Captive Insurance Program. How it Works!

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1 Captive Insurance Program How it Works!

2 Captive Definition An insurance company that provides insurance to and is controlled by its owners.

3 Types Of Captives Single Parent Rent-A-Captive Agency Captive Group Captives o o Homogeneous Heterogeneous

4 Reduce Costs Why A Captive? Improve Risk Management Improve Cash Flow Address Coverage or Administration Issues Control over Insurance Destiny Return of Underwriting Profits and Investment Income Multi-State Capabilities

5 Why Are Costs Lower? Premiums based on your loss experience Insulated from market conditions Fixed costs are lower Only good risks are accepted Enhanced loss prevention and claims management Return of unused loss funds and investment income

6 Insurance Coverage s Workers Compensation - Statutory Coverage - Employers Liability General Liability - Products Liability - Completed Operations Automobile Liability - Physical Damage

7 Specific Excess Insurance Statutory Umbrella Excess $1,000,000 Statutory Workers Comp. General Liability Auto $500,000 Captive Retention * Basket & Clash Coverage Included * ALAE Included in Retention as of 7/1/11

8 How is the Captive Protected? Aggregate Excess * Experience Adjustment (A) Loss Fund (A+B) $125,001 - $500,000 $0 - $125,000 *Unlimited Aggregate as of 7/1/11

9 Captive Flow INSURED CAPTIVE RESOURCES BROKER HARTFORD AFFINITY HARTFORD LOSS PREVENTION SERVICES GALLAGHER BASSETT CLAIMANT

10 Gallagher Bassett Services Nationwide Service Reserve Setting Claim Settlement Attorney Selection Process Hot Claims Procedure CRI Claims Services Manager - Claim Reviews - Quality Performance Reviews - They Work For You

11 Captive Flow INSURED CAPTIVE RESOURCES PROFITS BROKER HARTFORD AFFINITY HARTFORD LOSS PREVENTION SERVICES GALLAGHER BASSETT CLAIMANT

12 Captive Flow INSURED PROFITS AFFINITY

13 Share Certificates $36,000 purchase price ($100 Common share/ $35,900 Preferred share). Common Share - Voting rights, retains obligations for assessments & security collateral. Preferred Share Retains dividend rights, shareholder can be different from common share & share can be fractionalized. Shares can be transferred at a later date, subject to Board approval. Need to consider current share valuation.

14 Sample Member Loss Forecast: $400,000 Fixed Costs: $200,000 Premium: $600,000 ARO S $ 0 Total Pay-In: $600,000

15 Funding Structure $500,001 $500,000 $125,001 $125,000 $0 Reinsurance B FUND (Captive Shock Loss Layer) A FUND (Captive Frequency Loss Layer)

16 Sample Member $500,001 $500,000 $125,001 $125,000 $0 Reins. B FUND A FUND LOSS FORECAST = $400,000 A Fund $330,000 B Fund $ 70,000 Total $400,000

17 Loss Example #1 $195,000 of Total Claims less than $125,000 $500,001 $500,000 $125,001 $125,000 $0 Reins. B FUND A FUND B Fund Accounting $ 70,000 Beginning Balance A Fund Accounting $330,000 Beginning Balance - 195,000 Total Claims less than $125,000 $135,000 Remaining Balance

18 Loss Example #2 $500,001 $500,000 $125,001 $125,000 $0 Reins. B FUND A FUND $195,000 of Total Claims less than $125,000 and a $1,000,000 Catastrophe Claim. B Fund Accounting $ 70,000 Beginning Balance A Fund Accounting $330,000 Beginning Balance - 195,000 Total Claims Less than $125, ,000 1st $125,000 of Catastrophe Loss $ 10,000 New Balance

19 Loss Example #2 $500,001 $500,000 $125,001 $125,000 $0 Reins. B FUND A FUND $195,000 of Total Claims less than $125,000 and a $1,000,000 Catastrophe Claim. B Fund Accounting $ 70,000 Beginning Balance - 70,000 0 Ending Balance A Fund Accounting $330,000 Beginning Balance - 195,000 Total Claims Less than $125, ,000 1st $125,000 of Catastrophe Loss $ 10,000 New Balance Catastrophe Claim: $375,000-70,000 $305,000

20 Loss Example #2 $500,001 $500,000 $125,001 $125,000 $0 Reins. B FUND A FUND $195,000 of Total Claims less than $125,000 and a $1,000,000 Catastrophe Claim. B Fund Accounting $ 70,000 Beginning Balance - 70,000 0 Ending Balance A Fund Accounting $330,000 Beginning Balance - 195,000 Total Claims Less than $125, ,000 1st $125,000 of Catastrophe Loss $ 10,000 New Balance - 10,000 Add l for Cat. Loss 0 Ending Balance Catastrophe Claim: $375,000-70,000 $305,000-10,000 $295,000

21 Loss Example #2 $500,001 $500,000 $125,001 $125,000 $0 Reins. B FUND A FUND $195,000 of Total Claims less than $125,000 and a $1,000,000 Catastrophe Claim. B Fund Accounting $ 70,000 Beginning Balance - 70,000 0 Ending Balance A Fund Accounting $330,000 Beginning Balance - 195,000 Total Claims Less than $125, ,000 1st $125,000 of Catastrophe Loss $ 10,000 New Balance - 10,000 Add l for Cat. Loss 0 Ending Balance Catastrophe Claim: $375,000-70,000 $305,000-10,000 $295,000 Shared by All Members B Funds

22 Loss Example #3 $480,000 of Total Claims less than $125,000. $500,001 $500,000 $125,001 $125,000 $0 Reins. B FUND A FUND B Fund Accounting $ 70,000 Beginning Balance A Fund Accounting $330,000 Beginning Balance - 480, , ,000 A Fund Adjustment 0 Ending Balance

23 Experience Adjustment Schedule YEAR 1 YEAR 2 YEAR 3 YEAR 4 50% of 80% of 100% of $600,000 Premium Paid Experience Adjustment Due Experience Adjustment Due Experience Adjustment Due A Fund Claims Exceed A Fund Contributions by $150,000 (Paid Quarterly) $150,000-75,000 75,000 (Remaining (Paid Quarterly) $75,000-45,000 $30,000 (Remaining (Paid Quarterly) $30,000-30,000 0 (Remaining Balance) Balance) Balance)

24 Collateral Cash Letters of Credit

25 Collateral Requirements 2/3rd s of A Fund 1st Year 2/3rd s of A Fund 2nd Year 2/3rd s of A Fund 3rd Year Total = 2 X Average A Fund

26 Collateral Requirements Assume A Equals $330,000 Each Year 2/3rd s of A Fund 1st Year = $220,000 2/3rd s of A Fund 2nd Year = $220,000 2/3rd s of A Fund 3rd Year = $220,000 Total = 2 X Average A Fund = $660,000

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