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Actuarial Considerations for Captive Insurance Companies Casualty Loss Reserve Seminar September, 2007. Jessica Christensen Aon Global Risk Consulting. Captives: Quick Refresher. What is a captive? Limited purpose insurance company Who owns the captive? Single parent Group and associations
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Actuarial Considerations for Captive Insurance CompaniesCasualty Loss Reserve SeminarSeptember, 2007 Jessica Christensen Aon Global Risk Consulting
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 Casualty 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 Casualty 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 Casualty Loss Reserve Seminar – September 2007
The Actuary and the Captive • Role in captive formation • Ongoing captive responsibilities Casualty 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 Casualty 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 Casualty 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 Casualty 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 Casualty Loss Reserve Seminar – September 2007
So What’s New? Casualty Loss Reserve Seminar – September 2007
Captive Trends: Third-Party Business When captive premium for unrelated business is > 50% (or 30 %?), all the parent premium is tax deductible • 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 Casualty 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 Casualty 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 Casualty Loss Reserve Seminar – September 2007
Contact Information: Jessica Christensen Aon Global Risk Consulting www.jessica_christensen@ars.aon.com Casualty Loss Reserve Seminar – September 2007