Actuarial Considerations for Captive Insurance Companies Casualty Loss Reserve Seminar September, 2007

1. Actuarial Considerations for Captive Insurance CompaniesCasualty Loss Reserve SeminarSeptember, 2007 Jessica Christensen Aon Global Risk Consulting

2. 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

3. 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

4. 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

5. The Actuary and the Captive • Role in captive formation • Ongoing captive responsibilities Casualty Loss Reserve Seminar – September 2007

6. 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

7. 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

8. 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

9. 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

10. So What’s New? Casualty Loss Reserve Seminar – September 2007

11. 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

12. 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

13. 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

14. Contact Information: Jessica Christensen Aon Global Risk Consulting www.jessica_christensen@ars.aon.com Casualty Loss Reserve Seminar – September 2007