Your SlideShare is downloading. ×
Biba fringe session 2011
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Biba fringe session 2011

579

Published on

Published in: Economy & Finance, Business
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
579
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
0
Comments
0
Likes
1
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. What brokers need to know about Captives
    BIBA 2011, fringe session, Wednesday 11th May
    Mike Johns
    Alternative Risk Management Limited
    mjohns@arm.co.gg
    Paul Eaton
    Heritage
    Paul.Eaton@heritage.co.gg
  • 2. Guernsey
  • 3. Guernsey’s finance industry
    • Insurance, Banking, Funds and Trust
    • No.1 European Captive Domicile
    • 675 insurance entities
    • £3.4bn of GWP
    • 40% of the FTSE100 captives
    • Pioneer of Protected Cell legislation
  • 4. Presentation agenda
    • What is a Captive?
    • The different types
    • How and why are Captives used?
    • Pure Captives: Case Study
    • Broker Captives: Case Study
    • Why Guernsey?
  • 5. What is a Captive?
    • An insurance company
    • Usually formed for a specific purpose, primarily self insurance
    • Called ‘Captives’ as often only provides insurance to its owner
    • Often formed in a offshore domicile
    • Captures both premium and risk
  • 6. Captive Insurance Structures
    Reinsurance Captive
    Direct-writing captive
    Ownership
    Parent
    Subsidiary
    Sweden
    Subsidiary
    Belgium
    Subsidiary
    UK
    Parent
    Cover
    Premiums
    Ownership
    Premiums
    Ownership
    Fronting Company
    (conventional / locally based insurer)
    Premiums
    Captive Insurer
    Cover
    Captive Reinsurer
    Premiums
    Cover
    Reinsurer
    Illustration of how Captives are used
  • 7. Illustration of how Captives are used
    ownership
    REINSURANCE CAPTIVE
    DIRECT-WRITING CAPTIVE
    ownership
    Parent
    Parent
    Subsidiary
    Sweden
    Subsidiary
    Belgium
    Subsidiary
    UK
    premiums
    premiums
    cover
    Fronting Company
    Conventional / locally based insurer
    Captive Insurer
    ownership
    ownership
    premiums
    premiums
    cover
    cover
    Captive Reinsurer
    Reinsurer
  • 8. Types of Captive facility
    • Wholly owned company (subsidiary)
    • PCC Cell
    • ICC Cell
  • 9. Protected Cell Company Structure
    CELL A
    THE
    CORE
    CELL D
    CELL B
    CELL C
  • 10. How and why are Captives used?
    PURE Captives
    • Used by your clients as a mechanism to manage self insurance
    • Can underwrite various risks of the owner
    • Control over the unpredictable market cycle
    • Optimise the insurance purchase
    • Cost of risk based upon actual performance
    • Leverage with the insurance market
    • Focal point for awareness of risk management
    • Flexibility in cover and innovative approach possible
  • 11. How and why are Captives used?
    THIRD PARTY Captives
    • Can be used by brokers, MGAs or clients
    • A way of creating more value from existing profitable business
    • Earn additional revenue
    • Maximise control
    • Flexibility and Bespoke coverage
  • 12. PURE Captive: a case study
    • Accountancy Practice purchases PI cover
    • £10mn limit purchased from the traditional insurance market
    • Layered programme with total premium spend £675,000 split:
    Primary £1mn: Annual Premium £350,000
    £4mn excess £1mn: Annual Premium £200,000
    £5mn excess £5mn: Annual Premium £125,000
    • 5 year claims history good other than 1 large loss of £750,000
    • Insurance market seeking to increase rates
    • Client believes he has excellent risk management in place
    • Interest in taking some of the risk exposure
    • Creates a captive
  • 13. PURE Captive: a case study
    Advantages:
    • Potential for underwriting profit
    • No fronting insurer required – first party insurance only
    • Over time premium can be geared to actual loss experience
    • Positive cash flow/investment income on premiums and reserves
    • Possible greater control over claims
    • Influence over policy coverage
    • Potential leverage on overlying insurers at subsequent renewals
    Disadvantages:
    • Capital requirements
    • Exposure to losses
  • 14. PURE Captive: a case study
    ACCOUNTANCY PRACTICE
    £10mn PI insurance
    £675,000 Premium Spend
    Share Capital
    £650,000
    Broker
    CAPTIVE INSURANCE
    COMPANY
    Insurer 1
    Insurer 2
    £4mn xs £1mn
    £200,000
    £5mn xs £5mn
    £125,000
    Primary £1mn
    £350,000
  • 15. PURE Captives for your clients
    Reasons why you might suggest this to your clients and the benefits for you?
    • Offering best ‘risk financing’ advice
    • Better client retention
    • A less adversarial insurance purchase
    • Stability of insurance placement
    • Remuneration?
  • 16. THIRD PARTY Captives, Why are Brokers setting up Captives?
    • Good quality business – low claims ratio
    • Underwriting profit – maximise revenue stream from Portfolio
    • Possibility of Insurers reducing commissions
    • Hedge against a hardening market
    • Pricing and cover flexibility
    • Access to reinsurance markets
  • 17. An example of a Broker Captive
    Customers
    Underwriting Risk
    Commissions
    Underwriting Input
    Insurance
    Broker/
    MGA
    Profit Commission
    Claims Input
    Insurer 1
    Insurer 2
    Insurer 3
  • 18. Commissions
    Underwriting Input
    Profit Commission
    Claims Services
    An example of a Broker Captive
    Customers
    Insurance
    Broker/
    MGA
    Insurer 1
    Insurer 2
    Insurer 3
    Agreed reinsurance arrangement
    Broker
    Captive
    Underwriting Profit
    Optional reinsurance protection, if required
    Reinsurance Programme
  • 19. An example of a Broker Captive: simple number illustration
    Assumptions on Portfolio:
    • Portfolio Size: GWP £5mn
    • Current commission: 35%
    • Historic claims experience: 30% (based on net premium)
    • No losses > £50k
    Assumptions on Captive Solution:
    • No change in upfront commission
    • Captive reinsurers the insurer for £50k eel with an aggregate limit equal to 115% of net captive premium
    • Split in net premium: Insurer 40% and Captive 60%
  • 20. An example of a Broker Captive: simple number illustration
    • Capital required for structure: £292,500
    • Return on Capital: 300%+
    • Capital can be subscribed as cash or letter of credit
  • 21. Why Guernsey?
    • Europe’s No.1 captive domicile
    • Mature financial infrastucture
    • Excellent reputation
    • Highly skilled workforce
    • Convenient location and good travel links
    • Capitalisation requirements: No solvency II equivalence

×