Captive Insurance Basics

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Captive Insurance Basics

  1. 1. Basics of Alternative Risk Financing and Captive Insurance Strategies 1
  2. 2. Questions to Ask Prior to Selecting Risk Financing Strategy • What is your risk appetite? • How diverse is your Company’s operations? • How strong is your Company’s Financial Statements (Cash Flow)? • What are the State Insurance Laws? 2
  3. 3. What is Captive Insurance? • A subsidiary formed to insure the risks of its parent and affiliates. • A captive is sometimes owned by and insures more than one parent. 3
  4. 4. Why Form a Captive? • Allows the Parent company to maintain control of their insurance program during hard and soft market cycles – Greater control of risk management program – Greater access to reinsurance markets – More flexibility with insurance coverages – Investment income opportunities – Stability of the price cycle 4
  5. 5. Which Type of Captive Should I Form? • What types of coverage does my client require? • Is my client able to purchase insurance in the commercial market? • How many states does my client operate in? • What are the State Insurance Laws? 5
  6. 6. Captive Insurance Structures • Pure captives • Group captives - association, risk retention groups • Rent-A-Captives / Leased capital facilities • Protected Cell Captives 6
  7. 7. Basic Illustration of a Direct-Writing Pure Captive Insurance Program Captive Owner(s) / Insured(s) Premium $ Paid Loss $ Covered Claim Excess Insurance Excess Loss Premium $$$ Reimbursement $$$$ Captive Insurance Company Loss Reimbursement $ Excess Insurance Company Reinsurance Premium $ Reinsurance Company 7
  8. 8. Captive Structures • Pure Captive – Insures the risk of its Parent, affiliates, or companies that have a working relationship with the Parent Company – Provides insurance or reinsurance for all lines of insurance – Licensed in State of Domicile and non- admitted in all other states 8
  9. 9. Pure Captive Structure Parent Company Insured is parent, subsidiaries, affiliates or companies that have a business relationship with Parent Company Fronting Carrier (Could be RRG) Admitted Insurer in all 50 states, provides -or- policy to insured Pure Captive Insurer Provides direct insurance or reinsurance. Excess Insurer Reinsurer / Retrocessionaire 9 (Insures above Captive (Reinsures Pure retention) captive)
  10. 10. Captive Structures • Risk Retention Group – Insures the risk of its members – Provides insurance or reinsurance for liability lines of insurance only – Licensed in State of Domicile and registers in all other states – Able to provide direct coverage in every state registered 10
  11. 11. Risk Retention Captive Structure Members Members must be engaged in any related, similar or common business, trade, product, services, premises or operations. Risk Retention Group Provides direct insurance to its members in all 50 states after registering with each state. Can only provide liability insurance. Reinsurer (Could also be pure captive, rent-a-captive or risk retention group) 11 Provides reinsurance excess of RRG’s retention
  12. 12. Captive Structures • Association Captive – Insures the risk of its members – Provides insurance or reinsurance for all lines of insurance – Licensed in State of Domicile and non- admitted in all other states 12
  13. 13. Association Captive Structure Member Organization Made up of any legal association of individuals, corporations, partnerships, or associations, except labor organizations Fronting Carrier Admitted Insurer in all 50 states, provides -or- policy to insured Association Captive Insurer Provides direct insurance or reinsurance. Reinsurer / Retrocessionaire 13 (Reinsures Association Captive)
  14. 14. Captive Structures • Rent-A-Captive – Formed by a Sponsor • Some states allow an Agency to Sponsor • Some states allow only Insurance Company to Sponsor • Some states allow any organization to Sponsor – Provides insurance or reinsurance for all lines of insurance – Licensed in State of Domicile and non- admitted in all other states 14
  15. 15. Rent-A-Captive Structure Sponsor Varies by Domicile – either insurance company, captive insurance company or any entity that is approved by the commissioner to provide all or part of the capital and surplus required by applicable law Fronting Carrier (Could be RRG) Admitted Insurer in all 50 states. Issues policy to be reinsured by Cell Cell A Cell B Cell C any entity, partners, any entity, partners, any entity, partners, or joint venture or joint venture or joint venture partners, or members partners, or members partners, or within the same within the same members within the corporate family of corporate family of same corporate the entity that are the entity that are family of the entity insured by a rent-a- insured by rent-a- that are insured by captive captive a rent-a-captive Reinsurer Reinsures each participant (protected cell) of the Rent-A- 15 Captive
  16. 16. Capital & Surplus Requirements Domicile Pure Group Association Agency Rental AZ $250k $500k $500k $1m DC $100k $100k - $100k - $100k – 300k 300k 300k MT $250k $500k $750k N/A N/A NV $250k $500k $600k $750k SC $250k $500k $750k N/A $1m VT $250k $500k $700k $500k Domicile Class Class 2 Class 3 Class 4 Class 5 1 HI $100k $250k $500k - $750k $1m TBD 16
  17. 17. Premium Tax Table - Direct Domicile Minimum $1-20M $20-40m $40-50m +60m AZ None None None None None MT $5,000 0.40% 0.30% 0.20% 0.075% NV $5,000 0.40% 0.20% 0.075% 0.075% SC $5,000 0.40% 0.30% 0.20% 0.075% VT $7,500 0.38% 0.285% 0.19% 0.072% Domicile Minimum $1-25m $25-50M $50m+ DC $10,000 0.25% 0.15% 0.05% RRG $7,500 all other HI None 0.25% 0.15% 0.05% 17
  18. 18. Premium Tax Table - Reinsurance Domicile Minimum $1-20M $20-40m $40-60m +60m AZ None None None None None MT $5,000 0.225% 0.15% 0.05% 0.05% NV $5,000 0.225% 0.15% 0.025% 0.025% SC $5,000 0.225% 0.15% 0.05% 0.025% VT $7,500 0.214% 0.143% 0.048% 0.024% Domicile Minimum $1-25m $25-50M $50m+ DC None 0.25% 0.15% 0.05% HI None None None None 18
  19. 19. Application and Annual Fees Domicile Application Certificate Annual Other Fee of Renewal Fees Authority Fees Fee AZ $75 $1,000 $5,500 $100 DC $500 $300 $300 Misc HI $1,000 $300- $300-1,000 Misc $1,000 MT $200 $300 $300 Misc NV $500 $300 $300 Misc SC $200 $300 $300 Misc VT $200 $300 $300 Misc 19
  20. 20. Review and Evaluation Issues • Financial Implications – Funding Sources – Risk Retention / Transfer • Operational Considerations – Servicing Requirements – Captive Management • Regulatory Implications – Domestic and International 20
  21. 21. How to Establish a Captive • Captive Consultant – Feasibility of Captive • Actuary – Review of Loss History • Domicile Legal Counsel – Assist with Domicile Law 21
  22. 22. Formation and Implementation Process • Introductory Meeting with Regulator • Application and Business Plan Filing • Formation and Licensure • Ongoing Monitoring 22
  23. 23. Introductory Meeting with Regulator • Meeting with Domicile with Regulator • Present and discuss captive plan • Provide information about parent organization • Receive “yes” or “no” from Regulator 23
  24. 24. Application and Business Plan Filing • Captive Manager works with service providers and captive owner to prepare Application • Includes – Domicile specific application – Business Plan – Pro-Forma Financials – Actuarial Report – Biographical affidavits – Service Providers, Officers and directors – Copies of Policies to be issued – Miscellaneous 24
  25. 25. Formation and Licensure • Captive Manager works with legal counsel • Legal counsel prepares – Articles of Incorporation – By-Laws • Once application approved by Regulator, Insurance Department issues Certificate of Good Standing • Legal counsel files with Business registration department for business name • Parent Organization capitalizes captive (LOC or Cash) • Legal counsel files approved Articles and By-laws along with license fee and any other docs with Insurance Commissioner • Insurance Department issues Certificate of Authority 25
  26. 26. Ongoing Monitoring • Compliance with Approved Business Plan • Compliance with Domicile rules and regulations • Compliance with Domicile Investment laws • Federal Income Tax • Annual Filings – Audit (GAAP or SAP) – Actuarial – Domicile specific forms • Examinations • Annual Meeting Requirement 26
  27. 27. Where to find information on Captive Insurance • Captive.Com - www.captive.com • National Risk Retention Association – www.nrra-usa.org • Captive Insurance Companies Association – www.captiveassociation.com • Captive Insurance Company Reports – www.irmi.com • Risk Retention Reporter – www.rrr.com 27

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