Why captives might be right for your business

Why captives might be right for your business

Contents 1 What is a captive? 1 Why would I consider a captive as part of a more modern, flexible approach to risk finance? 1 2 How does a captive work? 2 Reducing your overall costs of risk finance 2 Insuring the uninsurable 3 Developing bespoke customer solutions 3 How do I know if a captive is right for me? 4 3 I m interested in learning more. What happens next? 6 Contacts 6 Willis Group Holdings plc is a leading global risk advisor, insurance and reinsurance broker. With roots dating to 1828, Willis operates today on every continent with more than 17,000 employees in over 400 offices. Willis offers its clients superior expertise, teamwork, innovation and market-leading products and professional services in risk management and transfer. Our experts rank among the world s leading authorities on analytics, modelling and mitigation strategies at the intersection of global commerce and extreme events. Find more information at our website, www.willis.com, our leadership journal, Resilience, or our up-to-the-minute blog on breaking news, WillisWire. Across geographies, industries and specialisms, Willis provides its local and multinational clients with resilience for a risky world. Why captives might be right for your business

What is a captive? 1What is a captive? A special purpose insurance company established solely for the purpose of financing risks emanating from the activities of its parent group. There are many technical definitions of captives. One of the most frequently used is A special purpose insurance company established solely for the purpose of financing risks emanating from the activities of its parent group. What is more important, however, is the role a captive might be able to play in supporting your business strategy, in enhancing your financial and operational performance and in helping you achieve your corporate goals in an ever-changing global marketplace. Why would I consider a captive as part of a more modern, flexible approach to risk finance? There are many reasons why a captive might work for you. Perhaps you would like your insurance premium to better reflect your own loss experience, rather than that of the market as a whole. You might feel that commercial insurers fail to take proper account of your robust loss control procedures in calculating your annual insurance premiums and that you are simply paying too much for your cover. Perhaps you operate across many different regions and want to bring greater consistency to the coverage you buy and more control over your insurance and claims data, particularly in countries where the insurance market is less developed. It might be that you are currently exposed to uninsured risks, or risks where there seems no economically viable option available from commercial insurance markets. Alternatively, it might be that you want to offer your customers added-value options that enhance your brand and help differentiate you from your competitors in a crowded market. Whatever your aims, it might be that a captive can help you achieve them. Why captives might be right for your business 1

How does a captive work? 2How does a captive work? Figure 1: Reducing your cost of risk finance There are a number of ways in which captives can work for you. Reducing your overall costs of risk finance Most businesses accept a small element of their own risk, typically through the use of deductibles, and then insure everything above that level with commercial insurance markets. For many companies, however, it might actually be more economical to take a higher percentage of their own risk, reducing the amount of insurance they need to buy commercially. It is in this area of increased self-retained risk that a captive can provide an efficient, effective solution. There are a number of important considerations that need to be taken into account, notably: 1. the capacity and/or willingness of the captive parent to accept increased risk; 2. the availability and cost of commercial cover; 3. the amount of capital available to commit as support for that risk and, of course; 4. the predicted level of costs likely to be incurred when compared with any expected reduction in commercial premium spend. Finding the right balance is key to deciding whether a captive strategy is right for your business, and that is where we can help, analysing your current insurance programme, your limits and claims and, where Why captives might be right for your business 2

How does a captive work? appropriate, providing a clear recommendation on how a captive might work for you. Where your activities extend overseas, a captive can also be a highly effective way to bring consistency to your insurance arrangements, and can help you capture data to support your multinational risk management strategy. Insuring the uninsurable Where you have uninsurable risks, or risks where commercial insurance is uneconomic, a captive can be used to provide the cover you need in an effective, purpose-built vehicle. Placing uninsured risks through a captive enables you to properly fund for potential losses, and to smooth cash-flow in the event of a claim. Figure 2: Insuring the uninsurable A captive might even be able to offer access to commercial reinsurance options that would not typically be available to you. Once we have a clear understanding of your needs, we will help you understand whether a captive solution is right for you. Developing bespoke customer solutions A captive is a bona fide insurance company owned by its parent and, as such, has the capacity to offer products that might not be generally available in the commercial insurance market, or which are tailored exclusively to your product and to the specific needs of your client. Where you already offer insurance-backed products (such as Warranty) to your customers, but through a third party provider, a captive can help you generate additional revenue by taking a direct share in any underwriting profits. Why captives might be right for your business 3

How does a captive work? If you are looking for an effective means to increase revenues from your current customer base, a captive just might be right for you. Figure 3: Generating new revenue How do I know if a captive is right for me? The Feasibility Study will provide you with everything you need to make a fully informed decision on whether a captive is right for you. Our Global Captive Practice is a world leader in designing, implementing and managing captives for our clients. Located in every major captive domicile, we employ a dedicated team of specialists with a reputation for delivering creativity and innovation alongside a rock-solid approach to the provision of administration, accounting and compliance services. Before any client takes the decision to establish a captive, we help them understand whether a captive is the right option for them. In advance of a formal Study, we are happy to talk with you to better understand both your business and risk finance objectives to establish whether a captive might be the right option for you. There is no typical profile of a captive owner because much depends on one or more of a wide range of factors including: current premium spend; loss history; geographic distribution of risk; risk appetite; availability and pricing of commercial alternatives; desire to develop customer solutions. Once we have had an initial opportunity to understand your business, the next step is usually to commission a Captive Feasibility Study. A Feasibility Study is a bespoke analysis of whether a captive is the right vehicle for you, and provides a detailed business plan that considers: whether the right vehicle should be a Captive, a wholly-owned Protected Cell Company ( PCC ), a Cell in a Third Party-Owned PCC or any other appropriate structure; Why captives might be right for your business 4

How does a captive work? what risks would be best written by the captive, including a detailed recommendation of optimum limits; an analysis of the best-suited domicile, and whether an onshore or offshore vehicle is most appropriate; capital and solvency implications; a detailed 5 year financial projection based on an actuarial analysis of your risks; a strategic development plan, taking your captive from formation to potential development opportunities as it matures; an analysis of exit options. The Feasibility Study will provide you with everything you need to make a fully informed decision on whether a captive is right for you. Why captives might be right for your business 5

I m interested in learning more. What happens next? 3I m interested in learning more. What happens next? We are always delighted to talk with clients about the general concepts behind captives so that they can get a better flavour of whether they might be right for them. Willis employs a team of captive specialists in the UK who are available to meet with you, or to take your call, by way of an initial, exploratory discussion. There is no obligation to proceed further unless we agree that a captive might be worth further investigation. There is no doubt that captives are being increasingly used by a wide range of businesses and industry sectors to provide innovative risk finance solutions that provide a real business advantage. Let us help you seize that opportunity. Contacts Asia Pacific Brendan Duggan Tel: +65 6591 8075 Email: brendan.duggan@willis.com Europe & ROW Tim Byrne Tel: +35 (1) 407 4984 Email: tim.byrne@willis.com North America - Sean B. Rider Tel: +1 212 915 7865 Email: sean.b.rider@willis.com Why captives might be right for your business 6

I m interested in learning more. What happens next? www.willis.com www.williscaptives.com The Willis Global Captive Practice is part of the Willis group of companies - the global risk adviser, insurance and reinsurance broker. (Willis Group Holdings plc (NYSE: WSH)) 10/2014 Why captives might be right for your business 7