CJPIA Executive Committee Workshop

Exploring Alternative Legal Structures for Pooling: Captives

April 25, 2014

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Pools Exist Today in a Variety of Forms

Simple contractual

agreement Joint Powers

Authorities

JPAs with

Risk Retention

Special Legislation

Captives

Reciprocals

Municipal Mutual

Insurers Comp

“Group Self-Insurance”“Non-Profit Mutual

Insurance Companies”

• Long Term Commitment• Risk Sharing• Homogeneity of Interest• Equitable Profit/Loss: “Rough Equity”• Commitment to Risk Management• Political Support

Key Values for Successful Risk Pooling

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Long Term Commitment

5

Risk Sharing

6

Homogeneity of Interest

7

Equitable Profit (and loss) Distribution: “Rough Equity”

Commitment to Risk Management

9

Political Support

• Long Term Commitment• Risk Sharing• Homogeneity of Interest• Equitable Profit/Loss: “Rough Equity”• Commitment to Risk Management• Political Support

Key Values for Successful Risk Pooling

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Captive Definition

• A licensed insurance company owned solely or in large part by one or more non- insurance entities for the primary purpose of providing risk financing to the owner or owners.

• Single Parent (Pure) Captive– Wholly owned by one parent company

• Group Captive– Owned by two or more companies, usually a trade

association or homogenous group of companies

Types of Captives

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Why captives are formed

• For all the same reasons as Pools, PLUS:– Tax Benefits (for-profit)– Regulatory Reasons

• To gain authority to do things– To cross state lines (in fronted or RRG form)– Increase investment options– Increase coverage reach

• To protect from others– Open meeting and records laws– Political pressures adversely influencing public entities

• To gain certainty

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Captive DomicilesNumber of Active Captive Insurance Companies

01002003004005006007008009001000

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Example: Captive plus JPAReinsured Program

M

E

M

B

E

R

S

Premium RRG issues a 1m/3m policy to members

Paid-In Capital

Reinsurer$750k x $250k

Ceded Premium

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Example: Captive Replaces JPAFronted Program

M

E

M

B

E

R

S

Front Company(statutory

limits)

Program

Premium

Captive(working layer)

ReinsurancePremium

Paid-In Capital

Policy Issuing Carrier

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Public Entities Using Captive Insurers

• NLC Mutual Insurance Company– Reinsures Risk Pools

• United Educators Ins., A Reciprocal Risk Retention Group– Insures Colleges and Universities

• States Self-Insurers Risk Retention Group– Insures municipalities

• Pelican Insurance: A Reciprocal Risk Retention Group (owned by PA Counties Pool members)– Insures County Owned Nursing Homes

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Public Entities Using Captive Insurers

• Public Risk Mutual and Public Compensation Mutual– Used as excess insurer of Nevada pools

• ASCIP– Single parent captive reinsures OCIP; underwriting profits accrue to

captive• SET-SEG

– Bermuda Captive provides regulatory requirement for aggregate stop loss

• Transit Re– Group captive reinsures transit pools

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Summary• Captives provide all the benefits available for

pools

Captives may provide additional benefits not available to poolsCaptives may protect pools from certain operational risksCaptive regulators are generally knowledgeable and business friendly

plus