Increase Deposits by Promoting Captive Insurance Model

1. Increase Deposits by Promoting Captive Insurance Model Sessions 4a and 4b (1:45-2:45) By: Jeremy Colombik, CPA Captives●NQDC●Insurance Brokerage

2. What is a Captive? • It is an Insurance Company

3. Pre-Captive Solutions Example: Your client is an owner of a very successful business: • Yearly Gross sales of 10MM • Business Income of 1MM • Risk Insured with Commercial Insurance Policies: • Trade Credit, Directors and Officers Liability, Employee Dishonesty • Self-Insured Risks: • Employment Practices, Cyber Risk, Loss of Key Talent, and Business Interruptions

4. Post-Captive Solutions • Yearly Gross sales of 10MM • Business Income of 1MM • Risk Insured with Commercial Insurance Policies: • Trade Credit, Directors and Officers Liability, Employee Dishonesty • Risk Insured with Captive Insurance Policies: • Employment Practices, Cyber Risk, Loss of Key Talent, and Business Interruptions Captive Benefits: • Profit Center • Reduce Commercial Insurance Premiums • Better Management of Risk • Increase Risk Awareness • Tax Benefits

5. Assets and Deposits for Bank • Yearly Gross sales of 10MM • Business Income of 1MM • $452,500 x 5 = $2,262,500 $452,500 x 10 = $4,252,000 Bank Captive Client Referrals Allow the Bank to Hold Money in Checking Account and /or Manage Captive Reserves

6. Why Is North Carolina Doing This? • Premium Tax • Jobs (insurance manager, accountant, actuaries, auditors and other professionals) Both mean more revenue for them.

7. What is 831(b)? • 831(b) effectively allows a small insurance company to receive up to $2.3 million per year in premiums, without paying any income taxes on those premiums. • The 831(b) election does not affect -- at all -- the deductibility of the premiums paid by the operating business to the Captive. Premiums are otherwise deductible, they may be deducted by the operating business just like any premium payments to a Captive. • This has the effect of creating an up to $2.3 million deduction in the operating business, with the premium monies transferred to the Captive, and with the Captive not paying any income taxes on the receipt of those premiums.

8. Comparison Captive vs. Non-Captive Risk management and the potential return with or without a Captive Non-Captive return on 100k per year Captive return on 100k per year **** * 1st year will include risk assessment fee ** Capital Contribution only considered on 1st year ****Operating Expenses (management + ceding + claims) ***Results may vary

9. Your client is a success business owner • Identify Typical Exposures • Relies on their reputation and referrals • Keeps track of their invoices with their laptop • Has multiple employees and one key employee • The business is located on the coast where natural disasters may occur Most businesses are exposed to numerous risks that do not fit easily into standard policy forms and the decision to form a captive insurance company is one that could prevent financial burden for business owners.

10. Contingent Business Income and Expense • Business Interruption • Contract Cancellation • Regulatory Changes/ Regulatory Investigation • Loss Due to Labor Shortage/Stoppage or Work Stoppage • Loss of Hospital Privileges • Loss of Hospital Referrals • Loss of Key Agent/Carrier/Subcontractor/Tenant • Loss of Key Contract/Customer • Loss of Key Person • Loss of Key Supplier (Supply Chain Risk) • Uncollected Receivable/Trade Credit • Supply Chain Interruption • Bankruptcy Legal • Executive Risk Coverages • Administrative Actions • Billing Audit Expense (Docs only) • Directors and Officers Liability • Employee Theft and Dishonesty/Employee Fidelity/Crime • Employment Practices Liability • Reputation Expense • FDA- Related Expense • HIPAA Audit Expense • Loss of Licenses • Legal Expense and Defense Costs Reimbursement • Fiduciary Liability • Wage and Hour Expense • Property • Commercial Policy Exclusions (Differences in Conditions) • Equipment Breakdown • Inland Marine • Loss of Inventory • Property Damage - In Transit • Property Damage - Mold & Fungi • Mineral Right Contract/ Mineral Right Regulatory • Environmental Liability/ Pollution Captive Insurance Typical Coverages • Other Coverages • Commercial General Liability • Cyber Risk • Patent Infringement • Pollution Liability/Clean Up • Reputational Risk/Brand Rehabilitation • Strike Insurance • Subcontractor Assurance Coverage/Subguard • Voluntary Product Recall/Contamination • Wrongful Acts • Gap Coverages • Contractual Liability • General Liability Gaps • Intellectual Property • Personal and Advertising Injury • Deductible Reimbursement • Auto Liability • General Liability • Pollution Liability • Products Liability • Workers Compensation

11. Captive Structure • An individual or business becomes a shareholder in a CHIC. • The CHIC offers property and casualty insurance for a business entity including standard coverage's and specialized coverage's for unique needs of particular business entities. Coverage is available only to businesses owned by CHIC shareholders. • The business applies for and purchases insurance from the CHIC. • An actuary assesses and quantifies risk and coverage limits. • Policies are approved and issued to the business.

12. Captive Structure Typical Structure Insured (s) Captive Insurance Company Issues Policies, Collects Premiums, Disburses Funds to TPA, State, and Feds Board of Directors Captive Manager Corporate Legal Counsel Actuary Domicile Regulations Bank & Investments Audit & Taxes TPA Claims

13. Captive Insurance Insurance Ceding Co. Captive Insurance Co. Offers Insurance lines of coverages and pays claims. Half of risk is distributed amongst all direct written business Operating Business Reinsurance Insurance Co. Captive Insurance Co. $_____ annual insurance premiums for property and casualty insurance coverages Receives $____ on annual premiums for reinsuring risk Risk Reduction Plan Owner Invest $_____ to become a shareholder in a Captives insurance company Contribution of Capital Ownership Control

14. How a Claim works? CLAIMS • As with all insurance companies, captives are expected to manage, process and potentially pay claims.

15. Insurance RISK Pooling INSURED 100% Premium 100% Claims Ceding / Fronting Company POOL 50% Insured’s Claims 50% 3rd Party Claims 50% 3rd Party Premium (Less Ceding Commission) 50% Insured’s Premium (Less Ceding Commission) Reinsurance Company – CHIC (Captive)

16. Claim flow • Example of a $300k claim • How much of that $300k claim is your captive responsibility Your Direct claim responsibility $150k $150k to be spread out in pool You submitted a Claim for $300k Captive (2) – 15K Captive (3) – 15K Captive (4) - 15K Captive (5) - 15K Captive (7) - 15K Captive (9) - 15K Captive (10) - 15K Captive (8) - 15K Your Captive (1) - 15K Captive (6) - 15K Total Claim $150k+$15k = $165k

17. approved Claim • Claim Receipt with all supporting documentation • Send to third party underwriter for analysis • Receive final outcome after thorough analysis • Provide Client with recommendations and approved result. • Disbursement of amount stipulated by coverage • Claim Analyst Recommendation: • Following our claim review and supporting financial/ patient booking documentation submitted in respect of the closure and subsequent loss of income for the operating location, our recommendation would be to settle the submitted claim as follows: • US $37,500 - 20% deduction for rebooking clients - US $1,000 deductible. Recommended settlement offer = US $29,000

18. Misconceptions in Captives Common Misconceptions in Captives • Captives are very expensive • All Captives are offshore • Captives are not good risk management tools • Captives are only for Fortune 500 companies • Captives are not a good business decision

19. Assets and Deposits for Bank • Yearly Gross sales of 10MM • Business Income of 1MM • $452,500 x 5 = $2,262,500 $452,500 x 10 = $4,252,000 Bank Captive Client Referrals Allow the Bank to Hold Money in Checking Account and /or Manage Captive Reserves

20. Who Qualifies for Captive Insurance • Do you work with business owners that have gross revenues of one million or more per year? • Are your clients looking for better management of risk? • Do your clients enjoy benefits that exceed the cost?

21. Who Are We…? • We provide the finest expertise in creating and managing Captives (CHIC). • We manage and form Captives for a wide variety of businesses (small to medium sized companies) (Onshore and Offshore) • Compliance/reporting • Underwriting • Claims Management • Financial Management MSI is one of the Largest Captive Managers in the North Carolina Domicile

22. Questions… Answers…