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Captive Board Members:

Playing a Leading Role

Panelists:

Tyrone Garrett, Housing Authority RRG

Stephen Crim, C&S Specialty Underwriters, LLC

Judy Ertel, Dynamo Insurance Company, Inc.

Moderator:

William D. Riley, Paul Frank + Collins P.C.

August 9, 2016

© 2016 VCIA; Speaker materials used by VCIA under license.

Agenda

• Review of legal governance

requirements

• Introduction of panelist case

studies• Housing Authority RRG, Inc.

• American Safety RRG, Inc.

• Dynamo Insurance Company, Inc.

• Discussion of governance

experiences

4

5

6

7

General corporate law principles

Captive-specific requirements

Risk retention group governance standards

8

Captives must comply with the first two layers;

RRG’s must comply with all three

Multiple Layers of Governance

9

General corporate

governance requirements

Standard functions of directors

• Decision-making• Broad matters of policy, strategy,

governance

• Appoint officers and management

• But not day-to-day operational matters

• Oversight• Ensure the continued financial health

of the corporation

• Make sure corporation is compliant

with legal requirements and ethical

principles10

Duties of directors

• Duty of loyalty• A director must act in a manner he/she

reasonably believes to be in the best

interests of the corporation, rather than

in his/her own personal interests

• Duty of care• A director shall discharge his/her

duties with the care that an ordinarily

prudent person in a like position would

exercise under similar circumstances

11

Duty of loyalty

• Prioritize the interests of the

captive’s stakeholders when

making a decision

• Do not use the position to gain

personal advantages

• Disclose conflicts of interest

• Abstain from voting when he/she

stands to gain personally

• Avoid usurping corporate business

opportunities

12

Duty of care

• Be reasonably informed before

making a decision

• Consider risks and implications of

decisions

• Can rely on information from officers

and professional advisors as to

matters for which they are reasonably

believed to be reliable and competent

• Be engaged

• Regularly attend meetings; ask

questions; review materials; stay

educated13

14

DIRECTORS

• Appoint officers and

management

• Grant authority and

provide direction to

management

• Set limits upon

management

• Receive regular

reports needed to

conduct oversight

MANAGEMENT

• Exercise authority

granted by directors

• Remain within limits

of authority

• Provide input to

board to allow for

further direction

• Regularly report to

board to allow for

conduct of oversight

Directors vs. Management

15

Captive insurance-specific

governance requirements

Captive board requirements

• Minimum of three directors

• Minimum quorum: 1/3

• Directors must have “character,

reputation, financial responsibility,

insurance experience, and business

qualifications” satisfactory to the

Commissioner

• At least one meeting per year in

Vermont

• At least one resident of Vermont

16

Who can serve as the resident

director?

• Captive manager representative

• Attorney

• Vermont-based employee of parent

company

• Disinterested independent director

(generally compensated)

17

Resident director requirement

Who can conduct a captive’s day-to-

day operations?

• Vermont captive management company

• “Borrowed” employees of parent company

• Insurance consultant

• Contracted program manager

• Employees of the captive

18

Management

19

Risk retention group

governance requirements

RRG Governance Standards

• Promulgated by NAIC, adoption required

as accreditation standard

• Enacted by Vermont in 2015 as 8 V.S.A. §

6052(g)

• Minor amendments adopted in 2016

• Additional amendments anticipated in 2017

• Intended to ensure that RRG’s are

operated for the benefit of their owner-

insureds, and not their service providers

20

RRG boards must have a majority of independent

directors

• Owner-insureds: independent

• Employees of owner-insureds: independent

• Material service providers: not independent

• Auditors: not independent

• No financial interest in the RRG: independent

21

Independent Directors

Governance obligations of board

• Ensure shareholders/members receive

evidence of ownership interest

• Develop governance standards

• Oversee evaluation of management

• Approve material service provider

contracts (requires majority of

independent directors)

• Annually review performance and

continued engagement of officers and

material service providers, in context of

RRG’s goals and objectives

22

Audit Committee

RRG’s must have an audit committee

• Minimum of three independent directors

• Non-independent directors only by

invitation

• Full board can serve with regulatory

approval

Charged with reviewing financial statements

and audit process with both the independent

auditors and management

23

Other board obligations

• Specifying director qualifications,

responsibilities, and compensation

• Implementing orientation and continuing

education requirements

• Ensuring access to management

• Adopting policies and procedures for

management succession

• Conducting an annual performance

obligation

24

25

Housing Authority Risk Retention

Group, Inc.

26

Who We Are

Housing Authority Risk Retention Group, Inc.

(HARRG) is part of the HAI Group family of

companies, which was founded by and dedicated to

serving the public and affordable housing community.

HAI Group delivers innovative, tailor-made solutions to

protect assets, improve efficiency, empower

employees, and move housing strategies forward. Our

portfolio includes insurance, software, capital,

research, advocacy, and learning solutions.

27

The Backstory

• During the mid 1980s, an insurance crisis

was raging for public housing authorities

• It was becoming difficult, if not impossible, to

obtain liability coverage from traditional insurance

carriers at rates they could afford

• In 1986, the Risk Retention Act was passed

• In 1987, 25 public housing authorities came

together to form HARRG with the intention of

providing stable, affordable liability insurance

to the public housing community

• HARRG began operation on June 1, 1987, and

was incorporated in Vermont on March 20, 1987

• HARRG is a mutual insurance company who

provides liability insurance to public housing

authorities

• HARRG is owned by the 948 Members it

insures

• HARRG is a nonprofit, tax-exempt captive

mutual risk retention group, operating under

the Federal Risk Retention Act, licensed and

domiciled in Vermont

• HARRG is rated "A (Excellent)" by A.M. Best

Company with a stable outlook

28

The Details Today

29

Available Coverages

• HARRG offers general liability written on an

occurrence form

• HARRG also offers

public officials errors and omissions liability

law enforcement liability

employment practices liability (EPLI); public

officials liability

and mold

• Coverage is also available for primary non-

owned and hired auto liability, and auto

liability

30

Governance Structure

• The governance of HAI Group is a key element

to providing our Members with the highest

quality products and services

• Due to the devotion of our Board of Directors

and Committee Members, we are able to uphold

our customer-driven focus and attention to detail

• HAI Group is governed by 13 members of the

Board of Directors

• They include 11 public and affordable housing

leaders and two outside directors

• HAI Group has 13 Committees

31

American Safety

Risk Retention Group, Inc.

Founded in 1986 (Vermont Domicile)

Insurance void for environmental risks

• Dramatic rise in EPA regulations

• Increased demand for Hazmat Remediation

Membership base – Environmental remediation risks

32

History

Current Operations

33

Coverages: General, Professional and

Pollution Liability

AM Best Rating: B++

Peak Size: $25M GWP with 3,500

policyholders

• Full spectrum of environmental risks

Today: $700K GWP with 200 policyholders

• Mostly radon contractors and lead

inspectors

Capital & Surplus: $6.3M

34

Premium Distribution

35

Board Composition: 3 founding members (remediation

contractors) + outside counsel

Committee Composition: Audit Committee (entire board)

Management: C&S Specialty Underwriters (Atlanta)

Outside Counsel: Paul, Frank + Collins (Burlington)

Auditor: Johnson Lambert (Burlington)

Actuary: Milliman (Atlanta)

Investments: Wellspring (Chicago)

Governance & Management

36

Dynamo Insurance Company, Inc.

Introduction

Cummins Inc. ~$19B global manufacturer - Pure

Parent Captive

• Startup- CMI utilized Six-Sigma assessment

methodology in 2010, post 2008 >$200M flood

loss

• Assessed captive’s impact to risk transfer

decisions

• Reviewed six domiciles

• Determined domicile based on operational

location; CHANGED DOMICILE 24 hours before

finalizing arrangements, as regulators changed

funding rules

37

Introduction, cont.

Risk Insurance owns the captive

• Internal leadership selects board participants

• VP Corporate Controller (Finance)

• VP Tax (Finance)

• EMEA Corporate Legal Counsel

• Managing Director Global Risk Insurance and

Risk Manager

• VT Legal, VT resident

37

Our Growth Journey

2011 inception to current• Initially three lines

• Currently 12 lines

• Annual premium ~$17M

38

2011

Global Property

UK Employers’ Liability

US Auto

2013

Intl. Product Liability

UK Motor

Distributor General Liability

2014

Africa General Liability

2015

Distributor Professional

Liability

Global Marine Cargo

2016

Distributor Crime

Future

Extended Warranty

Intl. Employee Benefits

Work Comp

A Mirroring Oversight Structure

39

Internal

Advisors

External PartnersClaims Administrator

Actuary

AMI

Tax

Consultant

Deloitte

Captive ManagerBanking

Investment

VT Legal Counsel

Paul Frank &

Collins P.C.

Auditor

Johnson Lambert

International Decision Impact

International team on 5 continents• Decision making is cultural; individual to collective spectrum

• Standardized decision making is critical to captive’s success

40

Parent Governance Culture

“A truly ethical company can’t be that way part of the

time. Cummins must always do the right thing whether

that means keeping our word to a customer or complying

with all laws in a market where others may not.”

• Investing in tools to demonstrate strong practice of decision

making

• Formally weigh quantitative and qualitative factors and score

them

• Formalize decision when to utilize the captive and when to pass

41

0 1 2 3 4 5 0 1 2 3 4 5

A) Insurance Company Operations

Underwriting Metrics

Global Cummins x x x

Loss Ratio

Profi t (Loss ) Ratio

Materia l i ty Ratio

Direct Economic Benefits

1) Operational Excellence

Ensure premium volume adaquately

covers loss costs and other

underwriting expenses. The

benchmark loss ratio range is

generally 45% to 95%, depending on

volatility of the risk and need to build

surplus capital.

Dynamo's loss ratio is slightly below the

benchmark statistic. Given that Property

is a low frequency, high severity risk as

well as Dynamo's desire to build surplus

capital in order to meet financial

obligations associated with an adverse

loss event, our performance exceeds our

goals.

Consider lowering premiums

(minimally to moderately), increasing

the level of coverage, adding

additional coverages, and/or

increasing our spend on loss control

engineering activities. NOTE: A

catastrophe property loss could cost

up to $25 million, which would put

Dynamo into a negative surplus

condition.

43.0%

43.2%

47.1%

Quali-

tative

Quan

ti-

tative

Captive Key Peformance Indicators

Global Property / Policy Year 14-15

Key Performance Indicator KPI Goal/Objective KPI Type(s)Goal/Objective

Priority RankingKPI Evaluation

Performance

Evaluation

Ranking

Response

43

44

Discussion of board member

experiences

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Disclaimer

46

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