What brokers need to know about Captives<br />BIBA 2011, fringe session, Wednesday 11th May<br />Mike Johns<br />Alternati...
Guernsey<br />
Guernsey’s finance industry<br />•  Insurance, Banking, Funds and Trust<br />•  No.1 European Captive Domicile<br />•  675...
Presentation agenda<br />•  What is a Captive?<br />•  The different types<br />•  How and why are Captives used?<br />•  ...
What is a Captive?<br />•  An insurance company<br />•  Usually formed for a specific purpose, primarily self insurance<br...
Captive Insurance Structures<br />Reinsurance Captive<br />Direct-writing captive<br />Ownership<br />Parent<br />Subsidia...
Illustration of how Captives are used<br />ownership<br />REINSURANCE CAPTIVE<br />DIRECT-WRITING CAPTIVE<br />ownership<b...
Types of Captive facility<br />•   Wholly owned company (subsidiary)<br />•   PCC Cell<br />•   ICC Cell<br />
Protected Cell Company Structure<br />CELL A<br />THE<br />CORE<br />CELL D<br />CELL B<br />CELL C<br />
How and why are Captives used?<br />PURE Captives<br />•  Used by your clients as a mechanism to manage self insurance<br ...
How and why are Captives used?<br />THIRD PARTY Captives<br />•  Can be used by brokers, MGAs or clients <br />•  A way of...
PURE Captive: a case study<br />•  Accountancy Practice purchases PI cover<br />•  £10mn limit purchased from the traditio...
PURE Captive: a case study<br />Advantages:<br />•  Potential for underwriting profit<br />•  No fronting insurer required...
PURE Captive: a case study<br />ACCOUNTANCY PRACTICE<br />£10mn PI insurance<br />£675,000 Premium Spend<br />Share Capita...
PURE Captives for your clients<br />Reasons why you might suggest this to your clients and the benefits for you?<br />•  O...
THIRD PARTY Captives, Why are Brokers setting up Captives?<br />•  Good quality business – low claims ratio<br />•  Underw...
An example of a Broker Captive<br />Customers<br />Underwriting Risk<br />Commissions<br />Underwriting Input<br />Insuran...
Commissions<br />Underwriting Input<br />Profit Commission<br />Claims Services<br />An example of a Broker Captive<br />C...
An example of a Broker Captive: simple number illustration<br />Assumptions on Portfolio:<br />•  Portfolio Size: GWP £5mn...
An example of a Broker Captive: simple number illustration<br />• Capital required for structure: £292,500<br />• Return o...
Why Guernsey?<br />•  Europe’s No.1 captive domicile<br />•  Mature financial infrastucture<br />•  Excellent reputation<b...
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Biba fringe session 2011

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Biba fringe session 2011

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

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