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CAPTIVES The Rationale

AGRi P C APT I V E S

Welcome!

Tim Averill, Executive Director SET SEG Property/Casualty Pool

Michael Rebaleati, Chief Operations Officer Nevada Public Agency Insurance Pool

AGRi P C APT I V E S

What is a captive insurance company?

CAPTIVE OVERVIEW

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A captive insurer is generally defined as an insurance company wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer’s underwriting profits.

What is a Captive Insurance Company?

A form of self-insurance whereby the insurer is owned wholly by the ensured to meet the risk-management needs of the members.

Captive insurance is utilized by insureds that choose to put their own capital at risk by creating their own insurance company, working outside of the commercial insurance marketplace, to achieve their risk financing objectives.

AGRi P C APT I V E S

There were 7,006 captives worldwide in 2016, a 2.3% increase over 2015.

Total Captives Per Region

46.3% 38.7% 12.3% 2.4%

United States

North American Offshore

Europe Asia

0.3%

Canada

Source: “Captive Managers & Domiciles Rankings + Directory.” Business Insurance Holdings, 2017.

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Types of Captives*

1 Wholly owned by one parent company

2

3

5

6

7

Pure/Single Parent

Owned by multiple non-related organizations

Group

Owned by members of a common industry or trade association

Association

4 Division of an existing off-shore captive formed in the US

Branch

Owned by policy holders and members Risk Retention Group

Owned by 3rd party sponsor

Sponsored/Cell Captives

Owned by insurance agents

Agency Captive

8 Created for a limited purpose of entering into a SPFC contract

Special Purpose Financial Captive

*Your captive manager will determine which type is best for you.

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Creates flexibility and options for consideration

Why Should a Pool Use a Captive?

• Commercial rates not competitive • Combined premium is advantageous

• Commercial coverage not available. • Provided coverage that the pool is statutorily unable to provide. • Proof of insurance needed • Seeking formalized risk funding and loss control monitoring • Good loss ratios and risk management protocols • Investment income • Desire for a potential profit center • Desire for a regulated environment • Protection from political risk

Premium

Operational

• Federal Programs (TRIA) • Reinsurance otherwise not accessible in commercial market

Access to Capacity

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Common Captive Coverages

1

2

3

5

6

7

Workers’ Compensation

General Liability

Property, including wind and quake

4 Professional Liability

D&O Liability

Employment Practices Liability

Excess Liability

8 Medical Stop Loss

*Your captive manager will determine which type is best for you.

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Your captive manager will help you navigate the process below.

Captive Development Process

Review current insurance program and

risk appetite

Decision to proceed

Captive application, license, incorporation and

capitalization

Formal feasibility study Business plan development

There are several key pieces to operating a captive that you must discuss with your captive manager, including the development of a service team and reporting structure to work under your Board of Directors.

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Ranked by captives managed worldwide in 2016

Top 10 Captive Managers

Company 2016 Captives Domiciles

Marsh Captive Solutions, New York

Aon Captive & Insurance Management,

London

Willis Towers Watson P.L.C., London

Strategic Risk Solutions Inc., Concord, MA

USA Risk Group Inc., Barre, VT

1,215

1,191

385

268

218

46

52

36

22

25

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Source: “Captive Managers & Domiciles Rankings + Directory.” Business Insurance Holdings, 2017.

Ranked by captives managed worldwide in 2016

Top 10 Captive Managers Continued…

Company 2016 Captives Domiciles

Artex Risk Solutions Inc., Itasca, IL

JLT Insurance Management,

Bermuda

AMS Insurance Management Services Ltd.,

British Virgin Islands

R&Q Captive Holdings Ltd., London

Atlas Insurance Management,

Cayman Islands

200

164

115

114

86

30

10

6

16

12

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Source: “Captive Mangers & Domiciles Rankings + Directory.” Business Insurance Holdings, 2017.

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Includes actuary study, legal fees for formation, fees for application preparation and domicile fees.

Formation & Feasibility: $35,000-$55,000

Estimated Cost of a Captive

Includes captive management, actuary, audit, legal, travel and meetings, premium taxes and license fees.

Ongoing Operations: $100,000-$150,000

In the form of cash, marketable securities or irrevocable letter of credit.

Capitalization: $250,000-$500,000 (minimum)

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SET SEG Property/Casualty Pool

CAPTIVE CASE STUDY

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• Michigan Public Schools • Intermediate School Districts • Community Colleges

Created in 1985 to provide coverage for Michigan’s public education community, the pool has matured and provides hands-on programs with services handled in-house.

MASB-SEG Property/Casualty Pool LANSING

514 Members

• Auto Liability • Auto Physical Damage • Cyber Liability

Property and Liability

• Educators Legal Liability • General Liability • Property

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• Association Captive: Wholly owned and controlled by MASB-SEG Property/Casualty Pool

• $5 million capitalization

• Interlocking boards

Domiciled in the Cayman Islands

MASB-SEG Reinsurance Limited

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Why the Pool Formed a Captive?

1

2

3

4

5

6 Potential to turn Pool reinsurance expense into future member surplus

Strengthen our negotiation position with reinsurance partners

Offer protection from increasing regulation

Ensure greater stability by providing an alternative to the commercial market

Broaden our offerings outside the scope of the Pool’s primary coverage

Comply with statutory aggregate excess requirements

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MASB-SEG Reinsurance Limited

Evolution of Risk

1985 2007 2010 2011 2013

Aggregate excess – started small

Annual Aggregate Property

Deductible

Employee Dishonesty

Bonds

Auto Liability, General Liability,

Educators Legal Liability,

Property

Property & Liability Quota

Share

Future Growth

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On average, we place $2 million per year in our captive in the Cayman Islands

MASB-SEG Reinsurance Limited

• Statutory Aggregate Excess Coverage • Property and Liability Excess Coverage • Employee Dishonesty Bonds • Participation in the Pools Quota Share Property and Liability Reinsurance Programs

Current Programs and Coverages:

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Property Reinsurance

MASB-SEG Reinsurance Placement Summary

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MASB-SEG Casualty Reinsurance

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MASB-SEG Educators Legal Liability Reinsurance

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Total Impact

Over the past 10 years, SEG Re has successfully provided reinsurance security to the Pool, generating

annual average rate of return in excess of 24%.

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Nevada Public Agency Insurance Pool

CAPTIVE CASE STUDY

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• Flexibility in coverage design, scope and retentions for underlying pools. • Flow of capital to captives supported access to reinsurance and higher retentions. • Investment income opportunities are not as restricted as for public agencies and helps

reduce costs over time. • Nevada Premium tax savings 3.5% plus Surplus lines fees 0.4% reinsurance tax 0.25%. • Open Meeting Law and Public Records Laws do not apply to captives, but do to pools.

Why Nevada Pool Formed Two Pure Captives

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Formed and capitalized by Nevada Public Agency Insurance Pool

Public Risk Mutual

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• A non-profit pure captive mutual insurance company

• Granted Certificate of Authority from Insurance Division on July 25, 2004

• Capitalized with $1,000,000

• Grants from the parent NPAIP has continued when funds are available

• A comprehensive cyber assessment program is being funded by PRM investment income.

• PRM coverage exposure has steadily increased.

• Formed by Members of Public Agency Compensation Trust (PACT).

• A non-profit association captive mutual insurance company

• Granted Certificate of Authority from Insurance Division on July 1, 2007.

• Initial Capitalization $5,000,000 • Grants from parent PACT

continue. • An online Fire/EMS training

series is funded by PCM.

Public Compensation Mutual Relationships of NPAIP/PACT

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NPAIP Lloyd’s 2017-2018 Property Structure

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UE’s participation decreased to 75% and PRM’s participation increased to 25%

NPAIP 2017-2018 Liability Structure Graph

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What additional services are you expanding on?

Considering the Future

•Cyber Liability •Medical Stop-Loss

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Questions & Discussion