Now you Have a Captive What do you Do

Panellists: Traver Alexander, Research Officer, Bermuda Monetary Authority BMA Brad Adderley, Partner, Insurance Team, Appleby Gina Smith, Actuarial Services, Bermuda Monetary Authori

Now you have a captive,

what do you do?

17 June 2008, Tuesday

Panellists:

Traver Alexander, Research Officer,

Bermuda Monetary Authority (BMA)

Brad Adderley, Partner, Insurance Team, Appleby

Gina Smith, Actuarial Services,

Bermuda Monetary Authority (BMA)

William Noonan, Vice President,

Risk Management, Structure Tone, Inc

Moderator:

Khim Chia, Assistant Vice President, Business Development

Marsh Captive Solutions - Bermuda

 Now I have a captive, what do I do?

 Challenges faced by Risk Manager

 If I can start all over again, would I do it differently?

Overview of Bermuda Captive Market

Traver Alexander, Research OfficerBermuda Monetary Authority (BMA)

talexander@bma.bm

• Statutory Financial Returns

• Annual Market Survey on Captives

Administered jointly by the BMA and BIMA, the Bermuda Insurance Managers Association

* Preliminary figures for year-end 2007

• Gross Written Premiums

a) Rates of Retention

b) Percentage of Business Assumed c) Geographical Location of Risk

• Types of Insurance Coverage

a) Main Property Lines of Business b) Main Casualty Lines of Business

• Asset Composition

• Class 1 Captives

Single parent captives insuring only the risk of that parent

or affiliate

• Class 2 Captives

Single parent or multi-owner captives with allowance

to insure 3rd party risk up to 20% of GWP

• Class 3 Captives

Captives with allowance to insure 3rd party risk over

20% of GWP

Bermuda Captives: Gross Written Premiums (in USD

Class 2

Bermuda Captives: Retention Rates (2003-2007)

Bermuda Captives: Percentage of GWP Assumed from Insurance Carriers (2007)

Bermuda Captives: Geographical Distribution of

Underlying Risk Insured (2007)

Class 1 Class 2 Class 3 All Captives

All other regions

Global

Caribbean and South America Europe

North America

Bermuda Captives: Business Written (2007)

44%

2%

54%

Property Casualty Financial and Other

Bermuda Captives: Business Written, by Class

Property

Bermuda Captives: Property Business Written, by

Bermuda Captives: Casualty Business Written, by

Professional Liability Workers

Compensation Auto Liability

Bermuda Captives: Asset Composition, by Class

Investment in Affiliates

Unquoted Investments

Quoted Investments Cash

• Largest domicile in respect to gross written premiums

and captive formations

• High rates of retention

• Growing geographical diversity in the location of risk

• Casualty leads Property in insurance coverage

• Strong balance sheet positions with 2/3 of assets in cash and quoted investments

Ongoing Compliance

Brad Adderley, Partner, Insurance Team

Appleby badderley@applebyglobal.com

Companies Act 1981

• Directors, Officers and Residency

• Annual Declaration

• Dividends and Other Distributions

Companies Act 1981 / cont.

Directors and Officers

• Minimum – Directors

• Minimum – Officers

• Residency

Companies Act 1981 / cont.

Annual Government Fee

• Timing

Companies Act 1981 / cont.

Annual General Meeting

Companies Act 1981 / cont.

Annual General Meeting

Companies Act 1981/ cont Dividends and other Distributions

(a) the company is, or would after the payment be,

unable to pay its liabilities as they become due; or

(b) the realisable value of the company’s assets would

thereby be less than the aggregate of its liabilities and

its issued share capital and share premium accounts

Class 1 Class 2 Class 3

Minimum Share Capital $120,000

(General Business)

$370,000 (Composite)

$120,000 (General Business) $370,000 (Composite)

$120,000 (General Business) $370,000 (Composite)

Minimum Capital and Surplus $120,000

(General Business)

$370,000 (Composite)

$250,00 (General Business)

$6 million npw: 10%; or (c) Loss Reserve Test: 10%

Greater of:

(a) $250,000;

(b) Premium Test – First $6 million npw: 20% plus – Excess of $6 million npw:

10%; or (c) Loss Reserve Test: 10%

Greater of:

(a) $1,000,000;

(b) Premium Test – First $6 million npw: 20% plus – Excess of $6 million npw: 15%; or

(c) Loss Reserve Test: 15%

Liquidity Ratio Relevant assets must equal 75%

of relevant liabilities Relevant assets must equal 75% of relevant liabilities Relevant Assets must equal 75% of relevant liabilities

Reduction of Statutory Capital Approval by the Authority required

for any reduction in total capital of 15% or more below that included

in previous year’s financial statements

Approval by the Authority required for any reduction in total capital of 15% or more below that included in previous year’s financial statements

Approval by the Authority required for any reduction in total capital of 15% or more below that included in previous year’s financial statements

Insurance Act 1978 Dividends and Distributions

Insurance Act 1978 / cont Requirements of Controllers

• Controllers to be “fit and proper”

• Multiple controllers (at least two) of corporate vehicles

• Oversight to include non-executive directors

• Business conducted in a “prudent manner” with appropriate levels of “integrity

and skill”

• BMA shortly to publish interpretive statements regarding the minimum criteria

• BMA may cancel the registration of a registered person if it feels the minimum

criteria are not, or are no longer, being met

Insurance Act 1978 / cont Powers of Bermuda Monetary Authority

• Powers to enable BMA to investigate unregistered activity

• Persons involved protected against self-incrimination

• Legal privilege respected

• BMA can obtain a search warrant if there is non-cooperation or fear of

destruction of documents

Insurance Act 1978 / cont Powers of Bermuda Monetary Authority

BMA may exercise its powers of intervention:

– If the minimum criteria are not met

– If a person becomes a controller of a private company insurer without

BMA permission or remains as one in spite of BMA objections

• BMA may direct the removal of a controller or officer as part of its intervention

• BMA may cancel the registration of an insurer

Insurance Act 1978 - cont.

Controller

• “Controller” includes “shareholder controller”

• Obligations arise when the following thresholds of voting control are crossed:

10%, 20%, 33% and 50% of voting control of insurer or its parent company

• Various summary/ indictable offences outlined for contravention of

shareholder controller’s obligations

Insurance Act 1978 – cont Obligations of Controller

• If insurer/parent is a private company, obligation on shareholder controller

to notify BMA in advance and receive BMA’s “no objection” (prospective

permission)

• BMA must be satisfied that shareholder controller is “fit and proper”

Insurance Act 1978 / cont.

Obligations of Insurer

• Registered Person must give notice of any changes to any controller to the BMA within 45 days of the registered person becoming aware of the fact

• Company’s obligations encompass more than simply changes to

shareholder controllers - failure to give notice is a summary offence

Insurance Act 1978 / cont.

Punishment

• Sanctions imposed on controllers who continue after notice of objection

served

• BMA powers to restrict shares/order sale of shares where controllers

continue in position after similar to that described above for shareholder

controllers

• BMA can object to existing controllers of a registered person (including but

not limited to shareholder controllers) if it considers they are no longer “fit and proper”

Insurance Act 1978 / cont.

Recourse

• What may be appealed and by whom:

– Canceling of registration or directing the removal of a controller by registered

person to a tribunal

– Affected individuals may appeal in certain instances

– Notices of objection may be appealed by the person on whom the notice is

served

• Tribunals to consist of a chairman and two other members; panel of nine

persons to be appointed by MoF

• Points of law may be appealed to Court

Actuarial Considerations for Bermuda Captives

Gina Smith, ACAS, MAAA, CPCU

Assistant Director, Actuarial ServicesBermuda Monetary Authority (BMA)

gsmith@bma.bm

Agenda

• Introduction

• BMA’s Actuarial Services Team

• Actuarial Considerations for

Captives within our Regulatory

Framework

• Captives represent a significant

proportion of Bermuda’s

international insurance industry

• Diverse Bermuda market

• BMA is a risk-based regulator

• Actuarial analyses also risk-based

The Actuarial Services Team

• Director - Rick Shaw, FIAA, BSc Hons.

• Assistant Director - Gina Smith, ACAS,

MAAA, CPCU

• (Re)Insurance experience spanning:

– Consulting

– International policy and regulation

– Mergers and Acquisitions

– Property Catastrophe Pricing & Reserving

– Capital adequacy issues

The Actuarial Services Team

Our Function

Proportionality Principle

– Risk-based

– Consistent with international standards

Key Stakeholder risks

– Threaten the security of policyholders

– Threaten the overall solvency position of the company

– Threaten Bermuda’s reputation

Distinction between regulation of captives versus

commercial insurers

Actuarial Considerations Licensing & Authorizations

• Assess nature, scale and complexity of new

applicants and their related risk

• Evaluate appropriateness of key actuarial & capital adequacy assumptions

• Evaluate key issues

– Know Your Customer (KYC)

– Loss reserve specialist approvals

– Shareholder related validations

– Due diligence procedures

• Regulatory & economic capital resource analysis

Actuarial Considerations On-Sites and Compliance

• Provide on-going support to supervisory teams

• Captive Manager On-Site Programme

• Broader On-site Programme

– Start-up assessments of newly licensed entities – On-going site assessments of mature companies

• Evaluate Adequacy of technical provisions including loss reserve levels, unearned premium provisions,

premium deficiency reserves and economic capital levels

Actuarial Considerations Run-Off & Restoration

• Provide support to Restoration & Off team

Run-• Policyholder protection is foremost

priority

• Evaluation of suitability of valuation

methods for technical provisions and other balance sheet items

Actuarial Services Role Industry Consultation

• BMA – continuous review and

enhancement of framework

• Industry consultation critical to

regulatory development process

Now You Have a Captive, What Do You Do? An Owner’s View

William B Noonan, CRIS

Vice President – Risk Management

Structure Tone, Inc

Risk Manager’s Checklist

• Captive Business Plan

• Captive Administrator

• Legal / Regulatory

• Parent Company Executive Management

• Finance / Accounting / Audit / Tax

• Expectations

• Insurance Carriers

• New Programs For Your Captive

Business Plan

• Read your Business Plan again (even if for the 100th

time)

• Read your Feasibility Study again

• Do the above at intervals (90 Days, 6 Months, a year after being approved)

• Are you sticking to your Business Plan?

• Are you doing what you told the BMA you planed

to do?

• Check your ego (My Ego) An administrators “Gold”

is there experience across all facets of a captive

Take advantage of their “Lessons Learned”

Legal / Regulatory

• Does your Business plan match your license?

• Making sure all legal partners understand your

Business Plan and Feasibility Study (Captive lawyer, Parent Company General Counsel, Outside Counsel, Tax Counsel)

• Making sure everyone is working off the same page

and plan!

Parent Company Executive

Management

• Do they fully understand the Business Plan?

• After you form your Captive, have key members read the Business Plan and Feasibility study again (They may not remember what was decided a year ago)

• Make sure they understand how the Captive may

change “cash flow” requirements at your annual

renewal

• Have all Financial Reports been changed to report on

Captive performance inside your organization.

• 953 D Election, are your auditors on the same page as

you?

• Have you looked at all possible exposures and cash flow

impacts as a result of owning a captive?

• Has your organization developed a plan for any new “cash flow” requirements or the changes compared with past

requirements.

Expectations (Parent Company)

• Resist the temptation to change your Business Plan

or speed it up

• Stay the course, and speak up Make sure all those who propose change are familiar with the Business Plan and Feasibility Study, or re-acquaint them with both

• Be on the watch for the tendency of others to believe that all risk issues and exposures can be solved with the captive

think they know just because they’re an underwriter).

• Carrier “Credit and Captive Departments” Make sure

you fully understand their rules and guidelines

New Programs

• Are they in your Business Plan, and on the same time line as your Business Plan

• Does the program make sense for your Captive?

• Due diligence on the new program

• Make sure Legal, Finance, and Tax implications have been studied

• Does your Administrator have experience with this

type of program in a captive?

Closing Comments

• Do not forget to use good old “Common Sense”

• The common theme in all the advice I have received from successful captive owners is the age old advise

of “Walk Before You Run” and “Crawl Before You

Walk”.

Thank You