EU Protected CellsCaptives on a budget

Ian-Edward Stafrace MIRM FCII PIOR Chartered Insurer

Risk Analyst & International Business Development

Atlas Insurance PCC Ltd, Malta

22 March 2011IRM Global Risk Management Professional Development Forum

Agenda

As a captive risk financing vehicle

&/or

To sell insurance to third parties

Why form your ownInsurance Vehicle?

Why Captive?

100%* of

Premium

Profits

Retained

by

Insurer

Your

Business

Catastrophe

Risk Premium

Self Insured

Premium

Re/Insurer

Your Cell/

Captive

Insurer

Traditional Insurance vs Captive

Risks

beyond

risk

appetite

reinsured

All Profits

Back to You

*On average only approx 65%

of Premium is used to pay claims

Why Captive?

1. Reduce Cost of Insurance

2. Long Term Cover

3. Risk Management Strategy

Why not just self insure?

In Self Insurance

• Reserves treated as profits & taxed

• Usually internal transfer with no reserve for large claims

• Temptation to strip funds

With Captives/Captive Cells

• Premiums tax deductible as expense

• Underwriting & Investment Profit help create reserves allowing higher retention

• Reinsurance market access

Why Sell Insurance ToThird Parties?

1. Underwriting Profits + Investment Income

2. Bolt-on To Non Insurance Sale

3. Knowledge Of Product, Market & Profitability

4. Avoid Market Uncertainty

Only for Large Organisations?

Problem 1: Capital Requirements

Problem 2: Fronting Costs

Problem 3: Costs to run a separate company

PCC

Cell Cell

Cell Cell

Core

SOLUTION:Cell in a Protected Cell Company (PCC)

Purpose

Segregating cellular assets & liabilities

Allow different owners with varying interests to participate in one company

Insurance Cells set up with less capitalas minimum requirements apply to PCC as a whole

Only EU State ToHave PCC Legislation

Approachable Regulator

EU Single PassportEnglish, Time Zone, Flight Connections

EU Compliant Regulations

Tax Efficient

Where? PCC Domiciles

Malta

Over 40 other domiciles have PCC or similar legislation: Gibraltar,

Guernsey, Isle of Man, Bermuda, Cayman Islands, various US states...

No Minimum Guarantee Fund (MGF) Required

• Complying with EU directives through PCC core capital

• Example: General insurer with €1 million annual premium

EU Standalone Insurer EU Protected Cell

Minimum capital needed:

Protected Cells: “Low-cost” AlternativeTo Owning A Stand Alone Insurance Company Or Captive

No Fronting Required for EU/EEA Risks

Reinsurance access for smaller investors

Lower Running Costs vs. Stand-Alone companies

Protected Cells: “Low-cost” AlternativeTo Owning A Stand Alone Insurance Company Or Captive

Insulation from other Cells/Core

Cell has its own income and expenses

Where cell liability arises:

1. Assets of that cell used

2. If insufficient PCC‟s core assets used

3. Use of assets of other cells prohibited

Cellular dividend & tax independence

Cell Cell

Cell Cell

Core

Benefits of Protected Cells (in Malta )

Lower CapitalDirect Writing Into Europe

No Setup of Separate Company

Easier Access To „Captive‟

Solution

Cell Assets

SegregatedNo Board Of

Directors

Reinsurance For Smaller

Entities

FavourableTax Regime

Shared Administration

Cell Management

PCC Board of Directors

Cell A

Cell Underwriting & Investment committees

Cell B

Cell Underwriting & Investment committees

3rd Party InsuranceManager

CaptiveCell

Commercial / affinity groups looking for a captive risk financing vehicle

FrontingCell

Captive owners

wishing to reduce EEA

fronting costs

Third Party Writing Cell

Any business planning to

sell insurance to third parties

…and any combination of the above

Why own anEU based Protected Cell?

Lower access point to captive solution

Special purpose applications

Access to reinsurers & specialist risk-bearers

A protected cell in Malta allows cell owner to:

Insure Directly Own Risks In EEA

Sell Insurance To Third Parties In EEA

Insure on Non-admitted Basis Risks Globally

Where Allowed

Reinsure Risks Outside EEA

A) Captive Cell

Example 1French Manufacturer

Desire

Reduce insurance cost & improve risk financing

Facts

Multiple Factories, Stores & Offices in France

Classes: Property & Non Compulsory Casualty

Premium €1,000,000 (approx 30% Property)

Loss ratio < 35% past 5 years

A) Captive Cell

Possible Solution:

A) Captive Cell

PCC

Cell owned by Manufacturer

Injects capital of €410,000

Property:

- Excess €50,000

- Reinsured above €200,000 any 1 loss/event

Casualty - Reinsured above €100,000 any 1 loss &

€300,000 in aggregate

Third Party

Manager?Cell Agreement: PCC + Manager + Cell Owner

Management Agreement: PCC -> Manager

Cell Agreement

PCC + Cell Owner

Cell Committee/s Members1 PCC + 1 Cell Owner + 1 Manager

Cell Committee/s Members1 PCC + 1 Cell Owner

Yes

No

PCC Manages Cell

Example 1French Manufacturer

A) Captive Cell

Example 2Association of Medical Professionals

Desire

Wants more control over PI cost for members

Facts

Premium €900,000

Loss ratio < 35% past 4 years

Single event/series exposure

A) Captive Cell

Possible

Solution

PCC Manages Cell

Agency Agreement

PCC + Association

Cell owned by Association

of Medical Professionals

Injects capital of €370,000

Reinsured above

- €30,000 any 1 loss

- €350,000 in aggregate

Third Party Claims Handler

Agency Agreement

Cell Committee/s Members

1 PCC + 1 Association Official

Example 2Association of Medical Professionals

Cells in Malta can be used as fronting facilities

Fronting cell reinsures most/all of the risk

Reinsurer could be a non-EU captive

Fronting Cell Example

€1 Million Annual Premium

-- Required Cell Capital €90,000 --

B) Fronting Cell

• Bolt-on products to non insurance sales

• Short tail risks - E.g. Extended warranty, property damage, theft, marine cargo, travel cancellation…

• Long-tail risks also possible

Possible Products

EU cells offer direct access to European market

Policyholder Protection Ensured

C) Third Party Writing Cell

ExamplePortable Electronics Retailer

Desire

Retain underwriting profit & have greater control over pricing / commissions / availability

Facts

AD & Theft cover sold to purchasers

Placed with external insurer in return for commission

Premium €750,000

8 year claims history - Loss ratio < 40%

No event or single large risk exposure

C) Third Party Writing Cell

C) Third Party Writing Cell

Possible

SolutionPCC Manages Cell

Agency Agreement

PCC -> BrokerBroker

Intermediary?

Agency Agreement

PCC -> Retailer

Claims Handling Agreement

PCC -> Third Party (E.g. Broker)

Cell owned by Retailer

Injects capital of €135,000

Yes

No

Retailer HandlingClaims?

No

Claims Handling Agreement

PCC -> RetailerYes

ExamplePortable Electronics Retailer

Next Steps to consider Cell Route

Engage the industry to determine viability & options available Brokers, PCCs (Independent/Managed), etc

Domicile Choice

• Ideal: €1m+Premium

• Loss Ratio = Profit Retained &/or Insurance SpendLoss Ratio

(Claims/Premium)

• Typical minimum 18% of Gross Annual Premium

• ↕ depending on risk, inclusion of liability, loss ratio, reinsurance, buffers

Available Capital/Collateral(To Capitalise Cell)

• Lower risk appetite may mean higher reinsurance purchase but at lower cost than primary market

Risk Appetite

• Fluctuating primary insurance prices, terms & availability

• Risk financing flexibility

• Improved risk information flow, etcOther Factors

Indicative Back of the Envelope Study – Some Key Considerations

Website: www.atlaspcc.eu

Email: ian.stafrace@atlas.com.mtPhone: (+356) 23435255

Atlas Insurance PCC Ltd47-50 Ta' Xbiex SeafrontTa' XbiexXBX 1021Malta