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Expanding Beyond YourOriginal Captive Business Plan

Courtney Claflin, University of California

Peter Gerken, Steel City Re

Brian Johnson, Bartlett Actuarial Group, Ltd

Moderator:John Ferrara, Ernst & Young

August 8, 2017

© 2017 VCIA; Speaker materials used by VCIA under license.

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Polls

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Live Content SlideWhen playing as a slideshow, this slide will display live content

Poll: Is your captive focused on one item?

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Poll: What is the purpose of your captive?

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Poll: What are the best words to describe why you have a captive?

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Poll: What are the biggest roadblocks to expansion of your captive?

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Fiat Lux

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University of California System

• 10 university campuses• $33 Billion Annual revenues• 5 academic medical systems• 3 national laboratories• 280,000 employees• 375,000 students• Sports teams, stadiums, airplanes,

airports, foreign … everything imaginable

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Fiat Lux Structure 2012- 2016

UC Regents

Fiat Lux Board of Directors

Fiat Lux

Issue deductible reimbursement policies- 5 lines of cover: Work comp GL/AL Medical malpractice Employment Practices

Note: Policies issued for top 50% of self insured retentions Results = $25 million premium/ $50 million in assets

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Overview of Captive Utilization Philosophy

Retained Risk Finance

Risk Transfer Rate Arbitrage

Access to Capacity

3rd Party Utilizations

Bus

ines

sPu

rpos

e

Governance around retained risks

Enhancing risk management efforts

Better use of capital to retain risk than transfer

Harmonization of risks across global portfolios

Reducing cost of risk transfer

Reinsurance market cost of risk transfer is less than retail equivalent

Managing TCOR Recapturing Ceding

Commission

Transferring risk to alternative forms of capacity, which may not be otherwise accessible in commercial retail market

Accessing profitability imbedded in insurances sold to affiliates / consumers / partners

Creating ‘stickiness’ for core product offerings

Further penetration into consumer / partner / affiliate wallets

Exam

ples

Deductible buy-down Participation in excess

programs Fronted global

programs Multinational benefit

pooling

Reinsurance pass through

Excess Re placements

Integrated risk programs

Multinational benefit pooling

Credit risk transfer ART solutions Cat bonds Integrated aggregates Parametric triggers Terrorism pools

Consumer facing insurance programs

Forced placed insurances

Affiliate business Agency captives

Capital Efficiency: Bringing together correlated and non-correlated risks to benefit from severity risk diversification effect Harmonizing and aggregating global and individual risk programs to maximize risk transfer market

leverage and diversify market concentration in risk portfolios 12

Fiat Lux Structure- 2016 Current

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• Sponsored new captive- UC Health RRG, A Reciprocal Risk Retention Group

• Insure 25 lines of cover for UC• Direct reinsurance placements vs. excess (wholesale vs.

retail)• Quota share arrangements with reinsurers• Provide 3rd party reinsurance to UC Health RRG• Provide stop loss reinsurance (health) to 375,000

individuals• 100,000 student health plan• 275,000 staff/faculty plan

• $980 million premium/ $1.4bn assets/ $150m unrestricted net position

Fiat Lux Structure- 2016 Current

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Fiat Lux Structure - 2017

UC Regents

UC Health RRG AIFUC Health RRG SAC

Fiat Lux Board of Directors

UC Core Cell Company

Fiat Lux

UC VoluntaryLife & DI

UC Health RRGA Reciprocal Risk Retention Group

Cal State Cell Co.

? Opportunities

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QUESTIONS

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Reputational Risk

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Measuring Reputation Risk

Monitoring & Managing Reputation Risk

Mitigating and Transferring Reputation Risk

Agenda

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Assuring Reputation to Create Value

Reputation can elevate and enhance the enterprise value of an organization

Reputation must be managed at a strategic level to signal stakeholders

Benefits to expanding the captive business plan Strategic relations with capital markets, regulators,

and customers Break down operational silos within enterprise Financing retained risk A Risk Management tool

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Presenter

Presentation Notes

Expanded sales, shorter sales cycle, lower credit costs, investor behavior, protect against activist investors and proxy fights

Measuring Reputation Risk

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Measuring Reputation RiskSteel City Re’s Reputational Value Metrics

Heart health:

Blood pressure (mm/Hg) Exercise tolerance

(HR/mph/time) Serum cholesterol

(mg/dL) Body mass index (kg/m2)

Reputation health:

sales volume, cycle time, pricing

HR costs cost of credit, credit

protection investor behavior regulatory behavior

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Presenter

Presentation Notes

, Steel City Re measures a company’s reputational health indirectly through real-time publicly-available measures of the loyalty of customers (sales volume, pricing, and sales cycle time), engagement of employees and such; and from these data after normalization generates parameters that predict a company’s reputational health risk.

Foundation• 15 years of actuarial data• 5.5 million data points

Deployment• Hundreds of captives• Hedge Fund x 9 years• KRMA, Exchange traded

fund• Repuvar a DJI/CME Index• RepSPX outperforming

S&P500 340%!

Authority and CredibilitySteel City Re’s Reputational Value Metrics

0.00

1000.00

2000.00

3000.00

4000.00

5000.00

6000.00

S&P500 RebasedRepuSPX

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Monitoring & Managing Reputation Risk

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Reputation Assurance is a Risk Management Tool

Reputational Value Metrics (RVM) measure both upside value as well as downside risk

RVM provides an almost real time measure, not available anywhere else in financial or insurance services

Metrics are shared upfront at time of underwriting as well as multiple times during the policy term

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Presenter

Presentation Notes

The classic role of captives is Risk Management

Risk: Losses Typically Underestimated During EventBecause reputational risk has a long-lasting emotional component

5.2%

23.7%

3.8%

13.3%

0.0%

11.8%

0%

5%

10%

15%

20%

25%

Initial Expectation Final Expectation

3-Year Average Initial Indemnification Experience (Steel City Re)

Market Cap Loss Sales Loss Net Income Loss

20 wks

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Presenter

Presentation Notes

12. Losses typically Underestimated One of our key observations from these parameters is that stock price is not a very good predictor of reputational risk, especially at the onset of an event. Data from more than 6000 events of the past few years indicates that the severity was initially grossly underestimated.

Risk: Exploding Cost of LossBecause reputational risk exacerbated by baseline community anxiety and anger

100%132%

259%227% 231%

461%

2011 2012 2013 2014 2015 2016

Huge

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…directors are being targeted and replaced …

The risk is now personal

Source: AgendaWeek, 6 Feb 2017

TOP BOARD ISSUE

Targeted ReplacedCMG 33% 0%

DB 20% 20%MYL 23% 0%VRX 55% 55%VW 100% 30%

WFC 7% 7%YHOO 82% 0%

Average 46% 16%

Risk: Personal at Level of Director and OfficerBecause emotions can be mitigated with sacrifice

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Mitigating and Transferring Reputation Risk

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Comparative Insurance Market Solutions

AIG Munich Re Steel City Re

Parameter Indemnified cost of PR

Estimated loss of net income

Parametrically determined % limits

Value of parameters After, as allowed After, forensically

determined Before

Use of funds PR services Unrestricted Unrestricted

Instrumental Value** $500K-$25m As needed $25-$100m

Strategic Value No No Tolerance (Emotions)

Premium** >2% ROL As needed 0.5%-4.9% ROL

**Significant variance/flexible structures29

Dealing with Emotional Features of Reputation RiskReputation Assurance: Signaling quality and integrity (like a warranty)

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Presenter

Presentation Notes

21. Art of Signaling Art of Signaling. Understand the mind of the stakeholder. At left, the type of stakeholder for whom a sign needs to convey “good governance practiced” At right, the type of stakeholder from whom a sign needs to convey, “this captive is actuarially sound with well supported pricing and policy structures.”

Steel City Re Parametric Risk Transfer:% Limits

ChangingParameter

Baseline = 2𝜎𝜎

Time=20 weeks

Indemnification

Loss Gate = n𝜎𝜎

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Presenter

Presentation Notes

Qualitative: A business process fails and it receives adverse publicityProcesses and media must be scheduled.Quantitative: A sustained material drop in the RVM If RVM drops below the first Loss Gate, an insured will be indemnified for 20% of the limits; below the fifth Loss Gate, the insured will be indemnified for 100% of the limits. Covered Loss shall not exceed the lesser of the Actual Loss sustained by the Insured or the Policy Limit.

Triggers and Losses

Loss Gates are multiples of standard deviations of the Named Insured’s historic RVM volatility

Qualitative: A business process fails and it receives adverse publicity

Processes and media must be scheduled

Quantitative: A sustained material drop in the RVM

If RVM drops below the first Loss Gate, an insured will be indemnified for 20% of the limits; below the fifth Loss Gate, 100% of the limits

Covered Loss shall not exceed the lesser of the Actual Loss sustained by the Insured or the Policy Limit

0.45

0.60

0.75

0.90

1.05

2/22/08 4/9/09 6/4/10

RVM Loss Gate 1 Loss Gate 2

Loss Gate 3 Loss Gate 4 Loss Gate 5RV

M (G

U)

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Presenter

Presentation Notes

Qualitative: A business process fails and it receives adverse publicityProcesses and media must be scheduled.Quantitative: A sustained material drop in the RVM If RVM drops below the first Loss Gate, an insured will be indemnified for 20% of the limits; below the fifth Loss Gate, the insured will be indemnified for 100% of the limits. Covered Loss shall not exceed the lesser of the Actual Loss sustained by the Insured or the Policy Limit.

Money Talks/Actions SpeakAssuring Reputation

Indemnifying Going-forward Losses

$100 million Line Slip –Tokio Marine Kiln

1st party indemnifications for companies, directors & officers

Parametric with rigorous pricing and underwriting support

Flexible; excellent with captives

Reversing Emotional Charges

“……communicates the quality of governance…absolving board members ….”

NACD Directorship, Jan/Feb 2016

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Presenter

Presentation Notes

21 Money Talks Today only Steel City Re offers a captive-friendly parametric solution that both mitigates the emotional charges of disappointed stakeholders and indemnify going-forward losses. At right, By signaling the presence of qualifying governance, risk management, and compliance, Steel City Re’s solution, as described in NACD’s board-level magazine, Directorship, “……communicates the quality of governance…absolving board members ….” This underpins the expressive force and proactively helps mitigate or reverse emotional charges. At left, Indemnification is backed by Tokio Marine Kiln. The parametric policy is triggered by a failure of a scheduled governance, risk management or compliance process, evidenced by both negative media, and a 20-week sustained drop in the Insured’s parametric measure of reputational health.

Captive Insurance Case Studies

Health Services Energy Services Financial ServicesSize $20M $90M $1B

Risk Quality & Safety Safety & Sustainability Ethics (Liquidity)**

Pricing 2.1-4.2% Prox / 0.56%-1.0% Remote

8.5%-16.5% Prox/ 2.2%-4.2% Remote

4.9%-9.7% Prox/ 1.3%-2.5% Remote

Limits $3M $8M $50M

Triggers 6.8% Loss in Revenue

15.8% Loss in Revenue 9.1% Loss in Revenue

Capital Prem=3.11% ($93K);Cap+$31K

Prem=12.2% ($976K); Cap+$325K

Prem=7.13% ($3.5M); Cap+$1.2M

**OCC-defined regulatory risk

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Presenter

Presentation Notes

Fit: There is not situation where it is not a good fit – risk finance and risk management Pricing: Quantify the risk Limits: Where to attach, co reinsur Capital required premium 2-3x Policy limit of $8m Premium $976,000 cost of risk (12% ROL) Capitalized $325K ; if no surplus: Loss Gate 1 $1.6m Existing – property risk…severity type of loss. Larger number. Optics for regulatory. Belly up severity. Impaired that has regulatory implications Form – Single parent as opposed

Captives can bear up to 100% of the risk

Available for public or privately owned

Modify RVI policy language for desired cover and triggers (no Index)

Risk finance and loss absorption capacity

Quantification drawn from SCRe actuarial data and expertise

Provide comfort to regulators and tax authorities

Underwriting services provided

Key domiciles have been briefed

Underwriting and Pricing Support for Captives

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Manage emotions Measure impact objectively Strategically signal

stakeholders Enable Risk Management

on an almost real time basis

Enable risk financing and Indemnification of going-forward losses

Measurement

Going ForwardEmotions

Reputation-Expanding the Captive Business Plan Summary

Limited Commercial Options**

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QUESTIONS

37

Actuarial Considerations

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Increased occurrence and/or aggregate limits

Expansion of manuscript policies

Generally requires loss history Gross losses Maybe more than captive time period

Expansion of existing coverage(s)

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Enterprise Risk Management coverages Disruptions to revenue Outside occurrences that require additional

expense Disruptions to business continuity Loss history preferable but not necessarily

required

Commercial coverages Large deductible reimbursement Excess covers Catastrophic covers Loss history generally required

Current uninsured coverage(s)

40

Trended ultimate loss projections Industry statistical data Monte Carlo simulations Commercial insurance filings Other repositories of data / statistics

Generally utilized actuarial methodologies

41

QUESTIONS

42

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