1. GROUP CAPTIVES A Risk Financing Alternative May 7, 2015 David Bubb Senior Vice President Marsh Inc.

2. MARSH 1 Group Captives Today’s Discussion Points Introductions The Basics of a Group Captive Captive Structure Loss Examples The Differentiators Next Steps

3. MARSH Value Proposition

4. MARSH Group Captives Value Play WC, GL & Auto $500k Premium WC, GL & Auto $500k Premium WC, GL & Auto $540k Premium WC, GL & Auto $530k Premium WC, GL & Auto $530k Premium $0 $1mm $350k Year 1Year 2Year 3Year 4Year 5 $100 k Losses $500 k Losses 5 Year Premium:$2,600,000 5 Year Losses:$ 900,000 Loss Ratio: 34%

5. GROUP CAPTIVE BASICS

6. MARSH Methods of Managing Risk Conventional Insurance Transfer All Losses Limited Benefits Risk Management Retain Predictable Losses Transfer Catastrophic Losses Majority of Insured Marketplace Non-Insure Retain All Losses Uninsurable Risks

7. MARSH An insurance company controlled by its owners. that provides insurance to and is What is a Captive?

8. MARSH Group Captives Benefits Cost control, cost efficiency and cost smoothing Premiums paid to insurance entity that Members own Member shares in the underwriting and investment profits Superior loss control and claims handling Control – You own it!

9. MARSH 8 ServiceProvider Captive ManagementMarsh—Cayman Actuarial ServicesPinnacle Actuaries AuditorsPricewaterhouseCoopers BankingRoyal Bank of Canada Third Party AdministratorGallagher Bassett InvestmentsRoyal Bank of Canada Loss PreventionRisk Consultants, Inc ReinsuranceAIG Fronting CarrierAIG Best In Class Partnership Those Who Make It Work

10. MARSH Coverages Provided WC, AL, APD, GL and Excess Liability Workers’ Compensation Excludes Monopolistic States - ND, OH, WA, WY ­Statutory ­Employers’ Liability Automobile ­Liability ­Physical Damage General Liability

11. CAPTIVE STRUCTURE

12. MARSH Captive Structure Has the exact look as traditional insurance Captive Retention $0 $ 1,000,000 Umbrella / Excess Work Comp General Liability Automobile Umbrella / Excess Same mechanics for: Certificates of Insurance Insurance Policies Umbrella

13. MARSH Captive Structure A Reinsurance Company behind a Quality Fronting Company Captive Retention $ 350,000 $0 $ 1,000,000 Basket & Clash Coverage Umbrella / Excess Work Comp General Liability Automobile Umbrella / Excess

14. MARSH Captive Structure How is the Captive Protected A Fund B Fund Possible Assessment Specific Protection Aggregate Protection $ 0 $ 350,000 Specific & Aggregate Protection $ 1,000,000 Excess $125,000

15. MARSH Sample Member Loss forecast = $ 500,000 Pay in = $ 746,000 B Fund (Captive Shock Loss Layer) A Fund (Captive Frequency Loss Layer) $ 400,000 $125,000 $350,000 $ 100,000 Reinsurance $1,000,000 $ 246,000

16. MARSH Operating Costs: Operating Costs Details Reinsurance 97,73213.10% Front 21,2622.85% Premium Tax 36,5564.90% FET 6,5650.88% Claims 31,7074.25% Risk Control 7,4601.00% Broker 11,1911.50% Off Shore Exp 26,1123.50% Variable Exp 7,4601.00% 246,04632.98%

17. LOSS EXAMPLES

18. ANTICIPATED YEAR OF LOSSES

19. MARSH 18 $100,000 Beginning balance A Fund B Fund Reinsurance Loss Example #1 Anticipated Loss Year B Fund Accounting A Fund Accounting $400,000 Beginning balance - 190,000 Total claims less than $125,000 $210,000 Remaining balance $190,000 of total claims - All losses less than $125,000 $125,000 $350,000

20. MARSH 19 “Anticipated Year” Results Accounting $210,000 A Fund +100,000 B Fund + 25,000 Estimated interest $ 335,000 Estimated return

21. CATASTROPHIC CLAIM YEAR

22. MARSH 21 $100,000 Beginning balance A Fund B Fund Reinsurance Loss Example #2 Catastrophic Loss Year B Fund Accounting A Fund Accounting $190,000 of total claims – all claims less than $125,000 and a $1,000,000 catastrophe claim $125,000 $350,000 $400,000 Beginning balance - 190,000 Total claims less than $125,000 $210,000 Remaining balance

23. MARSH 22 $100,000 Beginning balance - 100,000 $0 Ending balance A Fund B Fund Reinsurance B Fund Accounting A Fund Accounting $190,000 of total claims less than $125,000 and a $1,000,000 catastrophe claim Catastrophe Claim: $225,000 - 100,000 $ 125,000 shortfall $125,000 $350,000 Loss Example #2 Catastrophic Loss Year $400,000 Beginning balance - 190,000 Total claims less than $125,000 - 125,000 1 st $125,000 of catastrophic claim $ 85,000 Remaining balance

24. MARSH 23 $100,000 Beginning balance - 100,000 $0 Ending balance Reinsurance B Fund Accounting A Fund Accounting $190,000 of total claims less than $125,000 and a $1,000,000 catastrophe claim Catastrophe Claim: $225,000 - 100,000 $ 125,000 -$85,000 $40,000 $125,000 $350,000 Loss Example #2 Catastrophic Loss Year $400,000 Beginning balance -190,000 Total claims less than $125,000 -125,000 1 st $125,000 of catastrophic claim $ 85,000 Remaining balance - 85,000 Add’l for catastrophic loss 0 Remaining balance A Fund B Fund

25. MARSH 24 $100,000 Beginning balance - 100,000 $0 Ending balance Reinsurance B Fund Accounting A Fund Accounting $190,000 of total claims less than $125,000 and a $1,000,000 catastrophe claim Catastrophe Claim: $225,000 - 100,000 $ 125,000 -$85,000 $40,000 $125,000 $350,000 Loss Example #2 Catastrophic Loss Year $400,000 Beginning balance -190,000 Total claims less than $125,000 -125,000 1 st $125,000 of catastrophic claim $ 85,000 Remaining balance - 85,000 Add’l for catastrophic loss 0 Remaining balance Shared Risk A Fund B Fund

26. HIGH FREQUENCY YEAR

27. MARSH 26 $100,000 Beginning balance A Fund B Fund Reinsurance Loss Example #3 High Frequency Year $400,000 Beginning balance B Fund Accounting A Fund Accounting - 550,000 - 150,000 150,000 A Fund Experience Adjustment 0 Ending balance $550,000 of total claims - All less than $125,000 each $125,000 $350,000

28. Experience Adjustments & Collateral

29. MARSH Year 1Year 2Year 3Year 4 Frequency Fund Exceeded Original Funding by $150,000. 50% of Experience Adjustment Due. $ 150,000 - 75,000 $ 75,000 (remaining balance due) 30% of Experience Adjustment Due. $ 75,000 - 45,000 $ 30,000 (remaining balance due) 20% of Experience Adjustment Due. $ 30,000 - 30,000 0 (remaining balance due) Frequency Fund Adjustment (Assessment) Example

30. MARSH 29 Collateral Cash Letters of credit Collateral Functions Member to member obligations Capitalizes the captive Collateralize policy- issuing carrier

31. MARSH 30 Collateral Requirements Year 2 2/3rds of A Fund 2 nd year Total = 2 X average A Fund Year 1 2/3rds of A Fund 1 st year Year 3 2/3rds of A Fund 3 rd year

32. MARSH 31 Collateral Requirements Total = 2 X average A Fund = $792,000 Assume A Equals $400,000 Each Year $264,000 Year 2 2/3rds of A Fund 2 nd year Year 1 2/3rds of A Fund 1 st year Year 3 2/3rds of A Fund 3 rd year

33. MARSH Group Captives How does the Captive Do Business? 2 Offshore Board Meetings per Year Every Member has an equal vote Committee Structure – Underwriting, Investment, Finance, Loss Control Control – You own it!

34. Thank You!