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Captives & Actuaries

Captives & Actuaries. Session C 22 June 19, 2007 Casualty Actuarial Society. Michael R. Mead, CPCU. President of four captive management companies, one consulting firm and one brokerage firm President of Arizona Captive Insurance Companies Association

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Captives & Actuaries

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  1. Captives & Actuaries Session C 22 June 19, 2007 Casualty Actuarial Society

  2. Michael R. Mead, CPCU • President of four captive management companies, one consulting firm and one brokerage firm • President of Arizona Captive Insurance Companies Association • Past Chair of Captive Insurance Companies Association • Expert commentator on irmi.com

  3. Contact • mike@crusadercaptiveservices.com • 312-316-5084 • 800-800-4324 • 773-693-4990 • Crusader Captive Services LLC • 8600 W. Bryn Mawr Avenue, Suite 820 North, Chicago, IL 60631-3505

  4. An Actuary • “An actuary is a person who passes as an expert on the basis of a prolific ability to produce an infinite variety of incomprehensible figures calculated with micrometric precision from the vaguest of assumptions based on debatable evidence drawn from inconclusive data derived by persons of questionable reliability for the sole purpose of confusing an already hopelessly befuddled group of persons who never read the statistics anyway.” • Karen Daley, Perr & Knight

  5. A Captive • A form of insurance in which the insured gets what he deserves. • M.R. Mead

  6. Take Away • The actuarial process is vital to the success of getting the license for the captive. • Practical communication is everything. • Over 50% of commercial P&C market is in alternative risk (captives, etal)

  7. Starting Up and Maintaining a Captive Insurer • Do it for control of your risk dollars • Do it for the long term • Do it for coverage availability • Do it for price advantage • Do it for tax deductions

  8. Typical Approaches • Five years of loss, exposure data on Excel spread sheets • Knowledgeable, experienced people • Plenty of cash • Known, proven suppliers, regulators • Usual coverage

  9. More common approach • No loss data • No policy form • Owner unfamiliar with captives • Funding with unconventional methods • New domicile, regulator

  10. Traditional Captive Lines • General liability • Professional and products liability • Auto liability • Director and officer liability (D&O) • Employment practices liability • Environmental liability • Workers’ compensation • Product or service warranty • Property and business interruption

  11. Emerging Lines • Employee Benefits (ERISA and non-ERISA) • TRIA (Terrorism Risk Insurance Act) • Surety bonds and fiduciary risk • Shipping coverages • Title and private mortgage insurance • Property and business interruption • Equipment maintenance • Construction exposures (OCIPs – Owner Controlled Insurance Programs) • Trade credit risk

  12. Exotic Lines • Self-insured medical stop-loss (non-ERISA) • Managed care errors and omissions (E&O) • Reputation risks • Intellectual property/brand risks • Product recall coverage • Medicare “fraud and abuse” insurance • Integrated risk (earnings –EPS – protection) • Tax audit insurance • Punitive damages coverage

  13. Types of Captives • Single parent – Pure • Group/Association • Agency • Segregated Cell • Life and Health • Rentals • Tax specific (501(c)XV, 831(b) )

  14. Domiciles • 30 states +/- • 100 foreign countries • 20 knowledgeable regulators +/-

  15. Onshore vs. Offshore • Golf, ski or scuba? • Quality of regulation • Availability of service • Accessibility of domicile • Forget taxes (pretty much)

  16. Ownership • How will you get the deduction? • Group? • NCFC? • 831(b)? • What is the tax posture? • Who is advising?

  17. Risk Sharing Partners • Is the insurer hanging paper or jailing the client? Or helping? • Whose side is the actuary on? • If the owner doesn’t control it, how is it a captive? • Does the accountant know what a captive is? • Is the broker the manager?

  18. The Manager • Bookkeeping • Quasi cop • Some fiduciary responsibility

  19. Role of the Actuary • Set the captive’s retentions • Establish collateral levels • Recommend rates, policy forms • Recommend reinsurance structures • Defend the captive’s choices to other actuaries

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