swan captive risk financing – a structured approach 38th annual oesai conference 25 august 2015
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SWAN
Captive Risk Financing – A Structured Approach
• 38th Annual OESAI Conference• 25 August 2015
Agenda01 Rationale for Captive Structures
– Risk spend efficiency– Risk / Cover flexibility– Comparison to no insurance
02 Practical Approach– Risk Bearing Capacity– Risk Costing– Structuring– Testing
03 Captive Structure Options– Types of vehicles and their advantages / disadvantages– Suitability testing
04 Mauritius as domicile– Local business– (South) African business– Other opportunities
05 Looking to the future
Rationale for Captive Structures
- 01
Risk spend efficiency
— Insurers are profit-driven
— Insurers require stringently controlled capital bases
— Opportunity costs in various risk avenues to insurers
— Captives (Risk finance) focused on cost of risk only
— Reduced pooling, cross subsidies
01 Rationale for Captive Structures
Risk flexibility
— Limited where reliance placed on reinsurance protection
— Full retention provides highest flexibility
— Cover of uninsurable risks and differences in conditions or limits
— Administratively complex structures easier to accommodate
— Ease of amendment
01 Rationale for Captive Structures
Captive vs no insurance— No dedicated capacity, direct impact on operating results
— Potential for double-whammy at worst possible time
— No pooling or cross-subsidies possible
— Higher (explicit) administration and cost component require economy of scale
— Potential reduction in risk management co-ordination, increasing TCoR.
01 Rationale for Captive Structures
Practical Approach
- 02
Approach – The RF Process
FinancialCapacity
RiskProfile
-RBC-Risk Appetite-Risk Tolerance
-Cost Profile-Characteristics
Retention vs Transfer
Own Data
External Data
Exposure Analysis
-Options-Limitations-Cost / Benefit
RFStructure
ConventionalMarket
-Economy of scale-Risk characteristics-Requirements
-Flexibility-Price-Security
TCo(I)R
-Update-Amend
-Optimise-Allocate-Manage-Report
02 Practical Approach
Approach – The RF Process
FinancialCapacity
RiskProfile
-RBC-Risk Appetite-Risk Tolerance
-Cost Profile-Characteristics
Retention vs Transfer
Own Data
External Data
Exposure Analysis
-Options-Limitations-Cost / Benefit
RFStructure
ConventionalMarket
-Economy of scale-Risk characteristics-Requirements
-Flexibility-Price-Security
TCo(I)R
-Update-Amend
-Optimise-Allocate-Manage-Report
Captives
02 Practical Approach
Approach – Captive Development
— Understand client & requirements
— Process- Risk Bearing Capacity- Risk Costing- Risk Structuring- Structure Testing- Captive type selection- Implement, Integrate, Manage, Update
— Important to demonstrate value on on-going basis to client
02 Practical Approach
Approach – Risk Bearing Capacity
— Estimate of ability to retain risk without compromising key plans and operations
— Effective risk budget of organisation
— Considers all risk, need to assess and evaluate comprehensive risk profile
— Need to include all sources of RBC contributions and drains
Approach – Risk Bearing Capacity02 Practical Approach
Approach – Risk Costing— Understand mathematical and operational
drivers of risk cost- Develop risk cost curves under all sensible
structural scenarios- Overlay operational and financial realities
(MPL, MFL, RBC etc.)
— Integrate with market realities
— Optimise overall TCoR
— Integrate into risk management process and reporting
02 Practical Approach
Approach – Risk Costing
Attritional Losses
Risk RetentionLosses
Excess LayerLosses
CatastropheLosses
Loss Severity
02 Practical Approach
Approach – Risk StructuringLine 2 Expected Cost Best Case Worst Case
Assets Opt (5%, 10%, 85%) 11,907,800 0 75,000,000
Maximum 150,000,000
Expected Cost 11,907,800 Expected Cost 0 Expected Cost
Best Case 0 Best Case 0 0
Worst Case 75,000,000 Worst Case 0
Stopper 75,000,000Expected Cost 9,631,900 Expected Cost 0 Best Case
Recommended Premium 18,277,600 0
Breach Probabilities
Individual 2.6% Worst Case
Aggregate 0.0% 0
Best Case 0 Best Case 0
Deductible Structure: Worst Case 34,791,700 Worst Case 0Inner 45,000,000
Expected Cost 57,872,000 Breach Probability 5.3%
Best Case 12,300,700 Worst Case 129,467,300
No Limit
Aggregate
02 Practical Approach
Approach – Risk Structuring
IOP
Current SIR
Retained
Transfer
RatiosP1 – 2.01P2 – 1.47P3 – 0.997 (IOP)P4 – 0.481P5 – 0.345
02 Practical Approach
Approach – Risk Structure Testing
RBC %
02 Practical Approach
Approach – Risk Structure Testing02 Practical Approach
Captive Structure Options
- 03
Approach – Captive Type Selection
Low High
Complexity, Flexibility
Cost
ContingencyPolicy /
RAC
PCC
Group / MutualCaptive
InternationalCaptive
DomesticCaptive
03 Vehicles & Structures
Approach – Captive Type Selection
Considerations- Premium volume & Risk exposure- Risk complexity, nature of (insurance) liabilities- Diversification / Concentration of Risk- Relative costs, including risk transfer costs- Planning horizon- Options available- Existing skills / cost of outsourcing- Capital requirements- Governance requirements
03 Vehicles & Structures
Approach – Captive Type Selection
Suitability testing- Is a structure possible that minimises TCoR?- Is the criteria for minimisation of TCoR defined and understood?- What structural options are available and what are explicit costs of each?- Does retention structure create sufficient premium to generate economies-of-scale on frictional costs?- Is market efficient / hardening / softening?- Does sufficient access to (re)insurance protection exist?- Options available- What internal capabilities exist? Is suitable training / recruitment possible?
03 Vehicles & Structures
Mauritius as domicile
- 04
Mauritius as domicile
Regulatory Environment- Dedicated PCC legislation- Pro-(cell)captive solvency and administration
requirements
Geographic Location & Economic Environment- Proximity to (South) Africa, India and Pacific Rim- Small time differences- Stable socio-political environment- Currency flexibility
Cost & Expertise- Frictional expenses lower than many domiciles- Significant expertise available locally or with
relative ease
04 Mauritius as domicile
Mauritius as domicile
Local Opportunities (on-shore insurers) - Limited economy
- Some potential for PCC / Mutual structures
(South) African Opportunities- Significant spread of multi-national operations
(Africa & Pacific Rim)- Tax and other treaties- Reinsurance regulation under SAM (solvency relief)
Other regions- Multi-national companies in India, Malaysia &
Pacific Rim- Internet / Virtual & related companies
04 Mauritius as domicile
Looking to the future
- 05
Looking to the future• Clients and risks are becoming more sophisticated
and complex, necessitating specialist input in order to manage their TCoR efficiently.
• Governance requirements in most countries require risk financing to be sensibly structured within relevant framework of parent to be efficient, compliant, transparent and properly integrated.
• Captives are a powerful business tool but should be developed and managed as any other venture and held to same requirements to remain relevant within company.
05 Looking to the future
Thank you
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