REACHING YOUR GOALS

WITH A CAPTIVE

Today‘s Speakers

Panelist and ModeratorMike Meehan, CIC, CRMConsultant – Milliman, Inc.

Panelists:Anne Marie Towle, CPASenior Consultant – Willis Global Captive Practice

Ira Richterman, MDChairman – Starkap

Agenda

• Evolution of a Group Captive• Actuarial Feasibility Study

– Necessary Data

• Case Study - – The Starkap Family (How the “Family” was created)

Anne Marie Towle, CPAWillis Global Captive Practice

Senior Consultant

Evolution of a Group Captive

Methods of Managing Risk

Conventional Insurance

Transfer All Losses

Risk Management

Retain Predictable Losses

Transfer Catastrophic Losses

Non-Insure

Retain All Losses

Evolution of a Group Captive

Develop Business Case

Conduct Feasibility Study

Grow Participation & Commitment

Select Business Partners

Challenges & Recommendations

Manage Concerns & Feedback

Developing the Business Case

Sample Group Captive Risk Layering Model

Many types of insurances could

be shared in a group captive

platform:WCG/LA/LP/L

Etc…

Legal & Financial Considerations

Joining the Family

Grow Participation and Commitment Build credibility and trust within group Influence: turn advocates into promoters and leaders Stress importance of loss control and long term view Reiterate benefits: premium cost reductions, greater control, escape

cycles Reinforce cohesive elements of group Bring in service providers to talk about areas of expertise Realize it’s a financial decision and an organizational change

process Follow up, but be patient and allow them to assess information

Selecting Business Partners

Service Providers During feasibility study begin to meet and conduct due diligence Fronting and Reinsurance Carriers Legal Counsel Audit and Tax Advisors Meet regulators and visit appropriate domiciles

Captive Consultant/Manager Actuary TPA Banking and Investment Advisors

What to Look For Willing to partner with a number of

companies with individualized needs Experience collaborating with all service

providers to create value Ability to simplify and explain complex

information Technology and service that fits your

needs

How to Work with Providers Issue RFPs and understand

key selection criteria Be instructive about service

requirements and deliverables

Managing Concerns & Feedback

Financial Impact to Their Organization Capitalization and Prefunding Collateral, Dividends, Investment Income

Working Together Sharing of sensitive information

among companies Different reporting requirements and

risk management practices

Sharing Risk Bankruptcy Potential Assessments & Protections within Structure Risk Appetite Loss Control & Compliance

Captive Operations & Governance Service Providers Being Replaced?

One TPA? Voting and Control of Captive

Decisions Entry: Underwriting Guidelines Exit: Prohibitions to Leaving the

Captive

Mike Meehan, CIC, CRMMilliiman, Inc.

Consultant

Actuarial Feasibility Analysis

• Why is a feasibility study necessary?• What data do you need to complete the analysis?• What should you expect to get out of the

analysis?• What are my ongoing actuarial needs?

Why is a Feasibility Study Necessary?

• Forms the basis for measuring the financial viability of the proposed captive

• Helps to identify potential advantages and the potential risks

• Likely required for licensing/application process• May be required for presenting to the reinsurance

market

What Data Do You Need to Complete the Analysis?

• Basic information– Company specific

• Goals, constraints

– Operational• Account background• Management (claims, risk management)

• Loss Information– Historical

• Claim runs, large loss listings (i.e. outliers)

• Exposures– Historical and prospective

• Payroll, vehicles, sales, etc.)• Descriptions/locations

What Data Do You Need to Complete the Analysis?

• Expense information– Vary by type of program, domicile

• Other Assumptions– Growth– Rate of return on investments– Payout patterns– Capitalization– Taxes– Adverse scenario

• Challenges– Single entity vs. group program

What Should You Expect to Get Out of the Analysis?

• Loss analysis– Review of past loss experience– Actuarial adjustments– Consideration of internal factors (i.e. loss control)– Consideration of external factors (i.e. laws/benefit levels)

• Loss forecast / loss rate– For first year of captive– Confidence levels (adverse scenario)

• Pro forma financial statements– Typically five year– Based on expected and adverse scenarios– Based on expense assumptions, domicile– Payout patterns– Surplus and capital contributions

What Should You Expect to Get Out of the Analysis?

• Evaluation of Results– Adequacy of capital– Adequacy of reserves (for LPT)– Adequacy of premium– Minimum number of participants

• Solvency Measurements– Premium to surplus– Reserves to surplus

• “Decision Time”

What Are Ongoing Actuarial Needs?

• Annual loss reserve opinion• Change in business plan

– New coverage analysis– Loss layers / reinsurance analysis

• Updated premium projections• Capital analysis• Cost allocation / dividend analysis

– Especially Important for group program

Ira Richterman, MDStarkapChairman

Why Do We Want to Date?

• Escalating malpractice premiums– $22k to $103k per year without incident

• Lack of control of expenses• Ignorance towards risk management• Non-active role in legal matters

– 180 day letters thru legal suit

Who Do We Want to Date?

• Known physicians– Personalities– Practice management – record keeping and

communication skills

• Geographic location of practice– Re-insurer would not underwrite Cuyahoga County– Single county company

• Control vs limited size (premium)

Courtship

• Beginning to develop consultation team– Risk manager– Captive manager

• Feasibility study– an evaluation of cost

• Hospital Acceptance– Requirement of A-rated company

Permission From Your Future Father-In-Law

• Physician education– Coverage limits and asset protection– Start-up expenses– Competitive brokers– This is not an investment vehicle

• Obtaining Reinsurance

The Wedding

• Who’s in & who’s out?• Can we still get married?• The wedding license

– A solid long-term business plan (conservative)– Listen to your consultants

A Child is Born

• Where is the instruction manual?• It speaks a different language• Sleepless nights

Childhood

• Continued education and understanding– Monthly meetings– IMAC attendance– Marathon board meetings

Bumps and Bruises

• One large rainstorm• Loss of captive manager company

– Follow our leader to a new company

• Changing consultants as the company grows– Local insurance consultant to worldwide company– Single risk manager to larger national firm

• Individual vs. The Company

– Investment troubles – the tale of the audited financial statement

– Our auditor is just too big - $$$

Adolescence

• Defending our first suit – its not cheap• How to grow in the “longest” soft market

– Premiums higher than commercial – “Don’t worry the market will get hard again – its cyclical”

– Need to increase reserves– The local agent – pressure from the golf course

• The breakup of your first love– Losing a founding member

• Are we still big enough?• What information to share in the future?• So, do we want another relationship?

Adulthood

• Other relationships– Expanding insurance coverage

• Health• Workers’ Compensation• P & C• Short term disability

– CIE – Continuing Insurance Education• Continuously changing rules and regulations• New President?