
impression – don’t waste it!
•
Afterwards….. Have fun!
Business Plan Changes
• Material changes to business written, limits, reinsurance,
may require prior approval from regulators
• Capital reductions, change in certain investments (loan
backs) may require prior approval from regulators
• Such actions are best recorded as Board decisions
• Rationale for changes should be documented
• Material impact on the captive’s financials require revised
projections and revised business plan
• Captive manager should make the risk manager aware of
these requirements
Captive Review
•
What measures are available to review performance?
•
Review of service providers – how have they
performed?
•
Things learned for next year
Types of Review
Utilization
Governance
Review
Financial
Performance
Ratios
Full
Analytical
Review
Integrated
With
Parent
Financial
Impact
The Ovation
•Questions and Answers