A Practical Look at

the Captive Concept

Mexico City, Mexico – July 5, 2016

Distinctive. Choice.
INTRODUCTIONS – KEY STAFF

RICARDO KNIGHT
President & CEO
JLT Barbados

KIRK CYRUS
Executive Vice President
JLT Barbados

JUAN FELIPE LONDONO

Vice President
JLT Latin America

ANDREW HULME
Vice President, Underwriting
JLT Insurance Management
Presentation Overview

1 2 3
Captive Formations Operational Program Structures
Considerations
Key drivers to formation Lines of business
Regulation
Feasibility studies Retention & structure
Service Providers examples
Setup steps & timeline
Best Practice Pricing methodology
Capitalization &
operating costs
CAPTIVE FORMATIONS

Section 1

4
Risk Transfer Solutions

OR

Commercial Self-Insurance
Insurance Mechanisms
• Self-Insured Retention
(SIR) Program
• Large Deductible
Program
• International Insurance
Company (e.g.
Captive)
The Captive Concept

• A licensed insurance company incorporated

as a wholly owned subsidiary of an non
insurance parent formed to primarily insure or
reinsure the risks of its parent and/or affiliates.

• A sophisticated vehicle for self-insurance and

risk financing allowing the management of
retained risk in a formalised manner, creating
greater control of (re)insurance programs.

• Formed and regulated in a specialized

environment or ‘domicile’.
Profile of the Captive Insurance Market (2014)

• 6,876 captives globally

• In 100 domiciles (…and in 30 States in the U.S.)

• $55B of the global commercial insurance premium of $600B

• Of which U.S. Corporations represent 50-60% by volume

• 271 Captives in Barbados

• 90% of the Fortune 1000 Companies

• 50% of the Global Property and Casualty Premium written

through captives
Profile of the Insurance Market

- Captive Insight
 Mexico and LATAM
• Market penetration in Mexico and LATAM < 5%

• Due to tax and insurance regulation … but this is now

changing due to expanding network of tax treaties and tax
information exchange agreements

• Mexican and LATAM companies can now look to make

captives an integral tool in their risk management programs
for both domestic and global operations

• Yet still, established companies in Mexico, Colombia and

Brazil have used captive structures for many years
CAPTIVE BENEFITS

CAPACITY:
• Remove “uninsurable” risk exposures from Parent Balance Sheet
• Management of Deductibles and retention limits
• Create capacity (via direct insurance, act as a reinsurer)
• Strategic layer completion

CASH FLOW:
• Investment Potential
• Management of Cash flow
• Wholesale market access cheaper than direct markets
• Can be tax deductible premium expense for parent
• Dividend release can be aligned with Parent’s capital needs to reduce debt/equity ratios;
tax loss offset….
• Source for risk management financing and reward
CAPTIVE BENEFITS
COST SAVING:
• Stabilization of Premium using capacity and retained
earnings during hard markets
• Insulates owner from withdrawal of market capacity
• Long term consistency
• Use as a profit center

COVERAGE:
• Allows direct access to reinsurance markets
• Tailored insurance programs
• Flexibility
• Acts as a negotiation tool in coverage and pricing with markets
• Provide DIC/DIL coverage
CAPTIVE BENEFITS

CONTROL:

• Corporate focus on own Risk Management

• Corporate control of own premiums & claims
• Influence program design & cost
• Centralized access to loss data
• Claims handling
CAPTIVE BENEFITS
…Ultimately, it is to control the cyclical nature of the insurance market .
Rates High
Losses High
No Market Capacity

Rates Low
Losses Low
Insurance easy to buy
Road Map to Captive Formation
Setup - Feasibility Study

Risk Identification
• What specific risks does the sponsor believe will fit
within a captive structure?
• Are these currently placed in the commercial
market?
• Are these “uninsurable” risks?
• What are the regulatory issues?
• Fronting required?

Risk Quantification
• Collection of data
• Loss history (minimum of 5 years)
• Exposures, limits, territories, etc.
Setup - Business Plan

Vital to show how the captive’s performance will be

measured.

• Pro forma financial projections  5yrs

• Detailed analysis of program structures
• Regulatory compliance (solvency / liquidity
calcs)
• “Rules of engagement” – what operating
protocols ( i.e. no 3rd party business)
• Directors & Officers – detailed bios.
• Identify & appoint service providers
Capitalization - USD

Minimum Capital $125,000

Solvency Margin 20% Annual Retained

Premium for each
successive year
Financial Performance

Captives can operate with

$1m a little as USD 1 million in 3% Returns on invested funds
G.W.P.

Total captive expenses

Underwriting expenses 20% should typically be below
include: 20% of premium
• Fronting fees
• Brokerage fees
• On-shore Taxes (federal or Operating expenses:
state/provincial as applicable)
• Investment management fees • Minimum costs associated with
• Claims expenses, TPA and Loss the domicile include those for
Adjuster fees audit, actuarial, captive
• Financing guarantee costs manager and domicile fees
• Risk may be reinsured (in some
cases close to 100%)
Set up Costs – USD$

Service
Cost Item Provider Low High
Incorporation and
Licensing
Manager 10,000 20,000

Government
Regulator 740 740
Fees

License Fee Regulator 10,000 10,000

FATCA Tax 1,800 2,500

Audit Chartered
Accountant
1,000 2,500
Certification

TOTAL 23,540 35,740

Annual Operating Costs – USD$

Service
Cost Item Provider Low High
Management Manager 40,000 150,000

Audit Auditor 15,000 45,000

Corporate
Secretary 2,500 10,000
Administration
License Regulator 10,000 10,000

Actuarial Actuary 5,000 25,000

Local
Director Fees Executive
2,500 5,000

Miscellaneous Misc. 3,000 5,000

TOTAL 78,000 232,000

OPERATIONAL CONSIDERATIONS

Section 2
 Captive Domicile Snapshot

BERMUDA BARBADOS

Number of captives/managed insurance companies 800 271

SCC Legislation Yes Yes

ICC Legislation No Yes
Applicability of Solvency II No No

Minimum Capital - Insurance Captive $120,000/$250,000 $125,000

Minimum Capital - Reinsurance Captive $120,000 $125,000

Minimum Solvency Margin 20% NWP 20% NWP

Migration/Re-domiciliation legislation Yes Yes

Loan-back to parent company permitted Yes Yes

Loan-back to parent company admissible asset Yes restricted Yes restricted

Audited Financial Statements required Yes (Statutory only) Yes

Corporate Income Tax 0% 0%

Annual License fees - Captive $5,000 $10,000

License Application Timeframe 1 month 1 month

 Choice of Domicile - Barbados
• Extensive Treaty Network that offers reduced W/H tax, capital
gain exemption, certainty of tax treatment of the investment in
the source country, among other benefits
• Investment protection treaties that offer most favoured nation
status to companies, guaranteeing dividend repatriation, and
internationally arbitrated compensation for assets
nationalised, which is, itself, an effective deterrent
• Treaty network facilitates proven future expansion
internationally
• Signatory to the Multilateral Competent Authority Agreement
• Low operating costs and fee structure
• Simple and transparent solvency requirements
• Large local work force of qualified accounting and
administration professionals
 Barbados - Regulatory Environment
 Regulatory authority in Barbados is the Financial Services Commission (FSC)
and licensees subject to:
 Barbados - Regulatory Environment
The type of licence is detailed in Business Plan that outlines the specific risks
to be underwritten:
Barbados - Regulatory Environment

Rent-a-Captives (i.e. SCCs and ICCs)

Company A Company B Company C Company D Company E Company F

The legislation governing the Barbados An international insurer can segregate its assets
Captive
segregation of assets and liabilities in Insurance and liabilities in Barbados in 3 distinct manners:
Com pany, Ltd
Segregated Cell Company (SCC)
Barbados was first introduced by the
Separate Account Company (SAC)
Companies (Amendment) Act 2001-30 Incorporated Cell Company (ICC)

A-01 B-02 C-03 D-04 E-05 F-06

Com pany A Com pany B Com pany C Com pany D Com pany E Com pany F

(1998) (1998) (2001) (2007) (2007) (2009)

 Corporate Governance
“…The process by which the Captive makes
and executes management decisions…”

Composition of Risk Review

Board of Directors
The extent to w hich there is a
Competence, capability, deviation from the defined risk
honesty, integrity and and the process by w hich this
technical soundness of is handled
members and their attendance
and eligibility to vote at
meetings

Captive

Compliance
Standards Legislative
Confirmation to the regulator that Oversight
the company complies in all
material aspects with the
requirements of the governance Practice directives from
code regulator stating the minimum
requirements for governance
Operations Best Practice

Insurance
Management
Services.…
The role of the captive manager is
very different to the one of the broker

Essentially, the manager is the staff

of the captive insurance company

What to expect from a full service

manager:

• Financial reporting
• Insurance services
• Business planning
• Treasury management
• Optimized I.T. systems

The captive manager is the gate-

keeper to maximum success through
coordination and team facilitation
Operations Best Practice

How best to deploy surplus capital...

• Increase retentions in existing U/W structure

• Optimize investment risk/returns
• Enter new lines of related business
• Enter new lines of (controlled) 3rd party business
• Dividend back to the parent
LINES OF BUSINESS & PROGRAM
STRUCTURES

Section 3
 Structuring Captives (e.g. Mexico)

Deducts premium Insures risk Deducts premium

Reduces taxable Mexican Insurer Mexico Reduces taxable
Premium income
income

Dividends
Reinsurance
W/h Tax - 5%
Premium
(0% Premium Tax)

Exempt (Re) Insurance Company

Barbados

(As Stand alone or Rent-a-captive)

Taxed at 0%
Typical Lines of Business
DIC/DIL
Capacity wraps
• Fronting for reinsurance Loss
boosters
capacity portfolio
Swing transfers
• Primary retention/deductible
premium and ADC’s
funding protections Excluded
• Property/Time Element perils write-
Risk back
• Large retentions Incubation protection
• Casualty Captive Costs cap
Natural collars
• Primary casualty funding catastrophe Solutions
• Professional liability buy-outs
• Marine cargo and transit Finite Risk
Retention
• Employee insurance products buy-downs
Reinsurance
• Group life and disability Second and (excess of
• Terrorism subsequent loss and
• Bonding loss event quota share)
Single and
protections Commutation
• Punitive damages ‘wraps’ multi- line
and Novations
aggregate
• Filling gaps in excess stop loss
programmes and DIC
• Dealing with ‘uninsurable’ risks
Retention Strategy and Growth

Market
Start-up Maturity Innovation Leader
Retention Strategy and Growth

Market
Start-up Maturity Innovation Leader
Retention Strategy and Growth

Market
Start-up Maturity Innovation Leader
 Retention Strategy and Growth

£50m £50m agg

No Insurance or Additional Rentention

Toxic
Mould,
£5m eel/ Silica, Toxic Mould, Silica, Asbestos Liability
£10m agg Asbestos Risk Transfer
Liability
Retention
Toxic Mould, Silica, Asbestos Liability Risk Transfer

£250,000 eel/ £250,000 eel/

£1m agg £1m agg
Toxic Mould, Silica, Asbestos Liability Retention Toxic Mould, Silica, Asbestos Liability Retention

25% 50% 75% 100%

Market
Start-up Maturity Innovation Leader
Retention Strategy and Growth

Innovation
Retention Strategy and Growth
2012 2013 2014 2015

£250,000 eel/ann agg iro £500,000 eel/ann agg iro £250,000 eel/£500,000 £100,000 eel/£300,000
Toxic Mould Non-Damage BI ann agg iro Brand Damage ann agg EIL
100% retained by captive 100% retained by Captive 100% retained by captive 100% retained by captive
or SIR or SIR or SIR or SIR

£250,000 eel/ann agg iro
Toxic Mould
50% retained by Captive
or SIR
50% risk transfer
£500,000 eel/ann agg iro £250,000 eel/£500,000
Non-Damage BI ann agg iro Brand Damage
50% retained by Captive 50% retained by captive
or SIR or SIR
50% risk transfer 50% risk transfer

£250,000 eel/ann agg iro

Toxic Mould £500,000 eel/ann agg iro
10% retained by Captive Non-Damage BI
or SIR 100% risk transfer
90% risk transfer

Start-up Maturity Innovation Market Leader

 Pricing Methodology
Utilize commercial market techniques to develop bespoke pricing
methodology:

• Stability of cost: Stability in the cost of risk over the long-term.

• Viable underwriting premiums: Ensure that the captive underwrites to a

profit/breakeven in the long term, and maintains sufficient premium for
expected attritional losses.

• Ensure risk transfer: Pricing in line with risk retention and expected loss
ratios.

• Strong governance: In establishing a bespoke pricing methodology, the

captive can demonstrate a consistency in its approach and demonstrate
that key decision making functions are undertaken within the captive at
an arms length from the shareholder.
Conclusions

Summary:

• Captives tried and tested

• Mexican Companies continuing to access Captive

structures

Next Steps:

• Will this work for you?

• Pre-feasibility assessment performed by JLT

50
Thank You!