The Rent-A-Captive Alternative This brochure is made available for informational purposes only in support of the insurance relationship between FM Global and its clients. This information does not change or supplement policy terms or conditions. The liability of FM Global is limited to that contained in its insurance policies. FM Global’s Rent-A-Captives at a Glance

in, and receive the benefits of, a captive Watch Hill Insurance Company – Considering the Captive Option through our established “rent-a-captive” a sponsored, protected-cell When purchasing insurance, every facilities. These options are available (also known as a segregated cell), business seeks to optimize the point to our clients through the Watch Hill controlled corporation that serves at which it transfers risk through its Insurance Company, based in Vermont, as FM Global’s onshore option choice of self-insured retention. When USA; and New Providence Mutual in North America for alternative the point is set too low, it can raise Ltd. (NPML), based in Bermuda risk transfer. The company was risk-transfer premium, and the business (see sidebar at right). established in the state of Vermont, needlessly trades loss dollars with the the largest domicile for captive insurance company. When set too high, insurance companies in the United it exposes the company to unnecessary How a Captive Operates States, to meet the needs of clients volatility for relatively little savings. Although captive insurance companies in North America who want to keep have been effective risk management their financial interests onshore. Most companies still use a deductible tools for many years, the word “captive” as the sole means of controlling self- can be confusing, and the benefits of a insured retention. Sophisticated captive often require some explanation to New Providence Mutual Ltd. – a segregated-cell, companies are turning increasingly determine if a captive is the right choice. (NPML) controlled corporation, based in toward captives, which offer a more Bermuda. Bermuda provides formal, flexible and controllable risk- A captive insurer—or simply, a captive, New Providence Mutual and its retention framework. They are choosing is a closely held insurance company clients with a stable offshore captives for a variety of reasons— whose insurance business is primarily political environment, along with to share in the profits of favorable supplied by and controlled by its own- an established insurance, reinsurance underwriting performance, generate ers, and in which the original insureds and banking infrastructure. investment income, fund consistent are the principal beneficiaries. Like a deductibles across all locations, traditional insurance company, a cap- maintain stability of pricing or obtain tive collects premium, pays losses and broader coverage. As a mutual insurer derives investment income. The share- focused on the long-term interests of holder-insureds actively participate in our clients, FM Global offers policy- decisions influencing underwriting, holders the opportunity to participate operations and investments.

 What Are the Advantages Is a Captive Right for You? The Rent-A-Captive Option of a Captive? The captive option is ideal for many A rent-a-captive allows organizations organizations, but not for all. The prime to obtain the benefits of a captive An organization can realize many candidates generally take a long-term insurance company, without the upfront benefits from using a captive as part view toward risk management, have costs, capital investment and significant of its risk management program. a strong belief in loss prevention, and maintenance cost associated with forming Significant advantages include are willing to share in the risk. Also, and managing an owned captive. the ability to share in underwriting the captive option is most attractive FM Global’s rent-a-captives are profit and investment income. By to those clients who can contribute structured as follows: the client effec- utilizing a captive, as opposed to enough premium to justify the tively “rents” a protected/segregated relying on traditional insurance, the administrative costs involved. As a cell, working capital, surplus and captive owner essentially retains the result, well-capitalized companies licenses from an FM Global-owned premium paid into the captive, earns often look to captives as a strategic facility. FM Global also arranges the income from the investment of the risk management solution. necessary administrative, claims, funds, and retains potential under- engineering, reinsurance placement writing profit. In addition, a well- Once a decision has been made to and admitted fronting services. Under managed captive will carefully analyze consider a captive, the next choice is the segregated/protected cell structure, its risk exposures, provide loss preven- simple: Do you establish your own there is no pooling of risk between tion assistance, monitor claims, and captive company, or use an existing cells. While Watch Hill Insurance transfer unwanted risk to reinsurers, facility, such as one of FM Global’s Company and NPML hold funds for resulting in a lower net cost for insurance. rent-a-captives? their insureds, each cell, and its assets, is legally separated from the others. As a result, each participant is protected from another cell owner’s adverse loss experience.

 Choosing to Rent-A-Captive: A Case Study

Participation in a rent-a-captive is a practical and cost-effective alternative in any number of circumstances. The following example illustrates one of many scenarios that are possible through the negotiation process when designing a rent-a-captive program.

During renewal discussions, a manufacturing company was several factors were considered. First, the risk management seeking a means to continue with the same program and team was confident in improvements already made to prevent services already being delivered at the local level, and for the loss at the company’s facilities. They also had determined corporation to benefit from its excellent loss experience. The their company could comfortably retain the first US$5 million company also wanted to pre-fund for future losses. Logically, (post-deductible) annual aggregate of losses. Moreover, the the discussion turned to captives, and which type of captive program would be easy to administer and be independently would suit the company’s objectives. For this mid-sized audited every year, and the company would receive quarterly organization, the process of forming an owned captive would financial statements detailing the performance of its cell. be complex and costly. If participating in a group or assoc- iation captive, the company’s funds might be exposed to the Under the agreement, FM Global would credit the premium losses of others. Therefore, the firm decided on a protected for the manufacturer’s US$5 million of additional risk reten- cell rent-a-captive. The next step was to choose one. tion, and cede that exposure to the segregated/protected cell established within the rent-a-captive. The fund benefits by It was important that the company retain its current engineering, positive underwriting results plus investment income. Money fronting and claims services, and that the rent-a-captive be in the fund can then be reinvested, used to reduce the letter a fully fronted program with a financially stable insurance of credit, put toward assuming a larger share of risk in future carrier. Following analysis of its finances and risk profile, the years, applied toward the reduction of future premium, or company chose to become a cell owner with New Providence taken back and used elsewhere by the insured. Mutual Limited (NPML) by retaining the first US$5 million of annual aggregate losses and expenses above the policy deductible. To reach the decision on the terms of its program,

 Rent-A-Captive: How Does It Work?

Launching your rent-a-captive program is as simple as signing a participation agreement—as contrasted with the many details involved FM Global’s Rent-A-Captive Advantages in establishing a new captive company. The diagram below shows the Stabilization: Virtually all CEOs, CFOs flow of funds in a typical rent-a-captive program. and risk managers have seen the volatility of commercial property premium over the past several years. The use of a rent-a-captive is an effective means to properly structure a program to smooth Client the impact of market fluctuations. Improved Cash Flow: Because Investment Income you are the captive cell owner, both Premium and Underwriting Profit you and the insurance company Letter of Credit benefit from profitable underwriting.

Net Ceded Premium Risk Improvement: The captive cell Policy Issuing Company owner benefits directly from property e.g., Factory Mutual Insurance Company/ Rent-A-Captive loss prevention measures to improve FM Insurance Company Limited/ Affiliated FM risk quality at the owner’s locations. Paid Claims Ease of Implementation: Fully established and professionally managed, Loss Payments our rent-a-captive program offers you instant access to an operating company, Claimants which means reduced capital requirements and minimal administrative burden. Also, our rent-a-captive option provides one-stop access to all property insurance services, including fronting, with easy entry and exit provisions, from a stable, The insurance transaction with our rent-a-captive works much the same financially secure provider. as that of a traditional insurance program: The client pays premium to the insurance company. A portion of the premium (an amount determined as part Flexibility: While the rent-a-captive of the program design) is then ceded as reinsurance to the client’s cell in our approach does not fit every situation, rent-a-captive. the professionals at FM Global have the ability to help assess whether a When there is a claim, the policy-issuing company makes the payment, and then program can be designed to best meet seeks reinsurance reimbursement from the client’s cell in the rent-a-captive. your organization’s insurance needs and serve its long-term interests.

Your FM Global client servicing team representative can help you determine whether a rent-a-captive might be the right option for your risk management program.



P0561 Printed in USA (12/05) © 2005 Factory Mutual Insurance Company All rights reserved. www.fmglobal.com In the United Kingdom: FM Insurance Company Limited, 1 Windsor Dials, Windsor, Berkshire, SL4 1RS Regulated by the Financial Services Authority.