SWAN

Captive Risk Financing – A Structured Approach

• 38th Annual OESAI Conference• 25 August 2015

Agenda01 Rationale for Captive Structures

– Risk spend efficiency– Risk / Cover flexibility– Comparison to no insurance

02 Practical Approach– Risk Bearing Capacity– Risk Costing– Structuring– Testing

03 Captive Structure Options– Types of vehicles and their advantages / disadvantages– Suitability testing

04 Mauritius as domicile– Local business– (South) African business– Other opportunities

05 Looking to the future

Rationale for Captive Structures

- 01

Risk spend efficiency

— Insurers are profit-driven

— Insurers require stringently controlled capital bases

— Opportunity costs in various risk avenues to insurers

— Captives (Risk finance) focused on cost of risk only

— Reduced pooling, cross subsidies

01 Rationale for Captive Structures

Risk flexibility

— Limited where reliance placed on reinsurance protection

— Full retention provides highest flexibility

— Cover of uninsurable risks and differences in conditions or limits

— Administratively complex structures easier to accommodate

— Ease of amendment

01 Rationale for Captive Structures

Captive vs no insurance— No dedicated capacity, direct impact on operating results

— Potential for double-whammy at worst possible time

— No pooling or cross-subsidies possible

— Higher (explicit) administration and cost component require economy of scale

— Potential reduction in risk management co-ordination, increasing TCoR.

01 Rationale for Captive Structures

Practical Approach

- 02

Approach – The RF Process

FinancialCapacity

RiskProfile

-RBC-Risk Appetite-Risk Tolerance

-Cost Profile-Characteristics

Retention vs Transfer

Own Data

External Data

Exposure Analysis

-Options-Limitations-Cost / Benefit

RFStructure

ConventionalMarket

-Economy of scale-Risk characteristics-Requirements

-Flexibility-Price-Security

TCo(I)R

-Update-Amend

-Optimise-Allocate-Manage-Report

02 Practical Approach

Approach – The RF Process

FinancialCapacity

RiskProfile

-RBC-Risk Appetite-Risk Tolerance

-Cost Profile-Characteristics

Retention vs Transfer

Own Data

External Data

Exposure Analysis

-Options-Limitations-Cost / Benefit

RFStructure

ConventionalMarket

-Economy of scale-Risk characteristics-Requirements

-Flexibility-Price-Security

TCo(I)R

-Update-Amend

-Optimise-Allocate-Manage-Report

Captives

02 Practical Approach

Approach – Captive Development

— Understand client & requirements

— Process- Risk Bearing Capacity- Risk Costing- Risk Structuring- Structure Testing- Captive type selection- Implement, Integrate, Manage, Update

— Important to demonstrate value on on-going basis to client

02 Practical Approach

Approach – Risk Bearing Capacity

— Estimate of ability to retain risk without compromising key plans and operations

— Effective risk budget of organisation

— Considers all risk, need to assess and evaluate comprehensive risk profile

— Need to include all sources of RBC contributions and drains

Approach – Risk Bearing Capacity02 Practical Approach

Approach – Risk Costing— Understand mathematical and operational

drivers of risk cost- Develop risk cost curves under all sensible

structural scenarios- Overlay operational and financial realities

(MPL, MFL, RBC etc.)

— Integrate with market realities

— Optimise overall TCoR

— Integrate into risk management process and reporting

02 Practical Approach

Approach – Risk Costing

Attritional Losses

Risk RetentionLosses

Excess LayerLosses

CatastropheLosses

Loss Severity

02 Practical Approach

Approach – Risk StructuringLine 2 Expected Cost Best Case Worst Case

Assets Opt (5%, 10%, 85%) 11,907,800 0 75,000,000

Maximum 150,000,000

Expected Cost 11,907,800 Expected Cost 0 Expected Cost

Best Case 0 Best Case 0 0

Worst Case 75,000,000 Worst Case 0

Stopper 75,000,000Expected Cost 9,631,900 Expected Cost 0 Best Case

Recommended Premium 18,277,600 0

Breach Probabilities

Individual 2.6% Worst Case

Aggregate 0.0% 0

Best Case 0 Best Case 0

Deductible Structure: Worst Case 34,791,700 Worst Case 0Inner 45,000,000

Expected Cost 57,872,000 Breach Probability 5.3%

Best Case 12,300,700 Worst Case 129,467,300

No Limit

Aggregate

02 Practical Approach

Approach – Risk Structuring

IOP

Current SIR

Retained

Transfer

RatiosP1 – 2.01P2 – 1.47P3 – 0.997 (IOP)P4 – 0.481P5 – 0.345

02 Practical Approach

Approach – Risk Structure Testing

RBC %

02 Practical Approach

Approach – Risk Structure Testing02 Practical Approach

Captive Structure Options

- 03

Approach – Captive Type Selection

Low High

Complexity, Flexibility

Cost

ContingencyPolicy /

RAC

PCC

Group / MutualCaptive

InternationalCaptive

DomesticCaptive

03 Vehicles & Structures

Approach – Captive Type Selection

Considerations- Premium volume & Risk exposure- Risk complexity, nature of (insurance) liabilities- Diversification / Concentration of Risk- Relative costs, including risk transfer costs- Planning horizon- Options available- Existing skills / cost of outsourcing- Capital requirements- Governance requirements

03 Vehicles & Structures

Approach – Captive Type Selection

Suitability testing- Is a structure possible that minimises TCoR?- Is the criteria for minimisation of TCoR defined and understood?- What structural options are available and what are explicit costs of each?- Does retention structure create sufficient premium to generate economies-of-scale on frictional costs?- Is market efficient / hardening / softening?- Does sufficient access to (re)insurance protection exist?- Options available- What internal capabilities exist? Is suitable training / recruitment possible?

03 Vehicles & Structures

Mauritius as domicile

- 04

Mauritius as domicile

Regulatory Environment- Dedicated PCC legislation- Pro-(cell)captive solvency and administration

requirements

Geographic Location & Economic Environment- Proximity to (South) Africa, India and Pacific Rim- Small time differences- Stable socio-political environment- Currency flexibility

Cost & Expertise- Frictional expenses lower than many domiciles- Significant expertise available locally or with

relative ease

04 Mauritius as domicile

Mauritius as domicile

Local Opportunities (on-shore insurers) - Limited economy

- Some potential for PCC / Mutual structures

(South) African Opportunities- Significant spread of multi-national operations

(Africa & Pacific Rim)- Tax and other treaties- Reinsurance regulation under SAM (solvency relief)

Other regions- Multi-national companies in India, Malaysia &

Pacific Rim- Internet / Virtual & related companies

04 Mauritius as domicile

Looking to the future

- 05

Looking to the future• Clients and risks are becoming more sophisticated

and complex, necessitating specialist input in order to manage their TCoR efficiently.

• Governance requirements in most countries require risk financing to be sensibly structured within relevant framework of parent to be efficient, compliant, transparent and properly integrated.

• Captives are a powerful business tool but should be developed and managed as any other venture and held to same requirements to remain relevant within company.

05 Looking to the future

Thank you