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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
This presentation contains general information only. VCIA and its
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accounting, business, financial, investment, legal, tax, or other
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