GROUP CAPTIVESA Risk Financing Alternative

May 7, 2015

David Bubb

Senior Vice President

Marsh Inc.

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Group CaptivesToday’s Discussion Points

• Introductions

• The Basics of a Group Captive

• Captive Structure

• Loss Examples

• The Differentiators

• Next Steps

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Value Proposition

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Group CaptivesValue Play

WC, GL & Auto

$500k Premium

WC, GL & Auto

$500k Premium

WC, GL & Auto

$540k Premium

WC, GL & Auto

$530k Premium

WC, GL & Auto

$530k Premium

$0

$1mm

$350k

Year 1 Year 2 Year 3 Year 4 Year 5

$100 k Losses

$100 k Losses

$100 k Losses

$100 k Losses

$500 k Losses

5 Year Premium: $2,600,0005 Year Losses: $ 900,000Loss Ratio: 34%

GROUP CAPTIVE BASICS

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Methods of Managing Risk

Conventional Insurance

Transfer All

Losses

Limited Benefits

Risk Management

Retain Predictable Losses

Transfer Catastrophic Losses

Majority of Insured Marketplace

Non-Insure

Retain All

Losses

Uninsurable Risks

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An insurance company

controlled by its owners.

that provides insurance to and is

What is a Captive?

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Group Captives Benefits

• Cost control, cost efficiency and cost smoothing

• Premiums paid to insurance entity that Members own

• Member shares in the underwriting and investment profits

• Superior loss control and claims handling

• Control – You own it!

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Service Provider

Captive Management Marsh—Cayman

Actuarial Services Pinnacle Actuaries

Auditors PricewaterhouseCoopers

Banking Royal Bank of Canada

Third Party Administrator Gallagher Bassett

Investments Royal Bank of Canada

Loss Prevention Risk Consultants, Inc

Reinsurance AIG

Fronting Carrier AIG

Best In Class PartnershipThose Who Make It Work

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Coverages ProvidedWC, AL, APD, GL and Excess Liability

• Workers’ CompensationExcludes Monopolistic States - ND, OH, WA, WY

Statutory Employers’ Liability

• Automobile Liability Physical Damage

• General Liability

CAPTIVE STRUCTURE

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Captive StructureHas the exact look as traditional insurance

Captive Retention

$0

$ 1,000,000

Umbrella / Excess

Work

Comp

General Liability

Automobile

Umbrella / Excess

Same mechanics for:

Certificates of InsuranceInsurance PoliciesUmbrella

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Captive StructureA Reinsurance Company behind a Quality Fronting Company

Captive Retention

$ 350,000

$0

$ 1,000,000

Basket & Clash Coverage

Umbrella / Excess

Work

Comp

General Liability

Automobile

Umbrella / Excess

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Captive StructureHow is the Captive Protected

A Fund

B Fund

Possible Assessment

Specific Protection

Aggregate Protection

$ 0

$ 350,000

Specific & Aggregate Protection

$ 1,000,000

Excess

$125,000

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Sample Member

Loss forecast = $ 500,000Pay in = $ 746,000

B Fund(Captive Shock Loss Layer)

A Fund(Captive Frequency Loss Layer)

$ 400,000$125,000

$350,000

$ 100,000

Reinsurance

$1,000,000

$ 246,000

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Operating Costs:

Operating CostsDetails

Reinsurance 97,732 13.10%

Front 21,262 2.85%

Premium Tax 36,556 4.90%

FET 6,565 0.88%

Claims 31,707 4.25%

Risk Control 7,460 1.00%

Broker 11,191 1.50%

Off Shore Exp 26,112 3.50%

Variable Exp 7,460 1.00%

246,046 32.98%

LOSS EXAMPLES

ANTICIPATED YEAR OF LOSSES

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$100,000 Beginning balance

A Fund

B Fund

Reinsurance

Loss Example #1Anticipated Loss Year

B Fund Accounting

A Fund Accounting$400,000 Beginning balance - 190,000 Total claims less than $125,000$210,000 Remaining balance

$190,000 of total claims - All losses less than $125,000

$125,000

$350,000

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“Anticipated Year” Results Accounting

$210,000 A Fund

+100,000 B Fund

+ 25,000 Estimated interest

$ 335,000 Estimated return

CATASTROPHIC CLAIM YEAR

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$100,000 Beginning balance

A Fund

B Fund

Reinsurance

Loss Example #2Catastrophic Loss Year

B Fund Accounting

A Fund Accounting

$190,000 of total claims – all claims less than $125,000 and a $1,000,000 catastrophe claim

$125,000

$350,000

$400,000 Beginning balance - 190,000 Total claims less than $125,000$210,000 Remaining balance

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$100,000 Beginning balance- 100,000 $0 Ending balance

A Fund

B Fund

Reinsurance

B Fund Accounting

A Fund Accounting

$190,000 of total claims less than $125,000and a $1,000,000 catastrophe claim

CatastropheClaim:

$225,000 - 100,000 $ 125,000

shortfall

$125,000

$350,000

Loss Example #2Catastrophic Loss Year

$400,000 Beginning balance - 190,000 Total claims less than $125,000- 125,000 1st $125,000 of catastrophic claim$ 85,000 Remaining balance

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$100,000 Beginning balance- 100,000 $0 Ending balance

Reinsurance

B Fund Accounting

A Fund Accounting

$190,000 of total claims less than $125,000and a $1,000,000 catastrophe claim

CatastropheClaim:

$225,000 - 100,000 $ 125,000

-$85,000$40,000

$125,000

$350,000

Loss Example #2Catastrophic Loss Year

$400,000 Beginning balance -190,000 Total claims less than $125,000-125,000 1st $125,000 of catastrophic claim$ 85,000 Remaining balance - 85,000 Add’l for catastrophic loss 0 Remaining balance

A Fund

B Fund

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$100,000 Beginning balance- 100,000 $0 Ending balance

Reinsurance

B Fund Accounting

A Fund Accounting

$190,000 of total claims less than $125,000and a $1,000,000 catastrophe claim

CatastropheClaim:

$225,000 - 100,000 $ 125,000

-$85,000$40,000

$125,000

$350,000

Loss Example #2Catastrophic Loss Year

$400,000 Beginning balance -190,000 Total claims less than $125,000-125,000 1st $125,000 of catastrophic claim$ 85,000 Remaining balance - 85,000 Add’l for catastrophic loss 0 Remaining balance

Shared Risk

A Fund

B Fund

HIGH FREQUENCY YEAR

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$100,000 Beginning balance

A Fund

B Fund

Reinsurance

Loss Example #3High Frequency Year

$400,000 Beginning balance

B Fund Accounting

A Fund Accounting

- 550,000 - 150,000 150,000 A Fund Experience Adjustment 0 Ending balance

$550,000 of total claims - All less than $125,000 each

$125,000

$350,000

Experience Adjustments & Collateral

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Year 1 Year 2 Year 3 Year 4

Frequency Fund Exceeded

Original Funding by $150,000.

50% of Experience

Adjustment Due.

$ 150,000

- 75,000

$ 75,000 (remaining

balance due)

30% of Experience

Adjustment Due.

$ 75,000

- 45,000

$ 30,000 (remaining

balance due)

20% of Experience

Adjustment Due.

$ 30,000

- 30,000

0 (remaining

balance due)

Frequency Fund Adjustment (Assessment)Example

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Collateral

Collateral

Cash

Letters of credit

Collateral Functions

Member to member obligations

Capitalizes the captive

Collateralize policy-issuing carrier

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Collateral Requirements

Year 2

2/3rds of A Fund 2nd year

Total = 2 X average A Fund

Year 1

2/3rds of A Fund 1st year

Year 3

2/3rds of A Fund 3rd year

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Collateral Requirements

Total = 2 X average A Fund = $792,000

Assume A Equals $400,000 Each YearAssume A Equals $400,000 Each Year

$264,000 $264,000 $264,000

Year 2

2/3rds of A Fund 2nd year

Year 1

2/3rds of A Fund 1st year

Year 3

2/3rds of A Fund 3rd year

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Group Captives How does the Captive Do Business?

• 2 Offshore Board Meetings per Year

• Every Member has an equal vote

• Committee Structure – Underwriting, Investment, Finance, Loss Control

• Control – You own it!

Thank You!