November, 2003

Captive PrimerPresented by

John Yonkunas

Captives – Alternative or Obstacle

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Risk Financing Continuum

Unfunded Self

Insurance

Captive

DeductiblePlan

Retro Plan

GuaranteedCost

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Captive Defined

A closely held insurance company controlled by its owners…

... offering insurance products or reinsurance support to its owners as the principal beneficiaries...

...and the owners-policyholders actively participate in decisions influencing underwriting, operations and investments.

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Historical Growth of Captives Worldwide

0

1000

2000

3000

4000

5000

6000

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source: Captive Insurance Company Reports and Best’s Captive Directory

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4,837 Captives Worldwide (Year-End 2002 Figures)

Guernsey 408Luxembourg 280Ireland 209Isle of Man 173Singapore 51Switzerland 41All other 40

Total 1,202

Bermuda 1,426Cayman 642BVI 269Barbados 207Turks & Caicos 74Bahamas 25U.S. • Vermont 454• Hawaii 102• Colorado 20• Georgia 16• Illinois 14• South Carolina 12• Tennessee 10 • Arizona 10• New York 9• Other U.S. states/domiciles 140Other 205

Total 3,635

WESTERN HEMISPHEREDOMICILES

EASTERN HEMISPHEREDOMICILES

Source: Best’s Captive Directory

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2002 New Captive Formations by Domicile

Domicile

Cayman Islands

Bermuda

Vermont

Guernsey

British Virgin Islands

South Carolina

Barbados

Ireland

Hawaii

Others

Total

2002 Captive Formations

97

79

70

49

45

20

19

18

16

49

462

Source: Best’s Captive Directory

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Number of Captives by Type

Type of Captive

Pure Captive

Connected Business

3rd Party Business

Association Captive

Multi-Owner Captive

Risk Retention Groups

Rent-a-Captives (incl. Agency, Sponsored, and PCC)

Number of Captives

2003 vs. 2003

1366 1087

214 188

218 180

206 201

78 63

96 73

294 241

Source: Best’s Captive Directory

Pure Single Parent

Related Business Single Parent

Unrelated Business Single Parent

Captive of Insurer

Association Captive

Multi-Owner Captive

Healthcare Captive

Life Insurer Single Parent

Rent-a-Captive

Risk Retention Group

Self Insurance Groups

Reciprocals

Agency Captive

Special Purpose Vehicles

Protected Cell Captive

Producer Owned Rented Captive

Types of Captives

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Categories of Captives

Ownership & Control Single Parent

Group/Risk Retention GroupRent-A-Captive/Protected Cell

Captive

Transaction – Offshore & OnshoreDirect

Fronted

StructureStock/Mutual

Reciprocal

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Ownership & Control Categories

10

11

Single Parent

Insures the risk of the parent and sister companies

Includes predictable exposures & working layer

Offers unusual or uninsurable coverages Punitive Damage

TerrorismBusiness Risks

Assets Controlled by TreasuryLoan-Backs

Commercial Paper

Highly Leveraged

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Group

Insures the risk of the members/policyholders

Includes predictable exposures for casualty coverages at low retentions

Does not typically offer unusual or uninsurable coverages

Assets Managed by Investment Manager

Moderately Leveraged

Higher Regulatory Scrutiny

Risk Retention Group – Federally authorized licensed carrier

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Rent-a-Captive

Reinsures the risk of members - Fronted

Includes predictable exposures

No unusual or uninsurable coverages

Assets Controlled by Sponsor/Owner

Ownership/Governance Limited

No Direct Capital – Indirect Capital for “gap” exposure

Protected Cell Captive – legal segregation of assets and liabilities

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Rent-a-Captive Insurance and Reinsurance Transactions

AGENT

FrontingCompany

Rent-a-Captive

INSURED

INSURANCEAGREEMENTSINSURANCE

AGREEMENTS

SHAREHOLDERAGREEMENTS

SHAREHOLDERAGREEMENTS

REINSURANCEAGREEMENTSREINSURANCEAGREEMENTS

InsurancePremiumsInsurance

Policy &Claim Payments

InsurancePremiums

Primary LayerReinsurance Premiums

Primary Claim Recovery

PreferredDividends

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Transaction Categories

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Captives are Established to EitherInsure or Reinsure Risk

… direct insurance

Corporation CaptivePremiums

Coverage

Corporation InsuranceCompany

Captive

… reinsurance

Premiums

Coverage

Fronting Fee

Reinsurance

Insurance

Agreement

Captive

Agreement

Reinsurance

Carrier

Deductible/SIR Indemnification

Agreement

Excess

DED/SIR

ExcessExcess

DED/SIR

Owner/Policyholder

Captives as part of an integrated and complex risk financing program

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Structure Categories

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19

Structure Category

Stock/Mutual Stockholders/Members Board of Directors Officers Taxable at Captive level

Reciprocal Subscribers Subscriber Advisory Committee Attorney-in-Fact Subscriber Savings Accounts - Assigned

Surplus Taxable at Captive and Subscriber levels

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Captive Trends

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Trend 1: Continued Strong Interest in Captives

New captive formations

Expansion of existing captives

Effects of hard market Fronting insurance capacity diminishing and

fees increasing Higher reinsurance rates

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Trend 2: Unrelated Business

Captives are increasingly insuring risks unrelated to the owners for: Risk diversification Tax deductibility Profit potential

Examples Suppliers or independent contractor P/C risks Customers (warranty, credit life) Employee benefits

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Trend 3: Employee Benefits

Opportunity areas U.S.: disability, life, deferred compensation,

SERPs, retiree medical Non-U.S.: reinsurance of multinational

pooling, internationally mobile employees

Columbia Energy’s DOL ruling and ADM’s recent application for an exemption