Aon Global Risk Consulting Actuarial Considerations for Captive Insurance Companies Casualty Loss Reserve Seminar September, 2007 Jessica Christensen Aon Global Risk Consulting

2Casualty Loss Reserve Seminar – September 2007 Captives: Quick Refresher What is a captive? –Limited purpose insurance company Who owns the captive? –Single parent –Group and associations –Risk Retention Group –Rent-a-captive –Protected cell

Aon Global Risk Consulting 3Casualty Loss Reserve Seminar – September 2007 Captives: Quick Refresher (continued) Why are captives formed? –Manage increased retentions –Fund for risk where insurance is unavailable or unaffordable –Access reinsurance/increase capacity –Create a profit center –Manage decentralized business units –Tax efficiency

Aon Global Risk Consulting 4Casualty Loss Reserve Seminar – September 2007 Captives: Quick Refresher (continued) Where are they formed? –Offshore domiciles: Bermuda, Caymans, Guernsey, Ireland –Onshore domiciles: Vermont, Hawaii, South Carolina, Arizona What kind of structure? –Direct writer –Reinsurer

Aon Global Risk Consulting 5Casualty Loss Reserve Seminar – September 2007 The Actuary and the Captive Role in captive formation Ongoing captive responsibilities

Aon Global Risk Consulting 6Casualty Loss Reserve Seminar – September 2007 Role in Captive Formation Provide input to the business plan –Retention analysis for program design –Multi-year loss projections –Premium pricing analysis –Expected and adverse losses for captive proformas –Cash flows –Communicate to State reviewing actuary, if necessary

Aon Global Risk Consulting 7Casualty Loss Reserve Seminar – September 2007 Ongoing Captive Responsibilities Provide support to the captive’s owners and managers –Periodic loss reserve studies and opinions for captive financial statements –Premium pricing at renewal or as additional lines are insured –Coordination with auditing actuaries, or regulatory questions

Aon Global Risk Consulting 8Casualty Loss Reserve Seminar – September 2007 Captive Considerations Ranges –Regulators prefer funding to higher confidence levels for volatile risks –Actuarial Standard of Practice #36 –Auditing accountants focus on FAS 5 Reinsurance –If only funding retentions, only net numbers are needed –If captive cedes to reinsurers, need gross as well as net

Aon Global Risk Consulting 9Casualty Loss Reserve Seminar – September 2007 More Considerations Less predictable exposures –Examples: Earthquake, construction defect –Part of the consideration for capital requirement –Affects premiums, losses, dividends Discounting –Regulators and auditors must approve –Can affect premium and losses

Aon Global Risk Consulting 10Casualty Loss Reserve Seminar – September 2007 So What’s New?

Aon Global Risk Consulting 11Casualty Loss Reserve Seminar – September 2007 Captive Trends: Third-Party Business Homebuilders: Bid credits for wrap-ups –Bid credits on project books are converted into captive premium Employee Benefits –DOL fast track for risks that fit profile When captive premium for unrelated business is > 50% (or 30 %?), all the parent premium is tax deductible

Aon Global Risk Consulting 12Casualty Loss Reserve Seminar – September 2007 Captive Trends: Surety bonds Public institution –To provide surety bond capacity for contractors/subcontractors for major construction projects Entertainment risk –To increase capacity and reduce cost by offering surety to escrow accounts –Vast majority of capital loaned back to the parent

Aon Global Risk Consulting 13Casualty Loss Reserve Seminar – September 2007 Captive Trends: Cat Exposures TRIA –As long as TRIA regulation remains, captive owners are writing property risk to tap into Government reinsurance Earthquake and Excess Property –Low probability/high severity risks are being assumed in captives –Brings capital challenges, and potential limits loss ramifications

Aon Global Risk Consulting 14Casualty Loss Reserve Seminar – September 2007 Contact Information: Jessica Christensen Aon Global Risk Consulting