Alternative Risk Financing Vehicles

Began development in 2010 Launched first captive in 2011 Current Active Captive Portfolio ‒ Legacy health – Heterogeneous Preferred Risk Agency Proprietary ‒ Heritage – Homogeneous Long Term Care Communities ‒ Quest Health – National Heterogeneous Open Captive ‒ Poultry Industry Homogeneous captive ‒ Two Single Parent Captive – Reinsuring Industry Association Plans Total Membership ‒ Multiple Employer Captives: 5,000 employees ‒ Single Parent Captives: 8,000 employees Scott Captive Solutions Experience

Alternative Risk Equation There are a variety of alternative risk financing vehicles available, each with unique characteristics In selecting an appropriate risk financing vehicle, it is essential to understand: Businesses Goals and Objectives Organizational Challenges Risk Tolerance Financial Position and Outlook These factors will determine what vehicle or vehicles make sense for a given business at a given point in time

Level of Risk Level of Reward Lower Higher Lower Retro Program Captive Program Large Deductible Fully Insured Minimum Premium Funding Option Spectrum

Captive Overview Depending on structure, insured owns part or all of a insurance company. The company purchases reinsurance for catastrophic claims and the owners(s) fund a “bank account” for the smaller claims. After the policy year is closed, unused loss funds can be returned with interest. The captive pays a “fronting fee” to another insurance company for policy issuance and underwriting assistance. Captive Premium Fixed Expenses Fronting Reinsurance Taxes Loss Fund Actuarially Determined Exposure / History Investment Income Loss Control Operations Captive Mgmt

Captive Opportunities Advantages and Opportunities: Opportunity for dramatic Cost of Risk savings if insured performs Predictable cash flow—premium payment similar to traditional insurance Greater control of claims settlement (use of TPAs that understand they are managing their client’s money) Partnership with other risk-aware owners to share ideas and risk reduction strategies Vehicle for off-shore placement of funding Can earn interest income on loss funds before they are actually paid out. Protection from market forces impact on premiums. Minimal to no impact of Experience Modification Factor on premium (can also be a disadvantage if a credit mod is maintained consistently)

Captive Risks Potential Disadvantages Posting of collateral for each policy year (stacking of collateral). Catastrophic losses or consistent poor performance can make this program much more expensive than a traditional “guaranteed cost” plan, could be similar in cost to a large deductible plan. No upfront cash flow savings (“buy-in” premium payment) as compared to a large deductible plan Depending on structure, potential for additional assessment of premium if losses exceed predictions. Entry / Exit of plan is slightly more difficult than large deductible due to ownership issues in captives. Longer term realization of “risk profits” – must wait until the policy year is closed by actuary before funds can be returned.

Captive Structure Captive Retention $1,000,000 $1,000,000+ EXCESS STOP LOSS Workers’ Compensation & Employers’ Liability A A B B C C D D E E F F G G H H I I J J General Liability Automobile Liability & Physical Damage Captive Insurance Company

Large Deductible Overview Insurance policy issued with a larger per claim deductible (usually $250,000 or more) and, preferably with an Aggregate deductible (to limit insured’s maximum exposure). As claims are filed, the insurance company adjusts and pays them, sending a monthly invoice to the insured for reimbursement. Included is a charge for claims handling. Once a claim reaches $250,000, the insurance company does not bill the insured for additional costs on that claim. Policy premium is generally 70% of a standard policy.

Large Deductible Overview Advantages and Opportunities Opportunity for dramatic Cost of Risk savings if insured performs. Upfront cash flow savings (lower “buy-in” premium payment) as compared to a captive plan. No fronting fees (as seen with captive). Easy entry/exit of plan. Do not have added burden of involvement in management of an insurance company. Generally can select from several programs from competing insurance companies. Minimal impact of Experience Modification Factor (can also be a disadvantage if a credit Mod is maintained consistently).

Captive Structure: Key Points Potential Disadvantages Must post collateral for claims payment obligation for each policy year (stacking of collateral). At the mercy of insurance company adjusters/underwriters in claims payment and collateral obligations (including release of collateral when policy year is closing). Catastrophic losses or consistent poor performance can make this program much more expensive than a traditional “guaranteed cost” plan, could be similar in cost to a captive plan. Cash flow can be unpredictable during (and after) the policy period as claims payments are made –could have very significant invoices for reimbursement to insurance company. Continue to pay insurance company profit and overhead expenses with the “fixed cost” premiums.