EMPLOYEE BENEFITS IN CAPTIVES

1. EMPLOYEE BENEFITS IN CAPTIVES Risk Management for Financial Managers & Accountants November 17, 2000

2. EMPLOYEE BENEFITS IN CAPTIVES • BASIC CONSIDERATIONS • ERISA • COLUMBIA ENERGY • NON-ERISA STRUCTURE • BRANCH CAPTIVES

3. EMPLOYEE BENEFITS IN CAPTIVES BASIC CONSIDERATIONS • Employee benefits allowed in Hawaii captives • Fronted program • Third-party risk • ERISA

4. EMPLOYEE BENEFITS IN CAPTIVES ERISA • Plan: • includes welfare benefit plan and a pension benefit plan; • WBP generally includes medical, accident, disability, etc. programs • Insurer qualified to do business in a state

5. EMPLOYEE BENEFITS IN CAPTIVES ERISA • Prohibited transaction • Party-In-Interest includes with regard to plan • an employer • a corporation to which 50% or more of the combined voting power is owned (direct or indirect) by the employer (e.g., a captive) • Prohibited transaction exemption

6. EMPLOYEE BENEFITS IN CAPTIVES COLUMBIA ENERGY • Bermuda captive with a Vermont branch • Captive a party-in-interest • Captive licensed in at least one state • Independent audit by certified CPA w/in one year preceding transaction • Captive retains independent fiduciary at Columbia’s expense

7. EMPLOYEE BENEFITS IN CAPTIVES COLUMBIA ENERGY • Financial exam of captive by domiciliary regulator (VT) w/in 5 years preceding transaction • Licensing state requires annual independent actuarial review of reserves

8. EMPLOYEE BENEFITS IN CAPTIVES COLUMBIA ENERGY The Plan: • No commissions paid by Plan on direct sale of contracts or reinsurance thereof • Reasonable and market competitive premium • Immediate and objectively determined benefit to Plan’s participants and beneficiaries • “A” or better rated front (Wausau)

9. EMPLOYEE BENEFITS IN CAPTIVES COLUMBIA ENERGY The Plan - continued • Big Difference < 50% Unrelated

10. EMPLOYEE BENEFITS IN CAPTIVES NON-ERISA STRUCTURE • Established as a Qualified Self-insured • Front provides excess coverage above minimum state required retention • Captive provides Aggregate stop loss coverage to Front at minimum state required retention (Pass through) • Policy considered contractual liability not Benefits. Outside ERISA jurisdiction

11. EMPLOYEE BENEFITS IN CAPTIVES BRANCH CAPTIVES • Used when captive reinsurer is domiciled in an offshore jurisdiction • In Hawaii - Act 133, SLH 2000 allows licensing of branch captives • No branch needed if captive reinsurer domiciled in Hawaii

12. EMPLOYEE BENEFITS IN CAPTIVES WHY DO IT? • Premium Deductibility • Increase Employee Benefit & Retention • Strengthen Captive