Casualty Actuarial Society 2004 Annual Meeting Captives Presented by: Andrew Sargeant, President USA Risk Group of Vermont, Inc.

Captive Domiciles # of Active Captives # of Active Captives Bermuda Cayman Islands Vermont Guernsey British Virgin Islands Barbados Source: Business Insurance

Captive Domiciles Development of U.S. Domiciles: 9/30/ Vermont 538 (31) 507 (64) 443 Hawaii 140 (18) 122 (21) 101 South Carolina 100 (37) 63 (36) 27 Washington, DC 30 (10) 20 (14) 6 Nevada 27 (8) 19 (12) 7 Arizona 33 (15) 18 (14) 4 New York 26 (8) 18 (14) 4 Montana 12 (3) 9 (4) 5 Source: Business Insurance 2003 & 2002 and Insurance Departments

Captive Domiciles Risk Retention Groups Increase 9/03 – 10/04 Total Vermont1168 South Carolina 1941 Hawaii017 Washington, DC 1314 Arizona78 Nevada59 Other Source: Risk Retention Reporter

Captive Domiciles Reasons for new domiciles Success of Vermont Success of Vermont Premium taxes $20 million on $9 billion premium Employment Investment of captive funds $20 billion+ Increase in captive and risk retention group formations Increase in captive and risk retention group formations More U.S. sponsors staying onshore More U.S. sponsors staying onshore More flexible than established domiciles? More flexible than established domiciles? Possible problems?

Regulatory Requirements Application for Admission: Feasibility study Feasibility study Business plan Business plan Background information of sponsor Background information of sponsor Biographical affidavits of directors and officers Biographical affidavits of directors and officers Risk management/underwriting information Risk management/underwriting information Bylaws and Articles Bylaws and Articles Capital and surplus requirements Investment requirements

Ongoing Management Issues Governance Pure captive vs. group captive Pure captive vs. group captive Board and committee responsibilities Board and committee responsibilities Meeting frequency Meeting frequencyOperational Flow of information Flow of information Reporting frequency Reporting frequency Investment policy Investment policy Financial or other performance measures Financial or other performance measures

Ongoing Management Issues Regulatory framework Annual actuarial review Annual actuarial review Domiciliary financial report Domiciliary financial report Annual statement for risk retention groups Annual audit Annual audit Annual reports of parent company and reinsurer Annual reports of parent company and reinsurer Ratios Ratios Risk based capital IRIS Change of business plans Change of business plans Domiciliary exams Domiciliary exams Annual meetings Annual meetings Who’s responsibility?

Regulatory Framework “The times they are a changin’” Offshore domiciles compliance with OECD Offshore domiciles compliance with OECD Post Enron – parent company status Post Enron – parent company status Front company/reinsurer status Front company/reinsurer status Sarbanes Oxley Sarbanes Oxley