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Should a Diocese form a captive?
Kevin Heffernan Sr VP ArtexTim Perr Managing Principal, CEO Perr & Knight
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Should a Diocese have a captive
Types of Captives– Pure (Single Parent) Captive– Group Captive– Risk Retention Groups
Captive Structure and ApplicationsMarket TrendsCaptive Feasibility StudyOperating a Captive Insurance Company
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What is a Captive
A Captive Insurance Company is
An insurance company owned and operated by its member(s) for the benefit of those member(s)A licensed insurance company recognized as an admitted carrier only in its domicileInsures or reinsures the risk of its owner(s) or unrelated parties of their choosing
Shareholders
Business Captive
Fronting CarrierFronting Carrier
Insurance Premiums
Insurance Coverage
Basic Captive Diagram
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Benefits of a Captive
Minimize Insurance Cost
Improve Cash Flow
Wealth Accumulation
Control Risk
Reduce Insurance CostsCapture Underwriting ProfitPricing StabilityPurchase Based on Need
Greater Control Over ClaimsIncreased CoverageIncreased CapacityUnderwriting FlexibilityAccess Reinsurance MarketIncentives for Loss Control
Retain Premium DollarsTax BenefitsInvestment IncomeAdditional Profit Center
Estate PlanningAsset GrowthAsset Protection
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Pure Captive – Single ParentOwned by one company – parentInsures or reinsures risk of the parent
Group CaptiveOwned by two or more companiesInsures or reinsures risk of the group
Risk Retention GroupsEstablished under federal lawCan operate in all 50 states; insureds must be ownersCan write only liability risk
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Pure Captives
Insures the risk of an owner and it subsidiaries. traditionally used by large Fortune 2000 companies
Client is in control of the operation, lines of coverage, limits and domicile location
Allows for some direct writing of policies with access to the reinsurance market to follow form
Captive surplus can be used by owner as it needs: Stabilizing premiums in a hard market Increasing retention levels
Insuring new lines or expanding coverage on current lines
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Captive Structure
Diocese can establish not‐for‐profit insurance companies in some domiciles‐ including VT, DC, SC and HI.
The Diocesan (not‐for‐profit) captive can receive 501(c) 3 status, which makes it exempt from federal income tax.
The Diocesan Captive can build surplus in its captive and not have to commingle its insurance funds with those designed for programs.
The captive can be used similarly as traditional captives to smooth premiums or cover difficult to place risk.
Larger diocese can form a pure captive, offers greater flexibility than group captives.
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Move the SIR portion of their program into a captive, formalizing the SIR process by creating premiums charged by the captive.
Risk management cost can be shifted to the captive. Captive is a separate entity from the diocese and its surplus
grows independently from the diocese. Captive can access reinsurance markets, FET on reinsurance
placement is 1%. Coverage not found or hard to place coverage can be written
in the captive. A captive can access TRIA the Federal backstop.
Employee Benefits in a Captive.
Captive Applications
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Employee Benefits
Recent years has seen a growth in employers reinsuring benefit plans to their captive.
The benefit to the captive is its risks are diversified.
Diocese are exempt from ERISA so prior approval from Depart of Labor (DOL) to use a captive for employee benefits does not need to be part of the captive plan.
The discussion of employee benefits in a captive should consider the comprehensive use of a captive in an employers ERM.
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Fronting Required
Admitted insurance policies neededRated insurers needed (i.e. loan agreements)
F r o n t e d C a p t i v e S t r u c t u r e
C a p t i v e O w n e r / I n s u r e d
F r o n t i n g C a r r i e r
C a p t i v e I n s u r e r
R e i n s u r e r ( t h i r d p a r t y )
C l a i m a n t1 ) P r e m i u m $
2 ) R e i n s u r a n c eP r e m i u m $
C a t a s t r o p h e P r o t e c t i o n
P r e m i u m $ s
F r o n t i n g C a r r i e r R e t a i n s :- F r o n t i n g F e e- B o a r d s , B u r e a u s & T a x e s- E x c e s s C o v e r a g e P r e m i u m ( o p t i o n a l )
4 ) C l a i m $
5 ) C l a i m sR e i m b u r s e m e n t s
C a p t i v e R e t a i n s :- U n d e r w r i t i n g P r o f i t- I n v e s t m e n t I n c o m e- C a s h f l o w “ f l o a t ”
3 ) C o l l a t e r a l( L O C , T r u s t A c c t )
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Fronting Not Required
Admitted insurer not neededRated insurer “paper” not needed
$
Policy Coverage
Loss Payments
Premium Payments
Insured Captive
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Should a Diocese Form a Captive?
Actuarial Perspective
Tim PerrManaging Principal & Consulting ActuaryPerr&Knight
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How About a Captive?
Flexibility – You Choose the StructureSelf‐Insured RetentionsDeductiblesCoinsuranceLimits and Excess AttachmentsCreative Coverages (e.g., iPads)
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How About a Captive?
Surplus ProtectionCaptives are regulated by domiciliary stateCommissioner must approve all surplus releasesDouble edged sword
• Protected against debtors/claimants• Can be difficult to access
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How About a Captive?
Claims Trends – Workers Compensation Medical claim costs increasing moderately Medicare set‐asides (MSAs) significant expense Indemnity (lost time) claims costs flat as wages stagnant during
recession Claims frequencies down offsetting most claims cost inflation Costs expected to increase moderately going forward
• Claim frequency stabilizes• Wage inflation returns• Continued medical cost inflation
California approves 37% increase on 1/1/2012 FWIW, California Diocesanal experience does not support that
increase Marketplace: Moderate price increases but continued availability
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How About a Captive?
Claims Trends – Auto & General LiabilityBenign claim frequency and severity trends industry‐wideAuto claims costs have increased due to medical inflation however increase has been neutralized by decreasing claim frequency – less car accidents
Marketplace: Stable prices and widespread availability
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How About a Captive?
Claims Trends – Employment Practices LiabilityModerate increases in both claim frequency and severity over past 5 years in Diocesanal experience
Much higher trends in non‐church businessPerhaps correlated with recessionDiocesanal experience appears to have stabilized in 2011Marketplace: Price increases expected on all Management Liability Coverages (EPLI, D&O, Crime, Fidelity)
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How About a Captive?
Claims Trends – Sexual Misconduct LiabilityOlder claims
• Very few emerging any more• Most barred by statute• Low frequency/high severity
Newer claims• Tend to involve non‐clergy• Much lower settlements• Moderate frequency
High Political Risk• Quarry case in California• Law changes that extend statute of limitations
Marketplace: Meaningful coverage very difficult to find
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How About a Captive?
Claims Trends – PropertyCurrent value inflationCatastrophes upUnderlying trends not changing much but prices areExpect higher retentionsMarketplace: Much higher rates, restrictions on coverage and higher retentions
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How About a Captive?
Other TopicsHealth Insurance
• PPACA – aka Obamacare• Captive can be used as reinsurer of Church Program
Property• Single parent captive (tax exempt) can be used to spread risk across years
• Allows Diocese to smooth costs through market cycles
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How About a Captive?
What you should expect from your ActuaryIndependence and honestyGood communication skillsCross‐discipline knowledgeExperience
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Operating a Captive
A captive is a regulated insurance company and the company follows the regulation of your domicileThe captive should maintain a active business plan to guide the board of directors
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Items to Review Before and During Feasibility Study
Long‐term commitmentAdverse developmentCommitment of capitalDomicile taxesCaptive fixed operating costs
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The Feasibility Study
Key ObjectiveA key component of the feasibility study is to help an investor understand their return on investment
Base DataThis objective is best achieved if the captive investor has its own loss experience to use in the study
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Feasibility Study Results
Analysis of retention scenarios or loss projectionsProgram structureCapital and collateral requirementsProject performanceDomicile analysisTax considerations
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The Captive Formation Process
Business Plan Forecasts of Annual Expected LossesProgram Structure (Premiums, Limits, Capitalization)Proforma Captive Financial Statements
Selection of Service ProvidersCaptive Manager LegalAuditorsActuarial
Preliminary Meeting with Domicile Regulators45 to 60 day Process (Most Major Domiciles)
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Costs Related to Forming A Captive
Feasibility Study or Plan$30,000 ‐ $50,000, plus tax planning
Ownership Cost $100,000 ‐ $200,000Domicile taxesCaptive management feesAudit feesDomicile meetingsCost of collateralActuarial fees Legal feesPolicy issuance cost
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