Maximizing Captive Value Through Teamwork

Speakers: Irena Kaler, Executive Director/CAO, RWJ Health Network Insurance Services Ken Rand, Managing Director, Marsh Inc. Catherine Sheridan, Partner, Tax, KPMG Chris Kogut, Principal and Consulting Actuary, Milliman Moderator: Lawrence Bird, Managing Director, Marsh Bermuda

Overview Many resources are involved in establishing, managing and developing a captive. This discussion aims to show how the value of these divergent resources can be reaped to produce a powerful and efficient team to move your captive forward. We will show how to maximize captive value through teamwork.

How Does A Captive Start? There are many reasons to consider establishing a captive The team involved initially may include: - captive owner/parent company - captive consultant - insurance broker - reinsurance broker - actuary - tax consultant - finance and accounting - legal advice

How Does A Captive Start? Once the decision is made to proceed and the domicile is selected, the following might be involved to incorporate the captive: captive owner/parent company captive manager lawyers regulators

How Does A Captive Grow? Once incorporated and underwriting the planned business there will almost always be a need for ongoing development. For this to occur, the following resources might be used: - captive owner - captive manager - actuary - insurance broker - reinsurance broker - tax consultant - legal counsel - investment manager - regulator

Why Is Ongoing Development Important? Opportunities need to be identified for the benefit of the captive and its owners. Without teamwork and proper consultation, opportunities will be missed instead of being maximized: - insurance markets change - regulations change - laws change - risks change - investment markets change eg. fixed income and equity markets -changes in captive owner’s business, operations or corporate structure

Who Makes Up The Team? Captive (Re)insurance Brokers (Re)insurance Brokers Captive Manager Captive Manager Regulators Officers and Committees Board of Directors Investment Manager Lawyers/ Corporate Secretaries Banks/ Treasury Captive Owner Captive Owner Actuary Auditors TPAs/Claims Handlers Fronting Companies Tax consultant

How Are The Roles Linked? Tax Consultant Captive Manager Actuary STRATEGY Captive Owner (Re)insurance Broker RISKS

What Are Their Roles? Captive owner – share objectives with the team Everyone else – understand those objectives and partner with the captive owner and each other to achieve those objectives and more - captive owner - captive manager - insurance broker - actuary - tax consultant

The Captive Owner’s Role on the Team Keep the team informed – begins with the vision for the captive –changes, needs, challenges facing primary business –create understanding and alliances with on-shore, in-house advisors Create relationships –select vendors and consultants wisely –understand the contributions of each team member –know what you don’t know – ask the experts Utilize the Board’s talents –keep the Board informed –leverage their talents, expertise, knowledge in strategic ways

The Captive Owner’s Role on the Team Stay involved –regular contact with captive manager and “key” advisors –expectations met? Deliverables timely? –ask questions; exercise oversight –are you getting what you pay for? Is the captive “working” to advance your primary business needs? Don’t be an absentee landlord!

The (Re)insurance Broker’s Role on the Team

Analyze exposures of insured/policyholder Provide placement services in the commercial (re)insurance market –Identify markets –Negotiate terms and conditions –Present to insured / policyholder Advise on market capacity and conditions Communicate developments in the industry Provide policy reviews Provide client contract reviews (insurance requirements)

The (Re)insurance Broker’s Role on the Team Provide claims handling and settlement services Provide claims reporting services Assist in market collections Identify alternative forms of capital financing Provide placement services for fronted (re)insurance arrangements Contract certainty Credit security of (re)insurers

The Actuary’s Role on the Team Provide the “numbers” to make informed decisions Explain the risks and risk factors in insurance programs Highlight the uncertainty in future events Assist the captive board, owners and regulators in evaluating the captive’s solvency Protect insured/policyholder Communicate developments in the industry

Examples of Actuarial Involvement Reserve analysis and statement of actuarial opinion Funding/premium projections Retention analysis Strategic financial planning Claims management reviews Risk transfer opinion Premium allocation Capital adequacy reviews

The Tax Consultant’s Role on the Team Strongly recommend tax advisor be included in the Due Diligence Process Tax Advice needed PRIOR to establishing the Captive Planning needed to obtain tax objectives/efficiencies –U.S federal income tax implications/structuring –International tax implications/structuring

Examples of Tax Issues Withholding taxes Excise taxes - Direct/Reinsurance - Cascading State income/premium/procurement taxes Cell legislation Tax Compliance Reporting, including - Informational returns - FBAR

The Captive Manager’s Role on the Team Understand the captive owner’s objectives, business and corporate structure Ensure basic management services are provided Provide relevant expertise especially financial management and insurance Compliance with regulations Regulatory updates and developments New opportunities and developments; the manager must be up-to-date and, also, provide innovative ideas Co-ordination of the team

Which Roles Are Generally A Requirement For Success? Captive owner Board of directors Captive manager Insurance broker Actuary Tax consultant Corporate secretaries Auditors Third party administrators

Who Has Responsibility? Everyone has responsibility for their specific areas, but should not operate in silos Communication is always key Understand the captive owner’s business, needs and objectives to contribute maximum value Survey the landscape – opportunities, changes in legal and regulatory environment etc. Captive manager is the gate-keeper to maximum success through co-ordination and team facilitation Captive owner is the end point. Is your captive a strategic asset or a headache? You insure success.