Transcript Advanced PowerPoint Presentation

Advanced
PowerPoint
Presentation
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-1
This Advanced PowerPoint
Presentation accompanies the
“Tools & Techniques of Risk
Management & Insurance”
textbook. Each of the 28
chapters in the textbook are
presented here in the following
sections:
Outline
Key concepts
Major sections
Chapter summary
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-2
Contents
Techniques of Risk Management & Insurance
Ch 1 Introduction to Traditional Risk Management……………1-5
Ch 2 Enterprise Risk Management…………………………….2-1
Ch 3 Risk Assessment: Identification…………………………..3-1
Ch 4 Risk Assessment: Quantification…………………………4-1
Ch 5 Overview of Risk Treatment Alternatives………………. 5-1
Ch 6 Non-insurance Transfer of Risk…………………………. 6-1
Ch 7 Insurance as a Risk Transfer Mechanism……………….7-1
Ch 8 Overview of Alternative Risk Transfer Techniques……..8-1
Ch 9 Global Risk Management…………………………………9-1
Ch 10 Loss Control Techniques………………………………..10-1
Ch 11 Emergency Response Planning………………………..11-1
Ch 12 Business Continuity Planning…………………………..12-1
Ch 13 Claims Management……………………………………..13-1
Ch 14 Monitoring Claims for Financial Accuracy……………..14-1
Ch 15 Insurance Companies and Risk Management………..15-1
Ch 16 Working with an Agent or Broker……………………….16-1
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-3
Contents
Tools of Risk Management & Insurance
Ch 17 Commercial General Liability Insurance……………….17-1
Ch 18 The Workers’ Compensation System………………….18-1
Ch 19 Commercial Property Insurance………………………..19-1
Ch 20 Directors and Officers’ Liability Insurance……………..20-1
Ch 21 Employment-Related Practices Liability Insurance…..21-1
Ch 22 Business Automobile Insurance………………………..22-1
Ch 23 Crime Insurance………………………………………….23-1
Ch 24 Capital Markets Risk Transfer Tools…………………..24-1
Ch 25 Loss Control Tools……………………………………….25-1
Ch 26 The Certificate of Insurance…………………………….26-1
Ch 27 Surety Bonds……………………………………………..27-1
Ch 28 Claim Reviews……………………………………………28-1
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-4
Chapter 8
Overview of Alternative Risk Transfer Techniques
Outline
• What is Alternative Risk Transfer (ART)?
• Step One: The Options
• Step Two: Funding Loss Retentions
• Step Three: Understanding Types of Captives
• Step Four: Choosing a Captive Domicile
• Step Five: Reviewing the Differences
• Advantages of a Group Captive
• Potential Disadvantages of a Captive
• Step Six: The Captive Feasibility Study
• Step Seven: Understanding Captive Tax Issues
• Other Alternative Risk Financing Techniques
• Chapter Summary
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-5
Chapter 8
Overview of Alternative Risk Transfer Techniques
What is Alternative Risk Transfer (ART)?
• Defined: a collection of risk financing techniques
• The ART market is the set of products and services
• All ART techniques contain significant risk retention
• ART topics:
• ART retention types
• Funding loss retentions
• Captives
• Finite Risk contracts
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-6
Chapter 8
Overview of Alternative Risk Transfer Techniques
Step One: The Options
• Risk retention connotes
• retention of risk, and
• the responsibility for managing risk
( loss control, claims mgmt, and reinsurance)
• Retention requires three characteristics:
• losses predictable in amount and frequency
• non-catastrophic losses
• insurance premiums are not a good value
• Non-insurance (being uninsured) is not a deliberate act
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-7
Chapter 8
Overview of Alternative Risk Transfer Techniques
Step One: The Options
• Types of retention
• Per-loss (straight dollar) deductible – per occurrence
• Annual aggregate deductible – per year
• Percentage deductible – proportion of each loss
• Franchise deductible – per-loss that disappears at max
• Waiting period deductible – time deductible
• SIR – Insured pays first dollar losses up to retained limit
(may be subject to deductible stacking)
• Qualified self-insurance – retention plan complying with
state regulations
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-8
Chapter 8
Overview of Alternative Risk Transfer Techniques
Step Two: Funding Loss Retentions
• Two main categories: Informal & Formal
• Informal loss funding techniques
• Current expensing
• Unfunded reserves
• Formal loss funding techniques
• Post-loss funding
• Borrowing, letters of credit, equity issues
• Pre-loss funding
• Funded reserves, trusts, captives
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-9
Chapter 8
Overview of Alternative Risk Transfer Techniques
Step Three: Understanding Types of Captives
• Captives and Risk Retention Groups (RRG)
• Captive defined: a closely held and controlled company that
accepts risk financing transfers from its principals rather than
independently for the general public
• Characteristics
• Control over claims and reserving practices
• Control over investments
• Recapture of investment income and underwriting profits
• Potential tax advantages
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-10
Chapter 8
Overview of Alternative Risk Transfer Techniques
Step Three: Understanding Types of Captives
• Captives goals
• reduce/stabilize costs
• provide risk management services
• provide tax opportunities
• assure risk financing markets
• Captive classifications
• Owned
• Rented
• Captive types
• Pure (single parent)
• Group (multiple parents)
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-11
Chapter 8
Overview of Alternative Risk Transfer Techniques
Step Three: Understanding Types of Captives
• Captive classifications
• Owned: (policyholders own the capital)
• Pure: Single parent, single customer
• Group: Multiple parents, many customers
• Association: similar companies
• Agency: owned by a broker or agency
• RRG: permitted by the Risk Retention Act for
specified exposures; with regulatory exemptions
Supplement
• Single parent captives
• pure – captive’s only client is the parent
• broad – captive also sells to independent third parties
• third parties may deduct premiums paid to broad form
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-12
Chapter 8
Overview of Alternative Risk Transfer Techniques
Step Three: Understanding Types of Captives
• Captive classifications
• Rented captives: (principals provide the capital)
• Rent-a-captive: Owners rent captive to others;
contracts are separated to avoid risk sharing
• Protected cell: legislation provides firewalls
between policyholders to avoid risk sharing
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-13
Chapter 8
Overview of Alternative Risk Transfer Techniques
Step Three: Understanding Types of Captives
• History of captives
• late 1800’s: Factory Mutual System for fire insurance
• early 1900’s: Church Insurance Company,
Ocean Marine P&I Clubs
• late 1900’s: market failures led to off-shore markets
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-14
Chapter 8
Overview of Alternative Risk Transfer Techniques
Step Four: Choosing a Captive Domicile
• Captives subject to the domicile’s laws and regulations
• Minimum capital & surplus requirements
• Regulation’s purpose is to protect the consumer
• US domiciled captives are onshore captives
• Captives domiciled outside US are offshore captives
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-15
Chapter 8
Overview of Alternative Risk Transfer Techniques
Step Four: Choosing a Captive Domicile
• Domicile Selection Criteria
• Friendly regulatory environment: applications & reporting
• Required capitalization: minimum assets & premium to surplus
• Local service infrastructure
• Low fees and taxes
• Permitted business: few restrictions on classes or
third-party business
• Permissive Investment regulations: low relevant asset ratios
• Geographic convenience
• Onshore/offshore social perceptions and tax issues
• Political climate: stability of local governments & laws
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-16
Chapter 8
Overview of Alternative Risk Transfer Techniques
Step Five: Reviewing the Differences
Captive Owners
(insureds)
• Fronted versus Direct Captives
• State regulations & rating agency requirements may cause
captives to not be
• Licensed and/or
• Admitted
• Captives use fronting companies - licensed, admitted insurers
Fronting Carrier
(Provides paper & services)
Reinsurance Captive
(invests funds, accumulates surplus)
• Insured pays premium to fronting insurer
• Insurer cedes % of risk and premium to insured’s captive
• Captive acts as a reinsurer for the fronting company
• The fronting company provides paper and claim service
Captive Owners
• Direct-writing captives
(insureds)
• Insured pays premium to captive
Direct Captive
• Captive may use other reinsurers
Reinsurer
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-17
Chapter 8
Overview of Alternative Risk Transfer Techniques
Advantages of a Group Captive
• Reduced operating cost – compared to insurer overhead
• Lower/stable pricing – free from hard market increases
• Investment income & underwriting profit – retained by owners
• Broader coverage – due to fewer regulations
• Equitable premium rating - reflects actual losses
• Coverage availability/stability – free from market swings
• Direct reinsurer access – lowers commissions, better pricing,
access to reinsurer pools
• Improved service – better understanding of captive’s risks
• Reduction in long-term cost of risk
• Enhanced risk management perspective – increased visibility of
risk management, optimal retention levels, better allocation of
costs, investment income offsets cost of risk
• Fewer regulatory restrictions – allows self-funding and better rates
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-18
Chapter 8
Overview of Alternative Risk Transfer Techniques
Potential Disadvantages of a Captive
• Internal administrative costs – more time than insurance program
• Capitalization and commitment – substantial initial costs
• Dependent upon service providers – must outsource many services
• Inadequate loss reserves and potential losses – variation in losses
may deplete reserves and necessitate additional capitalization
• Increased cost and reduced availability of other insurance – loss of
account pricing discounts from packaging policies
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-19
Chapter 8
Overview of Alternative Risk Transfer Techniques
Step Six: The Captive Feasibility Study
Feasibility study factors:
• Unbiased perspective – study by an independent party
• Cost – expensive to perform a good study
• Qualified professional – hire a competent analyst
Captive Feasibility Study Basic Elements
Introduction: Goals, sources, executive summary
Candidate overview: current insurance, loss history, actuarial report
Captive basics: risk/reward, minimums, structure, rented/owned, domicile
Financial analysis: loss calculations, discounts, proformas
Tax issues: premium deductibility, captive taxes
Legal issues: SEC, domicile requirements
Incorporation: expenses, business plan, service providers
Timeline
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-20
Chapter 8
Overview of Alternative Risk Transfer Techniques
Step Seven: Understanding Captive Tax Issues
• Tax deductibility –
Is the premium paid to the captive deductible?
• Tax timing –
When must the captive pay taxes on earnings?
Supplement
Seek appropriate tax advice from a qualified tax consultant
• tax issues are complex
• tax rules are subject to change
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-21
Chapter 8
Overview of Alternative Risk Transfer Techniques
Other Alternative Risk Financing Techniques
• Finite risk reinsurance
• Not dependent on the spread of risk
• useful for high severity, high frequency risks:
•product recalls,
•warranty programs,
•environmental impairment programs,
•commodity price fluctuations,
•credit risk
• Fully funded programs – the risk is in the timing of payments
• Uses investment earnings and the time value of money
• Multi-period policy term with policy aggregates
Supplement
Additional risk-financing techniques include catastrophe bonds,
insurance derivatives, securitization, and contingent capital
arrangements
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-22
Chapter 8
Overview of Alternative Risk Transfer Techniques
Other Alternative Risk Financing Techniques
• How a finite risk program works
• Risks identified
• Reinsurer establishes premium and experience account
• Reinsurer sets preset interest rate (keeps excess)
• Losses paid from experience account
• Any surplus returned to insured
• Reinsurer charges fees for service
• Risk transfer in finite risk contracts
• Pure finite risk contracts have no risk transfer
• Blended programs contain a layer of risk transfer
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-23
Chapter 8
Overview of Alternative Risk Transfer Techniques
Other Alternative Risk Financing Techniques
• Types of finite risk contracts
• Loss portfolio transfers (LPT) – transfer unknown liabilities off
balance sheet for known expense
• Prospective aggregate contracts –
funds unknown prospective losses
• Retrospective aggregate contracts –
funds known prior losses
• Calculating a finite risk reinsurance premium
• Net present value of future cash flows + fees
• The potential accounting effects of finite risk reinsurance
• Get the advice of a competent tax counsel
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-24
Chapter 8
Overview of Alternative Risk Transfer Techniques
Chapter Summary
• What is Alternative Risk Transfer (ART)?
• Step One: The Options - types of retention
• Step Two: Funding Loss Retentions
• Step Three: Understanding Types of Captives
• Step Four: Choosing a Captive Domicile
• Step Five: Reviewing the Differences
• Advantages of a Group Captive
• Potential Disadvantages of a Captive
• Step Six: The Captive Feasibility Study
• Step Seven: Understanding Captive Tax Issues
• Other Alternative Risk Financing Techniques – finite risk
©2009 The National Underwriter Company
Dr. James Kallman, ARM
8-25