bermudacaptive.bm

1. www.bermudacaptive.bm JUN 2 - 4, 2014

2. An Introduction to Captives and the Bermuda Domicile Moderator: • Peter Willitts, President, Liberty Mutual Management Speakers: • Liz Cunningham, Senior Manager, Deloitte Ltd • Leslie Robinson, Assistant Director, Bermuda Monetary Authority • Scott D. Slater, Senior Manager, PricewaterhouseCoopers • Kent Smith, Associate, Conyers Dill and Pearman

3. An Introduction to Captives and the Bermuda Domicile Agenda • The Truth About Bermuda • What and Why a Captive • Including Actuarial and Consulting Considerations • Overview of Legal and Governance Issues • Regulatory Overview • Tax Considerations Made Simple

4. The Truth About Bermuda • 650 miles east of Cape Hatteras, N.C. • 23 square miles, population over 60,000 • Dependent Territory of United Kingdom • World’s # 1 Captive Domicile with 862 captives domiciled at December 31, 2011 • 3rd largest reinsurance market in the world • Over 30 of the top reinsurers in the world are based in Bermuda – exceeding the number in any other country

5. The Truth About Bermuda

6. The Truth About Bermuda So How is it working for the insurance market? • 1960s: Frederic Reiss – Birth of captives in Bermuda • Mid 1980s: Excess Liability market – ACE, XL • 1990s: Reinsurance market – Hurricane Andrew • New waves of capital • 2001 response to September 11, 2001 • 2005 response to hurricanes • Innovation in Policy Forms, Cell Companies, Captive Pooling and other specialized commercial vehicles, such as SPIs and Sidecars

7. The Truth About Bermuda How is it working for Captives? • Almost 100 captives have been domiciled in Bermuda for over 40 years, and another 300 for over 30 years • Companies from over 40 countries spanning the globe have domiciled their captives in Bermuda • In addition to the accounting community, there are 275 professionals in Bermuda with the CPCU or ACII designations – the largest concentration within a quarter square mile anywhere

8. The Truth About Bermuda General Insurers • Class 1 266 22.0% • Class 2 307 25.4% • Class 3 254 21.0% • Class 3A 104 8.6% • Class 3B 16 1.3% • Class 4 31 2.6% • Blue means Commercial Insurers

9. Place Title Here Long-Term Insurers • Class A 2 0.2% • Class B 0 0.0% • Class C 79 6.5% • Class D 6 0.5% • Class E 14 1.2% • Special Purpose Insurer 55 4.5% • Dual Licences 75 6.2% • TOTAL 1209 • Blue means Commercial insurers

10. The Truth About Bermuda Comparative Number of Captives? Bermuda 831 Cayman 759 Vermont 588 Guernsey 344 Utah 342 Delaware 298 2013 Worldwide 6,559 2012 Worldwide 6,125

11. Liz Cunningham, Senior Manager Deloitte Ltd. What and Why a Captive? including Actuarial and Consulting considerations

12. What is a Captive? An insurancecompany that providesinsurance toand is controlledby its owners.

13. Definition • In essence, a premium funding vehicle for insuring losses of the parent, or its affiliates, for a specific retention level. • A financing mechanism that increases its insured’s control over coverage that can produce a lower net present value cost of risk financing than commercial alternatives. • Will be the preferred alternative to risk retention or commercial insurance if insureds/ owners have • Ability to retain risk • Motive (and ability) to pre-fund losses

14. Characteristics • Formed to primarily insure, or reinsure the risks of: • its parent, • affiliates • or of a number of parties with risks in common, • or unrelated risk • Licensed insurance company • Regulated under its own legislation • Usually formed in a specialized environment or “domicile” – “onshore” or “offshore” • Licensed only in its domicile and unlicensed in all other jurisdictions

15. Parent Company and Subsidiary Captive Company Premium Claims R/I Market Types of Captives • Single Parent (Direct) Captive: • Owned by a single parent and • insuring only its parents risk • exposures

16. Parent Company and Subsidiary Premium Captive Company Claims R/I Market Types of Captives • Single Parent (Indirect) Captive: • Owned by a single parent and reinsures (part of) the risks of its parent ceded by a “fronting” insurer. • Captive acts as a reinsurer. Fronting Insurer

17. O/I O/I O/I O/I O/I* O/I Captive Types of Captives • Multi/Owner Group Captive: • Owned by more than one parent and (re) insuring the risks of all owners. • Association Captive: • Owned by members of a • common industry or trade • association. • This type of captive is designed • to insure the risks of that • industry among its members. • Participation is limited to • members of the association. *O/I = Owner Insured

18. Cell 2 Cell 3 Cell 1 Cell 4 Cell 6 Core Cell 5 Types of Captives • Segregated Account Company: • Each cell is built around a central core account and insures the risk of a different owner. • There is no risk sharing between the cells.

19. Why Form a Captive? • Benefits come in three main forms: • Financial • Cost Saving • Cash-flow • Risk Management • Coverage • Capacity • Control • Profit Center • Connected/controlled third party business

20. Understanding insurability Low Frequency High Severity High Frequency High Severity Severity Low Frequency Low Severity High Frequency Low Severity Frequency

21. Insurable Risk Confidence Level Insurable Risk Tolerance Level Retain Transferable Transferable (Material) Identify Upper Limit Possible Captive Retention Probability of Loss Loss Value ($) Markets won’t insure or will charge excessive premium Earnings & Working Capital can sustain losses Earnings & Equity Capital are sensitive to losses Equity holders may be willing to chance a loss Risk Retention Strategy Risk Transfer Strategy Is the Risk Transfer and Financing Paradigm Changing?

22. Understanding the Market - - - = Captive Performance Rates High Losses High No Market Capacity Rates Low Losses Low Insurance easy to buy

23. When Does a Captive Make Sense? • Insurance buyer has greater knowledge and understanding of the value a captive program can bring to an organization • Desire for greater flexibility in program design • Desire for broader and simpler insurance contracts • Anticipation of hard market pricing • Desire to obtain coverage for non-traditional exposures for which no other alternative exists • Insurance programs of significant premium size • Good loss experience • Degree of loss control capability • Commitment of senior management • Clearly defined objectives • Significant lag between loss occurrence and payment dates • Level of risk retention determined • Co-operation of direct & reinsurance markets • Possible tax benefits

24. Reasons Not to Form a Captive • Insurance markets are cost effective • Unable to make long term or capital commitment • Inappropriate risk profile • Tax and regulatory complications • Insufficient premium volume • Lack of risk appetite

25. Types of Coverages

26. Initial Steps To Forming A Captive • Risk Assessment (Exposures & Appetite for Risk) • Design • Coverages • Limits/Retentions/Deductibles • Capitalization • Domicile • Funding and Feasibility Study • Expected Losses • Expenses • Capitalization • Pro Forma Financials • With Business Plan, Basis for the Captive Application

27. How the Actuary can help • Project ultimate cost of future loss payments for… • Funding study • Feasibility assessment • Captive design (coverages, limits, retentions etc) • Reinsurance structure • Ongoing reserve setting • Statutory reporting requirements

28. Data is key! • Overview of subject business (classes, nature etc) • Claims triangulations by class • Individual claims experience (by class / geographical area) • Historic exposure information (payroll, property schedule etc) • Financial statements of captive and parent • Limits and attachment point profiles • Details of any inuring reinsurance • Details of any anticipated exposure changes over the next few years

29. Loss Development Triangles • These are tables that show changes in value of a group of losses (either paid or reported) or claim counts over time • Loss development triangles are typically used to derive expected reporting/payment patterns • Example of a reported loss triangle: • Dimensions in a development triangle: • Rows represent accident years • Columns represent age or maturity • Diagonals represent the valuation date 29 29

30. Common Actuarial Methods for Estimating Ultimate Loss • Ultimate loss = cumulative paid loss (known) + case reserves (known) + Incurred But Not Reported (estimate). • The relationships among these three components vary tremendously by line of insurance, by jurisdiction, and by time interval being reviewed (e.g., recent accident years versus mature accident years). The relationships also vary from captive to captive depending on the captives’ claims management philosophies and procedures. • For short-tail lines e.g. auto liability paid claims and case reserves typically represent a high proportion of ultimate claims at early maturities. • For long-tail lines e.g. medical malpractice or workers compensation, there is a lengthy period associated with reporting and settlement of claims. 30 30

31. Common Actuarial Methods for Estimating Ultimate Loss • Most common actuarial methods include: • Expected loss Method • Loss Development Method • Bornhuetter-Ferguson Method • No single method can produce the best estimate in all situations. Actuaries use more than one method and select, using actuarial judgment, the most appropriate estimate 31 31

32. Unique Risks of Captive • Availability of data • Quality of data • Timing differences • Solvency of other parties (i.e. reinsurers) • Complex or bespoke programs

33. Kent Smith, Associate Conyers Dill & Pearman Overview Legal & Governance Issues

34. Key Governing Statutes • Companies Act 1981 • Insurance Act 1978 - Insurance Accounts Regulations 1980 - Insurance Returns & Solvency Regulations 1980 (together, the “Regulations”) • SAC Act 2000 (for SACs)

35. Establishment in Bermuda • Incorporation in Bermuda • Merger / Amalgamation into Bermuda • Continuance into Bermuda

36. Insurance Act – License Classifications • General Business • Classes 1,2 & 3 – Captives • Classes 3A, 3B, 4 - Commercial • Long Term (annuity, life accident & health) • Classes A & B – Captives • Classes C,D & E – Commercial

37. Segregated Accounts • Any general business or long-term insurer wishing to operate segregated accounts may apply to be registered under the Segregated Accounts Companies Act 2000 (SAC Act).

38. Process to Establish Company in Bermuda • Application to incorporate / amalgamate / merge / continue into Bermuda / register under SAC Act is made to the ROC. • Beneficial owners (10% + beneficial owners) to be vetted by the lawyers and approved by the BMA (per Exchange Control Act 1972). • Application to incorporate can be made separately from the insurance license application (but is often made in tandem). • For amalgamations / mergers / continuances / SAC registrations, completion of the transfer may not occur until the BMA provides its non-objection to the ROC.

39. Registration under the Insurance Act Pre-Licensing Considerations • Decision made to form captive / re-domicile into Bermuda • Consideration given to class of captive • Selection of service providers • Insurance Manager • Lawyers • Auditors • Banker • Actuary / Loss Reserve Specialist

40. Registration under the Insurance Act Pre-Licensing Documentation Consists of: • Business Plan • 5 year pro-forma financials (Balance Sheet and Income Statement) • Pre-incorporation Form • Parent company financial statements • Resumes (senior management / directors) • Acceptance letters for service providers • SAC Form 1 (if applying for SAC registration)

41. Registration under the Insurance Act Pre-Licensing Application • Application filed with BMA by 5:00pm on Monday prior to ALC consideration at their weekly meeting the following Friday. • Four possible outcomes • Approved • Approved, but subject [ ] • Deferred • Declined

42. Organising the Company (a) Meetings to be held: - Provisional Meeting - Statutory Meeting - 1st Board Meeting (b) Items to be approved: - Approval of service providers (auditors, insurance manager, principal representative, resident representative, approved actuary / loss reserve specialist etc.) - Bank account opening - Bye-Laws

43. Formal Insurance License Application • Once required capital is paid into company, Form 1B (registration application) may be submitted to the BMA. • Insurance license may be issued in three days if application complete. • Captive can start writing business once certificate of registration has been issued.

44. Insurance Act – Main Provisions 1. Minimum paid-up Share Capital - $120,000 for Classes 1,2 & 3 - $120,000 for Class A - $250,000 for Class B 2. Principal Representative and Principal Office / SAC Representative • All Bermuda Insurers are required to maintain a principal office and appoint a principal representative resident in Bermuda (usually the Insurance Manager). • SACs must appoint a SAC representative resident in Bermuda.

45. Insurance Act – Main Provisions 3.Independent Approved Auditor • All Bermuda Insurers are required to appoint an independent approved auditor who will audit and report on the insurer’s statutory financial statements and statutory financial returns. 4.Actuary / Loss Reserve Specialist (LRS) - Class A & B insurers must appoint an approved actuary – must be an individual-responsible for preparing the actuary’s certificate filed with annual statutory return. - Class 2 and 3 insurers (and Class 1s if required by the BMA) must appoint an approved loss reserve specialist – must be an individual – responsible for preparing the LRS opinion in respect of company’s loss and loss expense provisions in its annual statutory return.

46. Insurance Act – Main Provisions 5.Statutory Financial Statements and Returns • - Every insurer must prepare annual audited statutory financial statements and submit to the BMA with its statutory financial return. • - Rules and guidance for preparation are set out in the Regulations. • - Statutory financial statements not prepared in accordance with GAAP. • - The statutory financial statements and statutory return are not public documents.

47. Insurance Act – Main Provisions 6.Minimum Solvency Margins An insurer’s statutory assets must exceed its statutory liabilities by an amount greater than its prescribed minimum solvency margin. 7. Minimum Liquidity Ratio (MLR) Every general business insurer must maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities.

48. Insurance Act – Main Provisions 8. Restrictions on Dividends and Distributions • Company may not declare or pay a dividend or distribution if it is in breach of its MSM (or MLR for general business) or if declaration or payment would cause such a breach. • Any company that fails to meet its MSM (or MLR for general business) on the last day of any financial year is prohibited from declaring or paying any dividends during the next financial year without BMA consent. 9. Restrictions on Reduction of Capital - No Bermuda insurer may reduce its total statutory capital (as per previous year’s financial statements) by 15% or more without prior BMA approval.

49. Insurance Act – Main Provisions 10. Insurance Code of Conduct All Bermuda insurers must comply with the Insurance Code of Conduct. - Designed to ensure sound corporate governance, risk management and internal controls are implemented.

50. Captive Governance