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University Of California
Captive 101 Risk Summit 2014
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Captive Primer What is a Captive?
A limited purpose, licensed insurance company, the main business purpose of which is to insure the risks of the captive’s owners A risk assumption vehicle An insurance or reinsurance company Specifically established to insure or reinsure the risks of its parent or associated third parties
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Captive Primer Risk Financing Continuum HIGH Program Control LOW HIGH
Self-Insured Trust Complete assumption of risk with limited regulation Single Parent Captive Complete assumption of risk Subject to Regulatory Oversight Group Captive Pooling of Risk with Participants subject to Corporate Governance Program Control Deductible Policy Significant/complete risk assumption in exchange for deductible credit Retro Policy Assumption of limited risk in exchange for potential return premium Deferred “pay-in” premium Guaranteed Cost Complete transfer of risk Commercial insurance with no deductible LOW HIGH Financial Control
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Captive Primer Factors Driving Captive Growth
The unwillingness/inability of insurers to provide cost effective insurance The need for new capacity for certain risks The drive control to frictional and non-loss costs Lack of confidence in the traditional markets ability to differentiate and provide stable protection The enhanced focus on loss prevention and intelligent claims handling The opportunity to take risk and profit positions in affiliate business The opportunity to see favorable risk management, wealth and tax outcomes
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Risk Transfer Arbitrage
Captive Primer Types of Captive Utilization Retained Risk Finance Risk Transfer Arbitrage Access to Capacity Third Party Business Infrastructure for providing transparency, validation, and rationalization of retained risk positions Enhancing risk management efforts Mutualizing risks across portfolios Reinsurance market cost of risk transfer is less than commercial retail cost of risk transfer Better use of capital to retain risk than transfer it Managing total cost of risk Federal programs (TRIA) Reinsurance capacity, which may not be otherwise accessible in commercial retail market (trade credit risk, +10 yr pollutions risks) Franchisee programs Consumer facing insurance programs (warranty, service contract, point of sale insurances, etc) Affiliate business (vendors, VAPs, distributors, etc) Agency captives 3rd party business
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Captive Primer Captive Utilization and Lines Of Business
Line of Business Utilization Model Rationale Value Proposition WC, AL, GL, EPLI, Property, APD Uninsured Risks ERISA Benefits Self-Insured Medical, STD, LTD, Exec. Life Retained Risk Finance Governance, financial optimization, and cost reduction of retained risk positions Reduced loss costs thru visibility and alignment Accelerated tax deductions WC, AL, GL, EPLI, Property, APD, Products Liability, Professional Liability Medical Stop Loss Group Captive or Pooling Sharing risk provides for greater retention capacity Gain control of insurance framework, costs, services and profits Reduce cost of risk Access profitability of insurance program Gain control of infrastructure Products Liability, Professional Liability, Environmental Liability, E&O, Terrorism, Trade Credit, Cyber Capacity and Rate Arbitrage A captive facilitates trading in the insurance marketplace as an insider Access to broader, more competitive capacity Ability to take out any commercial capacity which is driving rate Certain lines of business lend themselves more naturally to certain utilization models
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Fiat Lux Risk and Insurance Company
Why did UC form Fiat Lux? Help manage volatility in retained risk positions between silo’d trust infrastructure Provide coverage to stakeholders who don’t fit in self-insured trust mechanisms Support enterprise risk management efforts by building mutually beneficial insurance infrastructures for various stakeholders Reduce cost of risk Capitalize on enterprise risk management expertise Support development of revenue generating insurance activities
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Captive Primer Domicile Decision Factors
Capitalization and surplus requirements Receptiveness of regulatory environment Quality of local infrastructure Availability of expertise Stability of regulatory environment Flexibility as respects investment portfolio Ease of doing business – in a suitably regulated environment Experience in business under consideration Efficient financial outcomes: tax, investment etc. Availability of relevant corporate structural options
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Captive Primer Domicile Options Onshore: (over 35 States!) Offshore:
Vermont Hawaii District of Columbia South Carolina New York Delaware Arizona Tennessee Nevada Utah Montana Puerto Rico U.S. Virgin Islands Offshore: Bermuda Cayman Islands Barbados Ireland Malta Channel Islands (Guernsey/Jersey) Gibraltar Isle of Man Luxemburg British Virgin Islands Turks & Caicos
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Fiat Lux Risk and Insurance Company
Why did we domicile the captive in Washington DC? California does not have captive enabling legislation… so we could not form it here Washington DC has a very progressive captive law, allowing for the degree of structural and operational flexibility we need in order to build a scalable captive o meet strategic needs Washington DC allows for segregated captive facilities, which will assist in building diverse portfolios of insurance business with differentiated insurance company partners and managing tax outcomes at the captive and shareholder level Washington DC provides for the corporate from we needed in order to have a captive and comply with CA securities and insurance law UC has a campus in DC – UCDC – leadership already has a purpose for visiting
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Fiat Lux Risk and Insurance Company
How is Fiat Lux governed? What service providers does it use and why? Board of Directors Meets 3-4 times a year Comprised of: University President University CFO University CRO University General Counsel Outside directors Captive Manager – Willis Actuary - Bickmore Auditor - PWC Attorney – McDermott Will and Emory Consultant – Willis Reinsurance Brokers – various
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Risk Transfer Arbitrage
Fiat Lux Recap Utilization Plans for UC Fiat Lux – Phase 1 Retained Risk Finance Risk Transfer Arbitrage Access to Capacity Third Party Business Workers Compensation Auto Liability General Liability Professional Liability Employment Practices Liability Property Terrorism Casualty Terrorism Small Vendor Program
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Risk Transfer Arbitrage
Fiat Lux Recap Utilization Pans for UC Fiat Lux – Phase 2 Retained Risk Finance Risk Transfer Arbitrage Access to Capacity Third Party Business Workers Compensation Auto Liability General Liability Professional Liability Employment Practices Liability Threat & Security HPL Provider Stop Loss for Health Systems Property Terrorism Casualty Terrorism Small Vendor Program Student Tenant / Gadget insurance Affiliate Physician Med Mal insurance Program
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Fiat Lux Risk and Insurance Company
The Big Picture – Phase One
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Fiat Lux Risk and Insurance Company
What’s on the horizon for Fiat Lux? Student insurances: Tenant / Gadget on-campus, Tenant / Gadget off-campus Health Systems: Affiliated physician insurance programs (several target portfolios); Provider Stop Loss Conversion of HPL into captive with reinsurance program General Liability & Property Weird Coverage Threat & Security Commercialization of ERM expertise Affinity programs serving several communities Roll out of commercial programs to other systems (CSU, SUNY etc)
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Fiat Lux Risk and Insurance Company
The Bigger Picture
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Fiat Lux Risk and Insurance Company
Questions? Q&A
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