1. Captive 201 After the Feasibility and Implementation

2. Captive 201 After the Feasibility and Implementation Presented by: Kathleen Bibbings, EVP, Aon Insurance Managers (Bermuda) Ltd. Traver Alexander, Research Officer, Policy, Research and Risk Assessment Department, Bermuda Monetary Authority Craig S. Melnick, Manager, Global Insurance, Eaton Corporation Robert Paton, EVP, Aon Insurance Managers (Bermuda) Ltd.

3. Agenda – After the Feasibility and Implementation Overview of the Bermuda Captive Insurance Market Review – Feasibility and Implementation Day-to-day Captive Operations –Captive owner –Captive manager The Renewal process –Pre-renewal planning –Captive renewal pricing The Audit –Commencement of audit –Completion of audit –Statutory financial return filing Other Activities/Actions –Financial reporting - actual vs. budget –Board meeting –Business plan changes –Captive review

4. Overview of the Bermuda Captive Insurance Market

5. Sources Annual Market Survey on Captives –Administered jointly by: Bermuda Monetary Authority Bermuda Insurance Managers Association Statutory Financial Returns All figures for 2008 are provisional

6. Bermuda Captive Insurer Classification System Class 1 Captives –Single parent Captives insuring only the risk of that parent or affiliate Class 2 Captives –Single parent or multi-owner captives with allowance to insure 3 rd party risk up to 20% of NWP Class 3 Captives –Captives with allowance to insure 3 rd party risk over 20% but less than 50% of NWP

7. Topics Gross Written Premiums –Regional location of underlying risk –Property and Casualty coverage overview Main lines of business written Balance Sheet Size and Composition –Asset side overview Quoted investment detail –Liability side overview Profitability Indicators

8. Bermuda Captive Market Premiums

9. Premiums by Region of Underlying Risk

10. Assumed Premiums by Region of Underlying Risk

11. Types of Coverage

12. Major Property Lines of Business

13. Major Casualty Lines of Business

14. Bermuda Captive Market Assets

15. Assets Detail

16. Inside Quoted Investments

17. Liabilities Detail

18. Profitability Indicators

19. Highlights Small growth in gross written premiums in 2008 –Continued regional diversity in the location of risk Stability in balance sheet positions –Nearly two-thirds of assets in cash and quoted investments –Capital and surplus positions well in excess of regulatory requirements Bermuda remains the largest captive domicile

20. Review – Feasibility and Implementation

21. Captive Feasibility Sell to senior management the business reasons for the captive Get approval to do feasibility study Partner with a good consultant Demonstrate the advantages Optimal ownership structure Select your insurance or reinsurance markets Domicile Service providers Capitalization and form – cash vs. LOC vs. assets Obtain approval to implement the captive

22. Captive Implementation Select name – not as easy as it sounds! Identify directors and officers Obtain latest actuarial study Get market quotations to derive pricing Prepare proformas Complete the narrative Business Plan Select law firm to incorporate the entity Complete the captive application Attend pre-application meeting Always be honest and forthright with the regulators Submit application Obtain license Finalize arrangement with insurer or reinsurers Commence business

23. Day-to-Day Operations

24. Who is responsible for what Claims management/TPA management Claims reserve setting (actuaries) Receipts and payables Reporting requirements (monthly/quarterly) Investment management Operations Manuals – what should be included?

25. Roles and Responsibilities – Document in Procedures Manual

26. Day-to-Day operations - Captive Manager Act as Principal Representative in Domicile Co-ordinate activities of Domicile legal representatives, brokers, actuaries and other service providers, provision of financial services –Preparation of Financial Statements and Forecasts –Year end audits (independent approved auditor, assisted by Captive Manager) –Statutory filings Treasury Service Activities –Financial transactions (Captive Manager and Investment Manager) –Monitoring and processing cash and investment activities –Assist implementing of collateral requirements

27. Day-to-Day operations - Captive Manager Continued Insurance Services –Policy documentation –Mid-term endorsements –Claims handling (TPA with reports to captive manager) Business Development –Periodic reviews of captive utilization and development possibilities (Captive Manager/Consultant/Broker) –Implementing new programs

28. Day-to-Day operations - Captive Owner Provide leadership Determine the strategic use of the captive Set and Manage operational expectations Be the ultimate decision maker Approve filings Approve financials Provide necessary data

29. The Renewal Process

30. Pre-renewal planning When should the captive enter the renewal discussions? As early as possible! Who should be involved? Broker and insured with ‘skin in the game’ Review objectives Primary in captive and excess as insurance? Full limits in captive and excess as reinsurance? What is the best form of collateral? Policy writing and issuance. Standard or customized? Do not be afraid to forego use of the captive when capacity is cheap and security is good!

31. Captive renewal pricing Three usual methods of calculating premium 1.Market rates 2.Experience rating 3.Other premium pricing techniques

32. Market Rates Advantages Evidence of “arms length” pricing Usually produces higher premium – good if trying to build war chest Remove the need for captive to calculate Accepted by Captive Regulators Disadvantages Hard to persuade insurers to give rates/quotes each year May take more funds out of operational use than necessary Take into account industry data, not just insured data Include substantial administrative loadings Can be difficult to obtain in writing Can be far more volatile

33. Experience Rating Advantages Based on own experience, not industry Addition of “overhead” is usually much lower than commercial Premiums more palatable to insureds Gives better long-term cash flow Disadvantages Do not usually allow for profit margin, although can do Usually rely on investment income to address any adverse development. May not have sufficient data – revert to industry data.

34. Other Premium Pricing Techniques Mean (or Expected) Loss + Expenses Loss Ratio (using mean loss estimate, pricing to achieve a desired loss ratio) Targeted Return on Equity (pricing required to achieve targeted ROE, considering mean loss + expenses) Mean Loss + Risk Premium (percent of standard deviation) Confidence level Last year +/- inflation/growth percentage

35. The Audit

36. Commencement of Audit Audit planning meeting several months in advance Agree upon timeline and how this will be achieved Ensure other service providers agree with the timeline Prepared by Client customized request list issued well in advance Inform auditors of any major changes in the program or in the process Have documentation supporting the main processes Avoid Material Weaknesses or Control Deficiency

37. Completion of Audit Be ready for the start of the audit and ensure items requested are available to the auditors Inform the auditors of any changes between planning and field work Early completion means less ‘subsequent events’ Recommend frequent communication with auditors to ensure the audit is progressing smoothly

38. Statutory Financial Return Filing Specialized reporting format required by domicile Required 4 months or 6 months after fiscal year end depending on class of license Must be opined upon by an approved auditor May require a Loss Reserve Specialist Opinion prepared by an approved actuary depending on class of license

39. Other Activities/Actions

40. Financial Reporting – Actual vs. Budget Compare written premium closely to actual cash received If exposure changes, issue addendum to policy and associated invoice Are expense deductions taken by the front company the same as appears in the contract? Check carefully! As premium is recorded and earned, adjust IBNR so budgeted loss ratio is achieved As claims and reserves are recorded, adjust IBNR Compare claims with expected and take action! Is cash being received in a timely manner? Interest income in-line with expectations? Are general and administrative expenses in line with budget? If not, why not?

41. Board Meeting Get it on everyone’s calendar early Consider special invitees such as: –regulator, investment managers, claims, auditor, actuary, reinsurance broker, etc Present the important topics such as premium, claims, investments, dividends, etc. Encourage meaningful debate Review compliance check-list and ensure adherence This may be a once a year opportunity to make an impression – don’t waste it! Afterwards….. Have fun!

42. Business Plan Changes Material changes to business written, limits, reinsurance, may require prior approval from regulators Capital reductions, change in certain investments (loan backs) may require prior approval from regulators Such actions are best recorded as Board decisions Rationale for changes should be documented Material impact on the captive’s financials require revised projections and revised business plan Captive manager should make the risk manager aware of these requirements

43. Captive Review What measures are available to review performance? Review of service providers – how have they performed? Things learned for next year

44. Types of Review Utilization Governance Review Financial Performance Ratios Full Analytical Review Integrated With Parent Financial Impact

45. The Ovation Questions and Answers