Ride the Trend Cyber’S Potential and Pitfalls

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Ride The Trend Cyber’s potential and pitfalls

Growth Industry European View Marijuana’s captive future Associations on Solvency II

Group Captives Loss Control There’s strength in numbers Safety management is the key Is your Manager listening? THE RELATIONSHIP BETWEEN A CAPTIVE AND ITS MANAGER CAN DETERMINE A CAPTIVE’S SUCCESS.

Active Captive Management provides the following services:

• Captive consultation and risk analysis • Underwriting and policy administration • Feasibility studies • Captive accounting • Domicile recommendation • Claims processing • Capital and collateral evaluation • Annual compliance and regulatory management • Access to national service provider network • Annual risk analysis review • Company licensing and formation

To request a risk analysis, visit us online at: www.activecaptive.com or call 800-921-0155

Active Captive Management provides management services in the onshore domiciles of: Alabama, Delaware, District of Columbia, Florida, Kentucky, Hawaii, Montana, Missouri, Ne- vada, New Jersey, North Carolina, Oregon, Oklahoma, South Carolina, Tennessee, and Utah. Off-shore domiciles include: Anguilla and Nevis. NewsInBrief

UnipolSai re-launches reinsurer The ratings reflect EMANI’s excellent performance record and strong specialist business profile in the UnipolSai Assicurazioni has re-launched nuclear energy sector. CITINBRIEF its third-party reinsurer in Dublin to target property and casualty business. The track record of strong underwriting results is demonstrated by a five-year average Unipol Re has now become a third-party combined ratio of 34 percent, added A.M. Best. reinsurer and holds assets of more than €500 million in assets. Partially offsetting these strengths are EMANI’s exposure to large underwriting losses and the It will offer tailored reinsurance coverage potential for capital depletion following a full- to small and medium-sized insurance limit loss. companies throughout Europe, for a number of risks. The risk is mitigated by an extensive reinsurance programme, which is placed with a panel of The new company represents UnipolSai financial reinsurers. Assicurazioni’s first venture into reinsurance and the first time it has launched its brand Cyber risk Portfolio review shows risk Captives need to get their retaliation outside of Italy. takers rewarded against cyber attacks in first Enrico Pietro, chairman of the board of p20 Unipol Re, also holds the position deputy London & Capital has published its market general manager of general insurance at forecast for captives’ portfolios following the UnipolSai Assicurazioni. recent market turbulence.

Marc Sordoni, head of reinsurance for The asset management company cited the UnipolSai Assicurazioni, has been appointed Greek debt crisis, a comparatively strong CEO of the reinsurer and will supervise dollar and uncertainty in China, highlighted reinsurance for the 16 affiliated companies by the devaluation of the yuan against the of Unipol Group in Italy. dollar by the People’s Bank of China in August, as the year’s key events causing Michael Doyle, who is the chief risk officer of captives’ asset investment headaches. UnipolRe, previously worked at the Central Bank of Ireland in various roles in the London & Capital stated: “Equities were affected Emerging opportunities insurance supervision department. the most by the rise in volatility because it was Captives could be the answer to filling the expected that a sharp slowdown in global insurance gap in the legal marijuana industry Simon Wigzell, who was previously a senior economic activity would have a very damaging reinsurance manager at Fondiara SAI impact on company earnings.” p28 Group, has been appointed underwriting Group captives manager of UnipolRe. “The S&P 500 index was down 11 percent Joining a group captive could be a month to 25 August 2015, the low point in the rewarding decision Sordoni commented: “As our parent group’s Equity market correction.” p32 first venture outside of the Italian market, this represents an historic moment for the London & Capital went on to conclude: “The Europe update company. It was an important decision for index with the highest equity weighting had the The last stages of Solvency II are the group to make this move but thanks to worst performance, but even here, although the approaching and insurers are making the relevant current market share in Italy S&P 500 index was down 11 percent, captive good progress combined with the incentives Solvency II Index 3 was only down by 3.77 percent, thanks to p34 provides, it is made it a natural one.” the positive contribution from high grade bonds.”

“The fact is our parent company has great “Moreover, capping the maximum equity expertise in certain lines, in particular allocation at 30 percent also helped. The other third-party liability and property business. captive indices fared much better due to their We believe we can offer insurers very greater exposure to high grade bonds.” specific and tailored solutions thanks to this expertise, knowledge and database in these “Ultimately, the captive indices did what they types of business.” were supposed to do—enhance returns, and A.M. Best has assigned a financial strength protect capital the most for those (same) rating of “A- (Excellent)” and an issuer credit captives that require access to their capital rating of “a-“ to UnipolRe. The outlook for at short notice.” both ratings is stable. Safety management Looking ahead, London & Capital predicted How does a captive prevent losses A.M. Best assigns ratings to that “the main macroeconomic indicators from ocurring? suggest that the global economy is not p44 nuclear mutual insurer travelling head-long into a recession”. People moves A.M. Best has assigned a financial strength “The US service sector is expanding at New appointments at Allied World rating of “A (Excellent)” and an issuer credit its fastest pace since before the financial Global Markets, Beazley, the OIL rating of “a” to European Mutual Association crisis, oil prices are in the doldrums, the Group and more for Nuclear Insurance (EMANI). yield curve is still positive which is helping p50 3 NewsInBrief to boost banks’ profitability and their willingness to lend and global company earnings are still growing.”

“Consequently, captives with riskier portfolios will see their investment values recover and ultimately prosper, but with bumps along the way.” ACE Software to protect against sanctions risk

ACE Software Solutions has developed a solution for corporates to help manage sanctions risk.

The new solution, Pelican Sanctions, was unveiled at Eurofinance between 23 and 25 September in Copenhagen.

Banks are currently putting pressure on corporates to share the responsibilities for regulatory and sanction requirements.

Breaching sanctions can affect not only the reputation, but also the financial investment risk for any corporate organisation.

Pelican Sanctions provides a full analysis for all decisions taken by corporates to support audit and regulatory requirements. “Our members will receive customised services The report found that shareholders’ funds The solution can accurately screen allowing them to offset their risk arising from the reported by the Aon Benfield Aggregate transactions against any sanctions list, while use of technology and as they provide technology companies fell by 4 percent to $332 billion, providing explanations for all positive and products and services to their clients.” but the total was slightly higher at constant negative decision making. exchange rates, driven by solid earnings. Greg Gunn, managing partner of Gunn Mowery, Striking the Right Balance Parth Desai, who is CEO at ACE Software, added: “Gunn-Mowery is proud to partner with Premium growth is being achieved and in commented: “The focus on sanctions risk is the TCCP.” original reporting currencies, two-thirds of likely to increase as regulatory and reputational the ABA constituents achieved growth in risk are on the rise, which has led to corporates “Over the past 30 years, in addition to providing line property and casualty premiums in H1 2015. taking a more proactive approach in this area.” of business insurance and employee benefits, we For over two decades we have been at the forefront in the design and implementation of have developed expertise in several technology Underwriting performance remains strong, “Every corporate should have a responsibility areas including cyber liability, technology errors aided by low global catastrophe losses and risk management solutions for a vast array of clients. We offer a comprehensive range of and understanding of the sanctions risks and omissions, cyber security, and privacy.” favourable prior year reserve development. captive management services through our dedicated team of insurance professionals with involved and be actively committed to The combined ratio stood at 91.1 percent. implementing solutions to provide efficiencies Gunn added: “This experience, coupled with over 80 years of experience. and to better manage their business.” our outstanding customer service and integrity, The report also found that investment returns allows us to meet and surpass the unique needs are still under downward pressure, with little “Our solution has intelligence sanctions of TCCP member businesses.” prospect of relief in the near term. The ordinary filtering which provides peace of mind for any yield has declined to 2.8 percent. From the feasibility study and business plan preparation, through the license application global multinational corporation to manage Global reinsurer capital reaches and company incorporation process to the ongoing daily management of the captive, we risk and reputation.” Headline return on equity has eroded modestly, $565 billion but remains resilient at 10.7 percent (annualised). manage the process at each and every step to suit our clients’ requirements. TCCP and Gunn Mowery form Aon Benfield has estimated that global Sector consolidation continues, as companies strategic relationship reinsurer capital totalled $565 billion at the look to achieve the advantages of scale and end of June. diversification, according to the report. Contact us to see how our approach can deliver the right outcome for your business. The Technology Council of Central Pennsylvania (TCCP) and Gunn Mowery, a captive service Its report, which analysed the financial results Mike Van Slooten, head of Aon Benfield’s provider, have formed a strategic relationship. of 28 major reinsurers in H1 2015, showed international market analysis team, commented: that on an underlying basis, the capital “The landscape of the reinsurance industry is TCCP member companies will gain access to available to support reinsurance underwriting changing, driven by market dynamics in the comprehensive services that will help them was flat, with retained earnings offsetting developed world and the rising influence of to identify key areas where they can mitigate unrealised losses on bond portfolios. Asian capital.” risk and offset loss. Alternative capital continues to grow, but at “Discerning reinsurance buyers will continue Chuck Russell, CEO of the TCCP, commented: a slower pace than before, according to the to benefit in this environment, but the level of Derek Lloyd Gus Frangi “We’re excited to offer an on-ramp to Gunn report, which said that the total rose by 6 complexity is increasing and understanding broader +284 494 4078 +44 207 4882782 Mowery insurance products and services.” percent to $68 billion. industry trends has never been more important.” [email protected] [email protected] 4 www.amsfinancial.com

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From the feasibility study and business plan preparation, through the license application and company incorporation process to the ongoing daily management of the captive, we manage the process at each and every step to suit our clients’ requirements.

Derek Lloyd Gus Frangi +284 494 4078 +44 207 4882782 [email protected] [email protected] www.amsfinancial.com

Option 2- full page advert CIT.indd 1 16/01/2015 07:01 am NewsInBrief Premiums on the rise in CAIR member countries

The reported premium of Caribbean Association of Insurance Regulators (CAIR) member countries increased 20.4 percent between 2009 and 2013, rising from $3.6 billion to $4.5 billion, according to a new A.M. Best report.

A.M. Best conducted a five-year survey of CAIR member countries representing close to 7.4 million people, and in 2013, more than $74 billion in annual gross domestic product.

Of the 20 member countries, 18 participated in the 2013 data collection process. As the countries in the region are widely diverse with varying reporting requirements, accounting standards and regulatory requirements, the results varied from country to country on some levels.

In total, there was reported to be $11.7 billion of assets held by insurance companies in the CAIR member countries and reported cash and investments totalled $9.2 billion in 2013.

According to the report, investment risk across the Caribbean region remained relatively conservative, on aggregate, with characteristics and dynamics at play in each The report also found that during the 12 over 67 percent of the investments held in of the states.” months, eight quota share sidecar transactions bonds, cash and short-term investments. closed, totalling $955 million for the seven The region, though small, is diverse but there Lindeen added: “States don’t always agree, and sidecars that disclosed their sizes, and the is an effort to harmonise local regulations on an issue as controversial as health reform, industry loss warranty market increased from and reporting standards with current and that is certainly true.” $3.5 billion to an estimated $4 billion. developing international standards. “What may work in Washington may not be right Paul Schultz, who is CEO of Aon Securities, Lindeen urges Congress to pass for Montana, which is why giving states options commented: “The decrease in catastrophe bond when it comes to federal rules is critical.” issuance ... was in part due to the reaction of PACE Act for mid-sized employers the traditional and collateralised reinsurance players to the heightened competition from the National Association Insurance Commissioners Catastrophe bond coverage hit catastrophe bond market.” (NAIC) president Monica Lindeen has testified $23.5 billion, says Aon before US Congress in support of the Protecting “This reduction was offset by a sizeable increase Affordable Coverage for Employees (PACE) Act. Catastrophe bond coverage reached a record in collateralised reinsurance participation,” $23.5 billion on 30 June, according to Aon’s added Schultz. The hearing was held on 9 September in the insurance-linked securities (ILS) report. US House of Representatives. The PACE Act “We forecast $6 billion to $7 billion in ILS would let states define a “small group” for the The report, which analysed the key trends in the issuance during calendar year 2015, and purposes of health insurance. 12 months up to 30 June 2015, revealed that expect current pricing trends to continue into annual catastrophe bond issuance reached $7 2016 in the absence of substantial catastrophic The Affordable Care Act changed the definition billion, a decrease on the record breaking prior events that disrupt the supply of capital.” of “small group” from an employer with 1 to 50 year of $9.4 billion. employees to one with 1 to 1,000. Reinsurance capital growth eases, Some 25 transactions, including two in life and This change would subject mid-sized employers health, closed during the period, while $5.9 says Willis Re to new rating restriction and benefit requirements. billion of bonds matured, according to the report. The changes could increase costs to employers, The growth in global capital dedicated to limit flexibility and drive up premium costs for reinsurance stabilised during H1 2015, The 12 months under review saw two other employers, according to the NAIC. according to the new Reinsurance Market records in the ILS market with a Q1 issuance Report from Willis Re. The PACE Act will give states the opportunity of $1.7 billion across eight transactions and a to define “small group” in a manner consistent record average transaction size of $279 million Dedicated global reinsurance capital from with their state’s demographic needs. for any 12-month period ending 30 June. both traditional and non-traditional sources remains at $425 billion, unchanged from the Lindeen, Montana’s insurance commissioner, US exposures dominated the catastrophe record level reached at year-end 2014. testified: “The NAIC has endorsed the PACE bond market, with 22 of the 25 transactions Act because it would retain state flexibility to comprising US risk in some capacity. Outside The levelling of capital comes as reinsurers set the appropriate limits for the small group of the US, dedicated Japan risk was covered in accelerate their active capital management health insurance market and ensure stable two transactions and standalone Europe risk in strategies as acceptably profitable capital small group markets that reflect the unique one transaction. deployment opportunities in the market diminish. 6 NewsInBrief NewsInBrief

In H1 2015, publicly listed companies within the Willis Reinsurance Index returned virtually all earnings to shareholders, a total of $16 billion.

A number of reinsurers have also committed to returning earnings to shareholders at year-end if they believe additional retained capital cannot be deployed profitably.

Willis Re suggested that capital levels are also being affected as merger and acquisition activity intensifies and transactions are completed. Some 10.5 percent of shareholders’ equity reported within the Willis Reinsurance Index is currently involved in major merger activity.

But Willis does believe that, ultimately, the challenge of oversupply remains and market pressures continue to manifest in diminishing returns on equity.

Underlying reinsurer returns on equity during H1 2015 are even lower than during H1 2014, according to Willis.

John Cavanagh, global CEO of Willis Re, commented: “Markets clearly continue to face significant over-capacity and competitive pricing conditions, and overall underwriting margins remain under substantial pressure.”

“Ultimately, however, reinsurance remains In many instances, captives may face a Eligible collateral to pledge to the FHLB of attractive to investment capital in the long- requirement to use a domestic entity, and a New York includes residential, multi-family and term despite the diminishing underwriting and branch captive is one alternative. commercial mortgage loans, mortgage-backed investment returns being delivered.” securities and US treasury and agency securities. Stokes stated: “Offshore pure captives might form Aon releases free captive ebook onshore branches when US regulations require Matt DiLiberto, CFO of SL Green, said: “We are that the insurance company writing the coverage delighted to become a member of the SHLB of New York and appreciate the bank’s commitment Aon has released a free introductory guide be admitted to do business in a US domicile.” to captives. on this ground breaking step in accepting its first “Branch captives are an economical alternative captive member.” The ebook was released after Aon’s 2015 versus establishing a pure US captive or redomiciling He continued: “Access to the diverse array Global Risk Management Survey noted an from an offshore domicile,” added Stokes. of credit products that the FHLB of New York increase in captive owners in the Asia Pacific provides further expands our access to liquidity region, where alternative risk transfer is a In the paper, Stokes cited Employee Retirement fairly new concept. Income Security Act benefits and terrorism and provides an alternative means to efficiently insurance as examples of an organisation’s finance the debt and preferred equity platform, Aon’s ebook is designed to help companies need to have a US captive presence. as necessary, on flexible terms at an attractive determine if they need a captive and understand cost of capital.” why organisations are increasingly investing in Branch captives are also increasingly including these types of alternative risk transfer vehicles. a variety of traditional and voluntary employee Reinsurance demand to increase benefits, according to the paper. It will also help them to discover the different in 2016 and beyond ways to structure a captive, understand how to set them up, and learn about the outsourced SL Green Realty joins Federal Reinsurance demand will increase slightly services that will be required. in 2016 due to updates to rating agency Home Loan Bank of NY capital models, the continued privatisation of reinsurable and insurable risks from government JLT Towner backs branch captives Belmont Insurance Company, the captive pools, and reinsurers and insurers expanding insurer of SL Green Realty Corporation, has into new lines of business, according to Aon Branch captives are gaining interest as captives become a member of the Federal Home Loan Benfield’s market report. domiciled outside of the US seek to provide Bank (FHLB) of New York. certain coverages, including employee benefits The report outlined areas of expansion and terrorism insurance, for their owners’ US- Belmont is the first captive to become a member opportunity for insurers and reinsurers, including based operations, according to JLT Towner. of the FHLB of New York cooperative. US mortgage risk, annuity risk, privatisation of risk and rating agency criteria changes. Tom Stokes, managing principal and US FHLB members have access to a wide variety consulting practice leader at JLT Towner, has of flexible, low-cost funding through its credit In terms of market dynamics, the report authored a paper that looks at the increasing products, enabling members to customise revealed that at the end of Q2 2015, total global interest in, and benefits of, branch captives, advances, interest rates and match asset and reinsurance capital had declines of 2 percent to particularly for offshore entities. liability terms. $565 billion. 8 NewsInBrief We’ve grown in line with people’s confidence in us.

Iberis gibraltarica – Gibraltar Candytuft

Gibraltar embraced captive insurance in the 1980’s and in 2001 became the first EU jurisdiction to offer Protected Cell Company (PCC) legislation – widely used within insurance company structures writing both general and life insurance business.

In 2012, captive insurers achieved total gross premium income of nearly £800m. Three are PCCs managing over 30 cell companiwes. One insurance manager has created 50 cells with its PCC being the largest in the EU providing solutions for cell captives and fronting cells.

Gibraltar’s vibrant insurance sector has almost 60 insurance companies currently writing new business and in 2012 wrote over £3.8bn of gross premium income – with Gibraltar motor insurers accounting for 16% of the UK market.

Gibraltar offers bespoke insurance solutions for companies not currently domiciled with the European Union.

For more information visit the Gibraltar Finance website:: gibraltarfinance.gi Within the European Union Single Market

4530_CIT_Ad_203x267_v2.indd 1 30/07/2014 13:56 NewsInBrief

Set against an environment of stable operating At 1 September, global insured catastrophe “On the flip side, tropical cyclone activity in the earnings and light catastrophe activity, the losses had reached $16 billion, which is below Pacific Ocean maintained its torrid pace in August decrease was in part due to currency fluctuations. the historical 10-year average of $61 billion. due to above-average sea surface temperatures and favourable atmospheric conditions.” Predominantly, this was caused by the weakening of the euro against the US dollar, Global drought losses to surpass He added: “Multiple landfalling storms in Asia- higher bond yields affecting reinsurer bond $8 billion, says new report Pacific left considerable damage, and more investment market valuations, as well as share activity is expected as we enter the peak of the repurchases and dividends. El Niño is set to continue to intensify in the cyclone season.” coming months and could force global drought The alternative capital segment saw levels losses above the current forecast of $8 billion Elsewhere during August, Super Typhoon of capacity from sidecars ($8.4 billion), in economic damage, according to Aon Soudelor tracked through Saipan, Taiwan, and industry loss warranties ($4 billion), and Benfield’s Global Catastrophe Recap Report. China, causing economic losses in excess of collaterised insurance ($32.5 billion), while $3.2 billion. catastrophe bond capacity contributed Severe drought conditions have persisted $23.5 billion to the total. in western regions with total economic Soudelor was followed by Typhoon Goni, which losses expected to reach at least $3 billion, wrought havoc in the Philippines, the Korean Bryon Ehrhart, who is CEO of Aon Benfield mostly attributable to agricultural damage peninsula, and Japan, killing at least 70 people, Americas, said: “Reinsurance market dynamics in California. damaging tens of thousands of homes and in 2015 continue to provide our clients with causing economic losses well into the hundreds very high quality options to source accretive Drought conditions also affected Eastern Europe, of millions of US dollars. underwriting capital—we expect these dynamics Africa, the Caribbean, and Central America to remain through the upcoming 1 January 2016 during August, with combined economic losses Insurance execs against UK renewal cycle.” of more than $2.6 billion occurring in Romania, Czech Republic, and Poland. exit from EU At the end of Q2 2015, insurer capital remained unchanged from year-end 2014, standing at Steve Bowen, impact forecasting associate Almost three quarters, 71 percent, of surveyed $4.2 trillion. director and meteorologist, said: “As we continue insurance executives believe a UK exit from the to see the prospect of El Niño becoming one EU would be bad for business in the London The report highlighted that mergers and of the strongest in decades, more and more insurance market, according to Xuber. acquisitions activity around the globe increased impacts will be apparent around the world.” dramatically during 2015, with deal volume Insurers fear that a ‘Brexit’ could diminish the totalling $73.3 billion across 461 deals to 1 “This is already true in the form of global drought London insurance market’s position on the global September, compared to $16.8 billion across losses, as several countries have endured a stage, found the Risk Management Survey 2015. 387 deals in the equivalent prior year period. severe lack of rainfall and agricultural impacts.” The estimated GDP contribution of the London

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Risk Management (EU) Martin Fone +44 207 767 2918 [email protected] NewsInBrief market, according to the London Market Group, The report, Insurance 2020: On Track for the bold decisions are being taken in response to was £12 billion in 2013, representing 10 percent Payback, Realising Megadeal Potential, outlined today’s M&A market.” of UK financial services, 21 percent of London the ways in which insurers can address the and 32 percent of the overall UK insurance basics of deal-making in order to withstand the “Decisions need to be fully informed with those sector contribution. complexities and challenges of large acquisitions. responsible being assigned and accepting accountability, from board level through to business Justin Davies, a director at Xuber, commented: The report highlighted challenges facing the unit leaders driving the operations, for the evaluation “It is clear from the responses that remaining insurance industry in the midst of a flurry of and delivery of deal objectives. These megadeals in Europe is a priority for a majority of insurers, megadeal merger and acquisition (M&A) activity, can propel businesses ahead of competitors and all of whom want in place economic, political including the risk that deal strategy could become have the potential to reshape the industry.” and regulatory conditions in which the London defined by size rather than suitability and fit. market can continue to thrive.” Chinese port explosions are largest Another challenge is the possibility that a “The results also show how companies recognise technology or telecommunications giant could insured man-made loss event the need to embrace new technology and tools seek to acquire an underwriting platform and in order to remain at the forefront of this highly ready-made market share to match its own Two massive explosions that hit China’s Port competitive industry.” analytics and distribution capabilities. The industry of Tianjin could generate insurance losses of also faces broad challenges around competing in up $3.3 billion, according to a Guy Carpenter “Importantly, the responses have revealed what an increasingly consolidated marketplace. & Company report. our clients and the market in general want from their partners and service providers, and where The report suggested that there is a risk that non- The report estimated damage to cost between they perhaps need more support than they are participation in the current M&A wave could make $1.6 billion and $3.3 billion, which was more currently receiving.” companies vulnerable to takeover themselves. than double early estimates released by Credit Suisse. Conversely, 29 percent of those surveyed PwC believes that with the industry transforming, disagree that an EU exit would necessarily be finding ways to sustain growth and keep pace is According to the report, the fireball and shock bad for the London market. The UK government vital. By focusing on the basics with a clear vision wave from the explosions blasted shipping has promised to hold a referendum on EU of how and where their organisations intend to containers, and incinerated vehicles in the port membership by the end of 2017. compete, boards can fully realise the role M&A and on an adjacent highway overpass. can play in reinforcing their competitive platform. M&As are a perservation game In addition, it also destroyed warehouses, Arthur Wightman, PwC Bermuda territory and production facilities and dormitories, affected A PwC report has set out why alignment with insurance leader, said: “Acknowledging these the nearby Donghai Road Railway Station, and overall company strategy and preservation of challenges and tackling them headon drives blew out windows of residential structures within value are key to pending and future mergers. the best chance of success, in particular where several kilometres.

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> It is easy to obtain aﬀordable structures due to its competitive pricing scheme BVI remains a highly sought-after domicile > No requirement to hold board meetings in the BVI for enhanced insurance products and > No requirement to capitalise a captive in the services, fully compliant with the territory with a BVI bank International Association of Insurance > PopularP for mini or micro US I.R.S. Code 831(b) Supervisors’ core principles. captives which have taken the 953(d) election under the Code and for Segregated Portfolio or Protected Cell companies > Domicile of choice in terms of captive formations and is compliant with international regulatory standards > International membershipsmembe with OECD, IAIS, GIICS and CAIR conrms condence in our reputation as a trusted and reliable domicile NewsInBrief

James Nash, CEO of Asia Pacific operations at “There is also a real possibility that overly comes to improving profitability, according to Guy Carpenter, said: “The explosions that occurred onerous terms and conditions could invite research by Interim Partners. in Tianjin, China are likely to constitute one of the regulatory action or litigation against insurers.” largest insured man-made losses to date in Asia Interim’s research found that 33 percent of and will certainly be considered one of the most PwC suggested that insurers, reinsurers and senior insurance executives surveyed said complex insurance and reinsurance losses in brokers can capitalise on the cyber risk opportunity that spending more on technology would boost recent history.” while managing the exposures by maintaining profitability, followed by 21 percent who thought their own credibility in this area through effective investing in new staff and developing new While access to the site is limited, Guy Carpenter in-house safeguards against cyber attacks. products should be insurance providers’ top used its satellite-based catastrophe evaluation priority to improve profitability. service, CAT-VIEW, to analyse pre- and post-event Robustly modelling exposures and losses will satellite high-resolution imagery to determine the provide a better understanding of the evolving This compared with just 6 percent who thought extent of the losses. threat and could encourage more reinsurance that increasing margins by raising average companies to enter the market by identifying premiums would help boost profitability. concentrations of exposure and systemic risks Cyber market set to boom in an increasingly inter-connected economy. Ben Johnson, principal of insurance, asset and wealth at Interim, said: “Firms failing to harness The global cyber insurance market could grow to Paul Delbridge, insurance partner at PwC, the power of new technologies, including big data $5 billion in annual premiums by 2018 and at least concluded: “For insurers, cyber risk is in $7.5 billion by the end of 2020, according to a new analytics and social media profiling, could now many ways a risk like no other. It is equally an be putting themselves at a real disadvantage.” report from PwC. opportunity. Insurers who wish to succeed will base their future coverage offerings on conditional The report, Insurance 2020 & Beyond: Reaping regular risk assessments of client operations and Solvency II Solutions teams up the Dividends of Cyber Resilience, revealed that the actions required in response to these reviews. 61 percent of business leaders across all industries A more informed approach will enable insurers to Barnett Waddingham and Solvency II Solutions see cyber attacks as a threat to the growth of their reduce uncertain exposures whilst offering clients have formed a strategic partnership to integrate business, and 2014 saw an average of 100,000 the types of coverage and attractive premium their SIIMPLIFY and Tabular184 Solvency mm (W)II = 7.244” global security incidents a day. rates they are beginning to ask for.” reporting solutions.

Paul Delbridge, insurance partner at PwC, said: Through integration of the 120systems, mm insurance (H) = 4.724” “Given the high costs of coverage, the limits Investment in technology is key operators now have access to a complete imposed, the tight terms and conditions and the to improving profitability end-to-end Solvency II standard formula restrictions on whether policyholders can claim, reporting package for the solvency capital many policyholders are questioning whether Major investment in technology should be the requirement (SCR) and quantitative reporting their policies are delivering real value.” top priority for insurance providers when it templates (QRT).

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Individual Self-Insurers, Single-Parent and Group Captives

For more information, contact: Phillip C. Giles, CEBS 910.420.8104 [email protected]

QBE and the links logo are registered service marks of QBE Insurance Group Limited. Coverages underwritten by member companies of QBE. © 2014 QBE Holdings, Inc. NewsInBrief SIIMPLIFY, Barnett Waddingham’s Excel- CICA advises on micro captives Most micro captives participate in a risk based solution, enables a calculation of the distribution pool to minimise the impact of large standard formula SCR under Solvency II. losses, according to CICA’s document. The Captive Insurance Companies Association (CICA) has emphasised the importance of The risk pool operator must be able to explain Solvency II Solution’s product, Tabular, is an using best practices and qualified experts and document the proportionate share of risk Excel/Word-based Solvency II narrative and when designing and operating a micro captive, being shifted to and from the pool, along with QRT XBRL reporting tool, which has been particularly those that use the Internal Revenue the actuarial basis for determining the premium. integrated into Microsoft Office. Code 831(b) election. The pool must also have a method of Tabular is designed to be a repository for CICA has published a document, which it is QRT data and allow users to easily load and independently reviewing and approving claims, following up with a webinar, outlining the steps as well as a method for securing their payment. link source data from existing systems. The that businesses must take when setting up a integrated solutions enable users to quickly micro captive in the US, to ensure that they do Micro captives must also engage one or and efficiently import SCR calculations from not fall foul of the Internal Revenue Service’s more qualified experts to determine whether SIIMPLIFY into the QRTs on Solvency II (IRS) rules on their tax obligations. Solutions Tabular platform. they have a mechanism for distributing risk according to the IRS’s test for risk distribution. Dennis Harwick, president of CICA, explained: Kim Durniat, partner at Barnett Waddingham, “Well run captive insurance companies play an The ownership structure of the micro captive said: “This integration of SIIMPLIFY and Tabular essential role in risk management and must be has to accomplish the objectives of the offers the insurance industry a simple cost designed and operated to achieve risk transfer business owner, including that this ownership effective solution for Solvency II data integration and risk distribution.” structure meets the IRS’s test for risk shifting. and reporting in a familiar excel environment. Micro captives must not just operate as pass- CICA issued the information document to help through vehicles for profits to shareholders. The partnership aims to help insurance its members and the public better operate and companies to reap the benefits of an efficient, understand micro captive insurers. Ohio licenses Imprise Financial repeatable and auditable Solvency II reporting framework with consultant implementation and Harwick said: “Our mission is to be the best Ohio has licensed protected cell captive ongoing support.” source of unbiased information, knowledge and insurance company Imprise Financial. leadership for captive insurance decision makers.” John Staines, CEO of Solvency II Solutions, Through its protected cells, Imprise Financial will added: “By integrating our solutions, insurance According to the document, for business purposes, allow businesses to insure some of their own firms nowCBP-4141-01-Captive-MM.pdf have a simple and complete 1 end 5/20/14 to the micro9:25 captiveAM must have a valid non-tax business commercial risks, realise greater control of their end Solvency II reporting solution which takes purpose centered on effective risk management risk-management programmes, and achieve the hassle out of reporting requirements.” through valid insurance arrangements. long-term financial stability.

I expec¶ my bank §o: Look out for my business, not their interests.

When it comes to Captive Insurance, no other bank has more knowledge and know-how than Comerica Bank. More than just banking services, we provide our clients with a dedicated team of experienced Captive Insurance Specialists to help navigate through the challenges of alternative risk management. When it’s time, come to Comerica, and discover why we’re the leading bank for business.* To Learn More, Contact the Comerica Global & Captive Insurance Group: 313.222.5550

® CBP-4141-01 05/14 *Data provided by MEMBER FDIC. EQUAL OPPORTUNITY LENDER. comerica.com/captive Thomson Reuters Bank Insight, December 2013

16 NewsInBrief

If Captive Insurance is all about managing risk, then why put more risk in your captive?

Domiciling your captive in Vermont means less uncertainty and more peace of mind. No headaches, no surprises, and no learning curve. With over 30 years of experience and over 1,000 captives licensed in the state, it’s our higher standards that have made us the gold standard.

• Over 1,000 captives licensed • 34-year history in captives • 48 of the Fortune 100 • 18 of the Dow 30 • Nearly 100 healthcare-related captives • Over $170 billion held in assets

So, when it comes time to compare domiciles, don’t add mor e risk to your captive by adding inexperience or uncertainty. Insure your peace of mind with Vermont. Learn more at: VermontCaptive.com/GoldStandard NewsInBrief

Imprise Financial’s first protected cell will During the last five years, cash and invested percent in Q1 2014. This ratio has improved insure certain contractual liability risk of NWAN, assets, total admitted assets and policyholders’ steadily each of the last five years. a third-party administrator of service contracts surplus have increased at a faster rate than and warranties for automobiles, recreational total liabilities, according to Demotech. Loss and loss adjustment expense (LAE) vehicles and motorcycles. reserves represent the total reserves for Douglas Powell, senior financial analyst of unpaid losses and LAE. Ohio governor John Kasich signed legislation Demotech, said the levels of policyholders’ in June 2014 allowing businesses to form surplus have become increasingly important The cash and invest assets to loss and LAE captives. The state allows the formation of pure in difficult economic conditions because they reserves ratio for Q1 2015 was 223.3 percent, captives that can only insure the risks of their allow an insurer to remain solvent when facing a decrease from Q1 2014 when the ratio was parents, protected cell captives, in which each uncertain economic conditions. 243.7 percent. cell has a separate legal identity, and special purpose financial captives, which assume life Since Q1 2011, cash and invested assets have Powell said these results indicate that RRGs insurance risks. increased 83.4 percent and total admitted assets remain conservative in terms of liquidity. have increased 64.6 percent. Over a five-year The protected cell structure eliminates market- period from Q1 2011 through to Q1 2015, RRGs Despite political and economic uncertainty, entry barriers that companies typically face when collectively increased policyholders’ surplus by RRGs remain financially stable and continue to considering a self-insurance programme. 64.7 percent. provide specialised coverage to their insureds.

Mary Taylor, director of the Ohio Department of This increase represents the addition of nearly Insurance, commented: “This is a momentous $1.9 billion to policyholders’ surplus. A.M. Best affirms ratings of occasion for Ohio and more specifically, for Dorinco Reinsurance Ohio businesses. Giving businesses the option The reported results indicated that RRGs are to form a captive is another tool designed to adequately capitalised in aggregate and are A.M. Best has affirmed the financial strength help them thrive in Ohio.” able to remain solvent if faced with adverse rating of “A (Excellent)” and the issuer credit economic conditions or increased losses. rating of “a” of Dorinco Reinsurance Company, which is the captive reinsurance company of Risk retention groups financially Liquidity for Q1 2015 was approximately 70.6 The Dow Chemical Company. stable in Q1 2015 percent. A value less than 100 percent is considered favourable as it indicates that there The ratings reflect Dorinco’s continued strong Risk retention groups have a great deal of was more than a dollar of new liquid assets for operating performance, balanced risk profile financial stability and remain committed to each dollar or total liabilities. and strong risk-adjusted capitalisation. maintaining adequate capital to handle losses, according to a Demotech report on their Q1 This also indicates a slight decrease for RRGs Follow us @CITimes 2015 financial results. collectively as liquidity was reported at 71.9

18 NewsInBrief CyberRisks

Hope for the best, insure for the worst Captives need to take a leaf out of the Jack Reacher playbook and order themselves some strong coffee, because they may need to get their retaliation against cyber attacks in first BECKY BUTCHER REPORTS

The threat of cyber attacks is rising rapidly. facing a lot of consequences, even if claims cyber attacks multiple times over the last A constant source of headlines, the latest for distress are modest. The volume of data few years. This begs the question: what victim is infidelity website Ashley Madison. stolen and number of individuals affected in are they doing to protect themselves from The website, which encourages users to this attack could have a critical impact on a threat that they have so far been unable meet like-minded individuals and ‘cheat’ on the company. to avoid? their spouses, recently had approximately 37 million personal records stolen. They Of course, Ashley Madison is not alone. Size of the prize were subsequently published online, for all the world to see. Banking institutions RBS and NatWest PwC recently released a report on the current also suffered a recent a cyber attack, on cyber insurance market, predicting that the At least two other dating sites, Cougar Life what was, for many in the UK, the day they global market could grow up to a staggering $5 and Established Men, which are owned by were supposed to receive their salaries. billion in annual premiums by 2018, and at least the same parent group, Avid Life Media, Customers were unable to log on to their $7.5 billion by the end of the decade. Previous had their data compromised. Along with online account services for almost an hour, research also revealed that 61 percent of the actual hacking came threats of further just as monthly cheques were arriving. business leaders across all industries see information being released if Ashley cyber attacks as a threat to the growth of their Madison and Established Men were not The banks, unaware of the identity of the business, and 2014 saw an average of 100,000 shut down permanently. Avid Life Media is perpetrators, have now been the victims of global security incidents a day. 20 CyberRisks CyberRisks

CITHas Cyber your Survey: organisation, Has your or an organisation, organisation or you an work organisation with, ever you been work the with, subject ever of been a cyber the subjectattack? of a cyber attack?

100 A majority of CIT readers who responded to the survey said they have witnessed a cyber attack

57.1% 60

42.9%

0 YesYes NoNo

Businesses appear to be aware of the cyber to cushion the uncertainty, they are at serious retained risk, the utilisation of a captive to threat, and are seeking insurance protection as risk of missing this rare market opportunity to finance retained traditional and emerging a final resort to manage the risk, but, as Paul secure high margins in a soft market. If the risk is a logical next step.” Delbridge, insurance partner at PwC, explained industry takes too long to innovate, there is at the time of the report’s release: “Given the a real risk that a disruptor will move in and Captives and cyber high costs of coverage, the limits imposed, the corner the market with aggressive pricing and tight terms and conditions and the restrictions more favourable terms.” Salil Bhalla, head of global fronting in Europe, on whether policyholders can claim, many the Middle East and Africa at AIG, adds: “Cyber policyholders are questioning whether their Captive insurance could be one such is a relatively new product and while only a few policies are delivering real value.” innovator, of course, although that too appears captives are currently used to fund cyber risks, to be slow to meet the threat of cyber attacks. we have seen considerable interest from captive Delbridge explained that if no action is taken, According to Aon in 2014, only 1 percent of owners for placing cyber risks in their captives.” “there is also a real possibility that overly captive owners are funding cyber risk through onerous terms and conditions could invite their captives. But in May of this year, Marsh “In the past two years we have seen growth in the regulatory action or litigation against insurers”. reported that the number of captives under its number of cyber programmes that we front for management that wrote cyber liability in 2014 captives and expect to see this trend continue. “As boards become increasingly focused on grew by 18 percent, suggesting a slow uptake the need for safeguards against the most but an increase nonetheless. She expands: “This growth is driven by a damaging cyber attacks, insurers will find number of factors such as the diversity benefits their clients questioning how much real value Christopher Lay, president of Marsh Captive from a Solvency II perspective but also from is offered in their current policies. If insurers Solutions, said in May: “As more companies a desire by risk managers to show that their continue to simply rely on tight blanket policy use data and analytics to better quantify captives are innovative and provide real value restrictions and conservative pricing strategies their emerging risks and optimise their to the parent organisation.”

CITD oesCyber your Survey: captive, Does or a captiveyour captive, you work or with,a captive cover you cyber work risk? with, cover cyber risk?

100 More than half of respondents are seeing captives write cyber risk, suggesting they are being relied on to insure

57.1% 60

42.9%

0 YesYes NoNo

21 CyberRisks

CIT CyberIf not, whySurvey: not? Why was the captive concerned not used for cyber?

100 Survey respondents suggested that parent companies are not showing a desire to use captives for cyber risk cover

66.7%

40 33.3%

0 CommercialCommercial market porvidesmarket adequate provides coverage LackLack of of appetite appetite from parent from companies adqequate cover parent companies

CIT CyberIf yes, Survey:what was Whatthe most was important the most reason important for the reason captive for being the captivechosen forbeing cyber chosen risk? for cyber risk?

100 Survey respondents were split over why captives are being chosen to write cyber, with a majority saying greater control and the certainty that comes with reinsurance cover 75

50 40% 40%

25 20% 20%

0 CCommercial ommercial market market coverage cover was NatureNature of los of s es losses from cyber from is s ues G reaterGreater control control over ris k management over AccessOther—pleas to reinsurance e explain: was inadquateinadequate cyber issues risk management

In Vermont, the number of captives writing A cyber subscriber “All of this needs to be evaluated and understood cyber as increased, and the state now has a before they can then formalise the funding of any standalone entity dedicated to the risk. Sandra Companies need to identify the risks of their retained cyber risk through a captive.” Biggleston, director of captive insurance of business before they can tackle the cyber Vermont Department of Financial Regulation, problem, according to Mark Elliott, committee “Remember that a captive is a formalised says: “As corporations and other organisations member of the Guernsey International mechanism for financing self-insured risk, begin to understand and better evaluate their Insurance Association (GIIA). and not a form of risk transfer. It’s important to risk for cyber liability, we may see more captive evaluate what (if any) benefit would accrue to the programmes include cyber coverage.” He says: “If the company doesn’t fully understand organisation from placing their cyber exposure the risks they face and the measures they have into a captive before actually doing so.” “Commercial carrier offerings will likely pick up to combat these you are unlikely to explore a as well, and a captive would still be a good risk self-insurance route.” Cyber risk is only going to increase in size management tool for financing a portion of a and will continue to pose a serious threat to company’s cyber risk.” Ellen Charnely, managing director at Marsh, government, corporations and individuals also believes that companies are not fully aware around the world. “In particular, a group captive programme might of their exposures and therefore are unable to begin offering cyber coverage as an added measure risks. What’s more, data breaches are very difficult to benefit to its members.” predict and the target of the next cyber attack “Once they do understand their exposure is unknown. “If a group captive can service its membership they then need to ascertain how they wish in more innovative ways, membership retention to manage the risk, do they retain it or do The best solution is probably to hope for the best will likely increase, especially given the duration they transfer it, or some combination of but plan for the worst, and many appear to be of the continuing soft commercial market cycle.” the two.” doing this, only at a slow and steady pace. CIT 22 CyberRisks

Roundstone Hits the Mark

Experience Since 2003, Roundstone consistently delivers captive program solutions to a myriad of traditional and unique exposures.

Innovation Roundstone invented the producer friendly incubator captive with turnkey underwriting facilities.

Focus Committed to accurate quarterly reporting, fully executed agreements and transparent communication.

Results Roundstone introduced stop loss group captives in 2005 and remains the largest manager of stop loss group captives today.

27887 Clemens Road, Westlake, Ohio 44145 , 440-617-0333 www.roundstoneinsurance.com ~ [email protected] Playing where the risk is going to be: using a captive for cyber losses and liability It was Wayne Gretzky who said a good hockey player plays where the puck is, but a great player plays where the puck is going to be. The same applies to cyber risk, says Frederick Turner of Active Captive Management It seems like everywhere you look these (ii) cyber insurance from the commercial days—on the news, in articles, on social market where it’s cost effective to bind such media, in blogs and in insurance newsletters— coverage and where such coverage exists there is something written or said about cyber and fits the risk; and (iii) captive insurance risk and the serious danger that it poses to rounding out the insurance programme or just about every business, to governmental or replacing the commercial insurance entirely company infrastructure, and to both local and if the commercial market doesn’t have the world economies. In today’s internet savvy appetite for the risk, isn’t appropriately or fully and cyber connected world, cyber risk and covering it, or where commercial prices are liability issues loom large and are increasingly cost prohibitive. prevalent. It’s safe to say that of all the many contingencies a company should plan and An internal cyber risk management plan prepare for, cyber concerns are currently one of the most important issues for any Company management needs to assume company’s management to address. responsibility for monitoring the company’s points of vulnerability or attack relative to But understanding cyber risk can be cyber risk. For example, management needs overwhelming as the variety and type of risk to understand the financial risk to the business classified as ‘cyber’ in nature is in itself varied, if there is a breach of security and data is lost and sometimes obscure. Threats or loss or compromised. A business generally needs caused by hackers, cyber thieves, competitors to understand the type of information and data or employees misusing, misappropriating, it controls and maintains, how valuable it is to losing or improperly disclosing data or the performance and ability of the company confidential information are just some of the to conduct its business, and whether and risks companies face. how the company can absorb costs to cure or correct any data or information breach or Expenses associated with cyber-related class loss. This means that company management actions or other lawsuits, business interruption needs to be proactive in confirming that steps or data restoration, or regulatory compliance are being taken to identify, prevent, and costs in the form of notification and credit mitigate against cyber related risk and losses. monitoring expense, can result in losses valued in the millions. In fact, the financial impact of Management needs to be committed to a cyber breach can be significant. Per a 2013 understanding all laws and regulation applicable study conducted by the Ponemon Institute, the to the company relative to cyber privacy and average cost per record for a data breach is security and/or data exposures. It also needs $188—this study does not include the cost of to routinely and continually pose questions to outside counsel or settlement payments if the senior executives and key decision makers breach event winds up being litigated. to determine and address the company’s Yet, no matter the monetary size of the cyber preparedness for cyber loss and continue to loss, a cyber claim can have many direct monitor cyber risk management protocol on a going-forward basis. And management needs points of impact—on the company financials, intellectual property rights, the day-to-day to generally understand how the company is operation of the company, insurance and risk insured (or not) for cyber exposures. management, and even customer or third- party confidence in the company and the Prior to developing any actual cyber risk plan, services it provides. Proactively defining a company management should seek to foster a company’s cyber risk as part of a corporate proactive corporate culture where cyber risk is risk management function, where the end studied, monitored and understood. This includes result is a cyber loss prevention and safety/ a heightened awareness of security risks from mitigation plan, which includes insurance, senior management through the to the lowliest could markedly reduce the average cost to the employee levels and encouraging the timely and company when a cyber breach or loss occurs. accurate reporting of security breaches. The only way for mitigation to work in the event of a cyber There are many commercial insurance breach or loss is for crisis management to begin policies on the market nowadays covering within hours, rather than days. cyber risk. But those policies can be less than perfect. So perfect risk management This cannot happen unless there is a mitigation protection against cyber risk has to plan in place before any such breach occurs. involve more than just commercial market Some oversee cyber risks through the function insurance. In fact, it’s often the case that of the IT committee, whereas others use the companies should consider alternative risk audit committee. management in the form of having a captive insure cyber risk. Every company today should think about cyber and should understand its risk and how to The way to be a great risk manager when prevent against it. Just recognising that there is it comes to protection against cyber loss indeed a risk is the first step, then both internal is to have a triangulated risk management and external resources can be used to develop a programme where the three points of the comprehensive risk management and response triangle are: (i) cyber risk management plan. So, what would external resources be? A in place at the corporate/company level; key resource is insurance coverage. CyberInsight

A solid insurance programme includes captives uphold these practices. Had Wyndham had even for those members of the family that have commercial cyber coverage, its failure to the greater risk. Whereas in the commercial Company management also needs to know uphold written policies on privacy protection world, many forms of cyber coverage are the extent of a company’s insurance relative could also have resulted in a denial of any just expensive, perhaps cost prohibitively so, to cyber risk and loss. This can be easier claim made to the commercial carrier, if the especially when you consider how many lines said than done. Commercial market coverage privacy practices were disclosed to the carrier an insured might be required to purchase out for cyber risk has been around since the as part of underwriting and if they were a of the commercial market to satisfy outside early 1990s, but even today—years in the condition precedent to coverage. parties that require rated, commercial carriers. making—commercial forms can be hit or miss in terms of what is intended to be and So, if the insured has to carry a heavy then actually covered. Standard ISO-form programme load of rated general liability or commercial general liability coverage is not Businesses other lines, there might not be much room in really designed to cover cyber risk and all the budget to pay for an expensive cyber line its iterations, and nowadays these policies should work with on top of that, even if such a line is needed. typically exclude cyber claims and losses. A captive could literally come to the rescue in Many commercial carriers are now writing “commercial brokers that situation, enabling the insured to have it cyber coverage on very specific and tailored all, relative to insurance coverage, and build forms, but even then, such forms are still to define and out a complete coverage programme utilising evolving as the risk continues to evolve, with negotiate commercial both commercial and captive insurance. no standard language and generally, no one form that covers all angles of the risk. coverage as a starting Where’s the risk going to be?

One recent example out of an Illinois Appellate point and then could Managing cyber risk means that a company Court holds that the claim was excluded under look to a captive to implements cyber best practices that start a professional liability policy that offered with company management and an overall coverage under a cyber endorsement. The write cyber coverage awareness of the risk itself, then the company claim involved coverage for costs and fees can and should develop a contingency and associated with a class action lawsuit alleging to fill in gaps in response plan in the event of a cyber incident. damages due to unsolicited text messages sent to various cell phone customers for the commercial Risk management should also ensure that discounted medical procedures (Doctors market policy the company has a thorough insurance Direct Insurance v David Bochenek, No programme in place as protection against 1-14-2919, 3 August 2015). In this case, the fortuitous or unplanned cyber loss. Even the court held that the policy’s US Telephone best laid cyber risk mitigation or management Consumer Protection Act exclusion applied to plans can nevertheless result in loss, liability the cyber portion of the coverage even though or damage. the class action claim clearly fell within the What all this largely means is that even those ” Being a good cyber risk manager involves policy’s definition of “privacy wrongful act”. companies that seek to purchase commercial This can be typical, where exclusions really market cyber coverage, and in the end do good contingency planning. Being a great can be quite extensive and can dramatically obtain some form of commercial cyber line, cyber risk manager involves insurance as narrow the coverage. With commercial cyber, are likely still self-insuring much of this kind of part of that contingency planning where the policyholders can pay hefty premiums for risk. Of course, businesses should work with programme includes not just commercial what is really pretty thin coverage. commercial brokers to define and negotiate insurance, but also captive insurance rounding commercial coverage as a starting point and out the programme and filling in coverage for those troublesome areas of risk where the Moreover, commercial market underwriting then could look to a captive to write cyber can often be overwhelming and time coverage to fill in gaps in the commercial commercial market cannot suffice to cover (or affordably cover) all angles of the risk. consuming for cyber lines. The process can market policy, covering what cannot be be extensive where insured companies have obtained from that market or what is excluded Play your insurance where the risk is going to to ‘prove’ to the commercial underwriter that under the commercial lines, or even covering be—plan ahead. With cyber, planning ahead they have a risk management plan in place, an excess layer. In the world of cyber, being is everything. CIT and in the event that such plan is not in place able to write high limits excess to a first dollar and coverage is written, this could result in a defending commercial primary could be a coverage denial. nice idea, enabling the insured to have higher limits for a cyber loss at a lower cost and Recently, the US Court of Appeals for the Third transfer the risk to both a commercial carrier Circuit ruled in favour of the Federal Trade and a captive programme. Commission (FTC v Wyndham Worldwide Corp, No 14-3514, 24 August 2015). The court A captive could also write the cyber coverage held that Wyndham’s published privacy policy on either a third- or a first-party basis and could governing how the company safeguarded create a highly tailored policy that perfectly personal and confidential information must fits the company’s risk, which is different than match its actual practices. When the written what the commercial market would be able to policy was proven to be a “paper tiger” in that it do and is key to this line of cover because the did not match what was actually happening at risk itself can be so individualised. the company to protect data and confidential information, the court held Wyndham liable for Further, in the captive world, arms- losses and damages associated with the data length premium pricing models need only breach,. The court found it unfair of Wyndam contemplate the risk of the entities inside the to have advertised privacy practices in order corporate ‘family tree’—this can make the

to attract customers only to fail to actually coverage generally far more cost effective, Frederick Turner Founder Active Captive Management 26 CyberInsight

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THE RESERVE BANK OF VANUATU LICENSED RESIDENT INSURANCE MANAGERS Marinette Abbil, Insurance Regulator INTERNATIONAL FINANCE TRUST COMPANY LTD (IFTC) Private Mail Bag 9062, Emile Mercet St, Port Vila, Vanuatu Joseph Tari Ph: +678 2 3333 Fax: +678 2 4231 1st Floor PKF Building, PO Box 211, Port Vila, Vanuatu Phone: +678 22198 Fax: +678 23799 www.rbv.gov.vu Email: [email protected] www.icount.biz Email: [email protected] THE VANUATU FINANCIAL SERVICES COMMISSION George Andrews, Commissioner RISK MANAGEMENT INTERNATIONAL CONSULTING LTD Kevin Lindsay, Director Financial Services Centre, Elluk Drive, PO Box 137, Port Vila, Vanuatu Private Mail Bag 023, Carnot St, Port Vila, Vanuatu Phone: +678 26065; +678 7745024; +64 9 21970910 Ph: +678 22247 Fax: +678 22242 www.riskman.vu Email: [email protected] www.vfsc.vu Email: [email protected] WILLIS NEW ZEALAND VANUATU CAPTIVE INSURANCE ASSOCIATION Peter Lowe, CEO C/- P O Box 212, Port Vila, Vanuatu Level 8, 21 Queen St, Auckland, New Zealand 1000 Telephone: +678 22091 Fax: +678 23665 Direct: +64 9 356 9368 Mobile: +64 (0) 21 909 148 www.insurance.vu Email: [email protected] www.willisgroup.co.nz Email: [email protected]

EUROPEAN BANK LIMITED LICENSED CELL PROVIDER David Outhred, Director ORBIT INTERNATIONAL INSURANCE ICC LTD International Building, Lini Highway, Port Vila, Vanuatu Kevin Lindsay, Director Telephone: + 678 24680 Elluk Drive. PO Box 137, Port Vila, Vanuatu Email: [email protected] Mobile: + 64 (0) 21 970 910 www.orbiticc.com Email: [email protected] FIDELITY PACIFIC LIFE INSURANCE COMPANY LIMITED LAW PARTNERS Tom Bayer, Director Law Partners House, PO Box 212, Port Vila, Vanuatu International Building, Lini Highway, Port Vila, Vanuatu Jonathan Law or Vicki Joe, Principals Phone: + 678 23410 Phone: +678 22091 Email: [email protected] Frederick Turner Founder Active Captive Management www.lawpartnersvanuatu.com Email: [email protected] EmergingRisks

A ‘growth industry’ for captive insurance? Certain insurers are shying away from the legal marijuana industry, leaving a gap that could be filled by captives. Michael Schroeder of Roundstone Management examines the issues surrounding this controversial topic One of the primary reasons a captive insurance recognise the legality of such enterprises. destroys the financed property that is not company is formed is a lack of capacity in the Banking and insurance needs for these covered by the insurance of the business traditional insurance market. Where traditional businesses pose substantial challenges, as possessing the property? The answer is insurers raise their premiums, reduce their both involve significant regulation on a state obvious—most vendors quickly look to coverage or simply do not entertain the and federal level. Yet, these businesses have obtain their own coverage, either through underwriting of certain risks, you are certain to legitimate exposures that require coverage the traditional market or an alternative, such find the captive insurance industry. Examples should a loss arise. What to do when insurers as a captive insurance facility. Captives of past limitations in market capacity that led abstain or exit the space entirely? Many that indemnify vendors for their uninsured to an increase in captive formations include businesses are turning to the captive industry. exposures that arise when selling into the medical malpractice captives in the 1980s, If no one else will insure your business, then marijuana industry are growing. Imagine professional liability coverage for nursing why not start your own insurance company? a process and coverage form similar to homes in the early 2000s and, more recently, After all, the one requirement for forming a collateral protection insurance you see in the trucking liability captives. captive insurance company is capital and auto and home financing markets. these businesses appear to have plenty. Captive insurers offer an alternative to the The feds traditional market, especially when that market The coverage steps away from an entire class of business. The marijuana industry presents many This is what happened over the summer The coverages needed by marijuana-related businesses with an interesting question: what when Lloyd’s instructed its underwriters to businesses are not unique to the insurance can or should legitimate businesses do when cease issuing new policies and to not renew industry. Coverage, such as general liability, confronted with the fact that a customer is existing policies for businesses involved in the property, surety, workers’ compensation operating in the state-legalised marijuana marijuana industry. and business interruption, are all relevant industry? While legal according to the state of to a business producing, manufacturing, or the business’ domicile, the federal government Thousands of dispensaries in California distributing cannabis-related products. Any maintains laws, namely the Controlled and Colorado were suddenly searching for traditional insurance underwriter should be Substance Act, directly prohibiting the new business operations coverage. Prior able to quickly assess and rate these risks. business’ operations (ie, marijuana production to its exit, Lloyd’s was the largest writer They do so for barbershops and manufacturers and sale). Legitimate service providers and of marijuana-related business coverage. of widgets every day. suppliers of essential business tools, such Opinions of industry participants maintain as computers or garbage disposal, struggle that they experienced favorable underwriting Companies selling into the marijuana industry to determine how to proceed. Likewise, outcomes with outsized rates. also confront insurance challenges. What insurance providers are confronted with the does a supplier of equipment, a landlord or question of what they can or cannot do when More than 20 US states have established finance company do when it discovers the they get a call from a business operating in the medical marijuana regulatory regimes. purchaser of its goods or services is lacking marijuana industry. Fortunately, the federal Four have legalised marijuana under state basic insurance coverage? Captive insurance government recognised the quandary and recreational marijuana laws. Still, businesses company solutions appear to be a viable offered some insight for businesses looking involved in the production and distribution alternative. After all, what vendor wants to to maintain compliance with federal law when of marijuana in states where medical and place equipment with another business that confronted with a state-legalised marijuana recreational use is legal operate in a grey is unable to show proof of insurance? What business customer. The state-federal conflict market because federal law does not yet happens when a run-of-the-mill fire or theft created by state marijuana laws has been the 28 EmergingRisks EmergingRisks

subject of four different Department of Justice • Violence and the use of firearms in It would appear that the federal government (DOJ) memoranda that date back to 2009. The cultivation and distribution of marijuana; has essentially given the ‘green light’ to banking memoranda articulate the DOJ’s approach • Drugged driving and the exacerbation institutions to handle the monies associated with the to the state-federal conflict by confirming of other adverse public health state-legalised marijuana industry, albeit not without marijuana remains a dangerous, illegal drug consequences associated with strict, and arguably burdensome, regulations. under federal law, but also indicating that marijuana use; the federal government will not pursue legal • The growing of marijuana on public Is the above guidance enough to encourage the challenges against states so long as the lands and attendant public safety standard insurance market to participate in covering state and local governments maintain strict and environmental dangers posed by the marijuana industry? Will other markets after regulatory enforcement controls. marijuana production on public lands; and Lloyd’s fill the void with policies sufficient to cover • Marijuana possession or use on the real life exposures of a business producing or federal property. distributing cannabis products? The DOJ went further in its 2013 memorandum and instructed federal prosecutors not to This remains to be seen, but no doubt the captive consider the size or commercial nature of Additionally, because federal law continues to industry can offer solutions. CIT a marijuana business alone in determining prohibit the deposit or withdrawal of proceeds whether to pursue enforcement of federal law. derived from the distribution of marijuana and any other controlled substance, it is not Rather, the DOJ identified several factors surprising that state-legalised marijuana that should be considered when deciding to providers have historically experienced pursue a civil or criminal enforcement action difficulty securing banking services. for violation of federal law. Recently, however, the US Treasury has The activities that are the priority or focus of issued guidance to banks, incorporating the federal enforcement include preventing: DOJ’s enforcement priority memoranda and • The distribution of marijuana to minors; directing financial institutions that provide • The sale of marijuana to criminal services to marijuana-related businesses to enterprises, gangs, and cartels; file specific transactional forms. • The diversion of marijuana from states where it is legal under state law in some One of these is used when the institution form to other states; determines, after the exercise of due diligence, • State-authorised marijuana activity from that its customer is not engaged in any of the being used as a cover or pretext for the activities that violate state law, or that would trafficking of other illegal drugs or other implicate the DOJ’s enforcement priorities

illegal activity; listed above. Michael Schroeder President Roundstone Management Experience Missouri Angling to find the right domicile?

To learn more about starting your Missouri captive insurance company, please contact Captive Program Manager Maria Sheffield @ 573-522-9932. [email protected] MO

insurance.mo.gov/captive CLOSE TO HOME DIFP Missouri Department of Insurance, Financial Institutions & Professional Registration / John M. Huff, Director Lake of the Ozarks: 55,000 acres & 1,150 miles of shoreline.

29 ZurichPerspective

Seeking certainty in uncertain times For captives, aggregate stop-loss programmes can deliver a greater degree of financial certainty in an increasingly volatile risk environment, says Todd Cunningham of Zurich Global Corporate in North America MARK DUGDALE REPORTS What does Zurich’s aggregate stop- deliver certainty to the financial performance How much of this pressure on capital loss programme offer to captives? of the captive. It’s not unlike what a general would you say is regulatory driven? insurance company would do with reinsurance to manage its catastrophe exposure and The programme does two things: firstly, With Solvency II being implemented in Europe reduce the volatility in its portfolio. it may cap off volatility on a catastrophic at the beginning of 2016, more pressure is basis, through excess reinsurance for any being applied to a captive’s capital. Captive number of risks, including property, casualty How important is that certainty to managers, who are not financial professionals and cyber. Secondly, it may have a stop-loss captive managers? but risk managers first and foremost, want to feature, which is a cross-class aggregate, know how their captives are going to handle that can cap the frequency of severity in I think the last thing a risk manager wants to surplus in terms of insurance cover and the risks the captive retains. This second do is to have to go to the CFO and request potential risks. feature provides the captive manager with more cash to cover the kind of event we’re greater certainty in the captive’s worst year. talking about. Captives are funded by their They are looking at the potential for parents with surplus, and that surplus needs bolstering frequency of loss or severity as What do you mean by ‘worst year’? to be balanced with the risks that are taken a means of meeting capital requirements. on. It’s tantamount to dipping into your More and more, they are looking at multi- The worst year could be if the captive had a savings—that capital really should be safe line, multi-year integrated risk programmes loss frequency or severity issue. The stop- and sound and not subject to tremendous to cap off the worst day, which in turn loss capability of the programme would amounts of pressure. alleviates some the regulatory pressure. 30 could also depend on thesegment. depend also could A utility, for is facing,beitcyber,It or reputational. brand organisation what theparent consider and to lookatrisksbeyondthetypical exposures I think captivemanagersarebeingcalledupon What aboutemergingrisks? because theyarenon-correlatedrisks. some capitalreliefunderprovisionsofSolvencyII to the captive, and at the same time, there may be different non-correlatedrisksarebeingbroughtin Doing thishelpstominimisevolatilitybecause the programme. term disability and other similar coverages in long- benefits, employee their embed to look multiple of putting risks under one roof, so to speak, so they may ways find to owners their Captive managersareoftenbeingaskedby these programmes? How are captiveinsurersemploying in applicable states.Somecoverages maybe written onanonadm itted basis throughlicensed surpluslinesbrokers. ©2015Zurich American Insurance Company coverages and does not revise or amend the policy. Coverages and rates are subject to individual insured meeting ILour underwriting qualifications Schaumburg, and product availability Lane, American 1400 Company, Insurance of overview broad a gives provisions policy the of description The conditions. and terms coverage, your American describes fully and specifically that 60196. contract Yourthe is policy Zurich including America, North in Zurich of companies member individual by underwritten product solely for informational purposes. Nothing herein should be construed as a solicitation, offer, advice, recommendation, or any other service with regard to any type of insurance This is intended as a general description of certain types of insurance and services available to qualified customers through the companies of Zurich in North America, provided probability buthighseverity catastrophe. as astabiliserintheeventof averylow of netcapacityandalargelimit couldact Therefore, givingthecaptivea large amount more volatility. emerging risks into a captive, you introduce when it happens. But when you introduce finance thatpotentiallysizeablelossifand into acaptive,sothattheorganisationcan event. Instead,itmakessensetoputthatrisk of dollarscoveragebecauseit’s arare the notionofpurchasinghundredsmillions cyber attack,anorganisationmaydismiss With more emerging risks, such as a serious risk needs. with thesedivergent to deal adapted canbe spread therisk.Stop-lossprogrammes them or to look for a retrocessional reinsurerto to retain to reinsureandwhether appropriate what todeterminerisksare The captiveneeds than sayamanufacturer. differentmay faceentirely example, exposures 31 the captive.CIT put into some ofthoserisksbeing ringfences function throughthe stop-loss feature, which This iswheretheseprogrammescanreally ZurichPerspective

Todd Cunningham Head of strategic risk solutions Zurich Global Corporate in North America GroupCaptives Stronger together, but different apart Joining a group captive can be a rewarding decision, but it’s not one to be entered into lightly, says Brenda Pickering of USA Risk Group (BVI) One of the basic concepts of insurance is become cost efficient when shared with What type of risk is shared? pooling risk. Any large insurance company multiple companies. relies on the distribution of risk or ‘the law of The type of risks can vary from group large numbers’ to (hopefully) have enough Retention of premiums and the ability earn to group. However, the coverages most individual risks to be able to take in more underwriting profits and investments: if commonly written through group captives are premium than it pays out in claims. the group is able to efficiently manage the worker’s compensation, general liability and combined risks, then members retain the auto liability. Group captives may write one or For larger entities such as Fortune 500 underwriting profits that would otherwise go to all of those coverages. Additional coverages companies, the insurance risks within their commercial insurance companies. sometimes written through group captives own organisations are generally substantial include auto physical damage, commercial and diverse enough to support a wholly What type of groups can be formed? property, and group health stop-loss, which is owned captive. These companies have now becoming more common. significant financial resources and risk The group captive can take two basic management infrastructure to efficiently forms: homogenous or heterogeneous. In a How much risk is assumed? manage their own risk. homogeneous group, the entities making up the captive come from a similar, if not identical, The amount of risk assumed varies from The group captive concept takes a similar industry such as roofing, food distribution or programme to programme. Most commonly, approach but on a smaller scale. Many smaller nursing homes. group captives assume per claim risk of companies may see a captive as a potential $250,000 to $500,000. Above that amount, benefit for their organisations. However, While there may be some slight variation within group captives will have reinsurance for they lack sufficient risk diversification and/or the individual operations, all of the group catastrophic claims. Most group captives risk management infrastructure to support a members will share some key characteristics. also purchase aggregate coverage, which captive on their own. This is where the group protects the group in the event of adverse captive comes in. The potential benefits of this structure loss frequency. include: the ability to apply standard When several like-minded organisations can How is risk shared? underwriting criteria across the group; the come together to share risk and resources, ability to apply standard loss control and a captive solution becomes more viable. So, In general, a group captive risk in a group captive claim management resources; and member for a group captive, the five key elements familiarity with industry facilitates focus on can be shared either pro-rata or hierarchically. of a captive, namely, stability of insurance ‘best-in-class’ operations. cost, stability of insurance coverage, access In a pro-rata structure, risk is shared among to the reinsurance market, focus on risk and the group based on their overall share of Potential drawbacks to this structure include: loss control, and retention of premiums and the programme. For example, if there are a lack of risk diversification; an economic the ability to earn underwriting profits and 10 members with equal premium, each will downturn could affect all members at once; investments, apply as follows: have 10 percent of the risk. If there are 10 a mass recall or other catastrophic exposure members but one member has 25 percent could affect many members; competitors Stability of insurance cost: this advantage of the premium, they will assume the same may refuse to participate together; and over a single parent captive is that the group percentage of the risk. This form of risk sharing insufficient number of qualified companies captive has the ability to stabilise insurance may be the easiest to apply and possibly within the industry. cost through risk sharing of all participants and the most equitable, assuming the premium therefore, minimising the cost of insurance accurately reflects individual loss experience. through pricing and reinsurance. In the heterogeneous structure, companies from a variety of industries join together to In a hierarchical risk sharing structure, each Stability of insurance coverage: this form the group. Unlike the homogeneous member assumes a combination of its own means that the premiums are taken from the group, the members may have little in risk and that of the group. For example, if the participants own loss experience, which they common, either operationally or in terms of group captive has a $250,000 retention, each have the ability to control. their risk profile. individual member may be responsible for the first $100,000 for each claim it incurs and Access to the reinsurance market: for Potential benefits to this structure include: the group shares risk for all claims between certain coverages, such as property and more risk diversification; industry/geographic $100,000 and $250,000. group health stop-loss, access to reinsurance variety; less exposure to industry-specific markets can be critical. By forming a group, risk; the ability to draw potential members This structure is often referred to as an ‘A/B entities can gain buying power that would be from a much larger pool of entities; and the fund’ where the ‘A’ fund is the individual unavailable on an individual basis. ability to learn from different industries and retained risk and the ‘B’ fund is the shared adopt new loss control techniques. layer of risk. Focus on risk and loss control: companies can share risk management resources such Possible drawbacks to this structure include: How are group captives owned and governed? as loss control consultants, data analytics and the need to apply a variety of underwriting risk management information systems. criteria; it may be difficult to efficiently Ownership is generally pro-rata, based share loss control and claim management on the amount of premium a company The cost for some of these resources would solutions due to varying needs of members; contributes to the group. Since risk is usually be prohibitive on an individual basis but and member cohesion may not be as strong. shared pro-rata, this is the most equitable 32 Group Captives or alloftheseareas. committees may be formed to oversee some Depending onthesizeofgroup,individual claim management,financeandauditing. tasks willincludeunderwriting,losscontrol, to-day operation of the company. The board’s captive byselectingaboardtooverseetheday- determine thebestcourseofactionfor operational areas. The ownersareableto guidelines and procedures for all of the key of thecaptive,groupmembersmustdevelop In order to ensure the optimal performance structure goingin. aligned. Membersarefullyawareofthe operation ofthecaptiveandinterestsremain that allmembershaveanequalsayinthe While thismayseemunfair, thisensures regardless of overall percentage of ownership. member willreceiveoneshareofvotingstock captive, but in most group captives, each for theamountofpremiumpaidintogroup classes of shares may be issued to account is typicallymoreevenlydistributed.Different While ownershipmaybepro-rata,governance the underwritingrisk. of more higher premiumpayingmembersassume an inequitableamountoftheprofitswhile members with lower premiums may receive owners. If profits weretobesharedevenly, way toreturnunderwritingprofitsthe These committeesareoftenthebackboneof to leavetheprogramme. the financialimplicationsshouldtheydecide understand the terms of participation and The prospective member needs to programme andstructure. to properly evaluate the merits of each available, it is critical for potential members With thevarietyofgroupcaptiveoptions to takeanumberoffactorsintoconsideration. and a is consideringjoiningagroupcaptive,itneeds company a When commitment loss. financial for potential financial significant a Participation inagroupcaptivecaninvolve is sharedandhowmuchriskassumed. participate, whichrisksarecovered,howrisk variety of different ways in termsofwho can Group captivescanbestructuredina other companies. and beingabletosharebestpracticeswith distribution risk more of benefit the like would either betoosmalltoformtheirowncaptiveor interested in participatingacaptive, but may management toolforcompaniesthatare Group captivescanbeahighlyeffective risk the captive. directors todeterminethelong-termgoalsof investment withthebackingofboard and decisions financial making by captive the 33 into lightly. CIT rewarding decision,butonenottobeentered shots? Joiningagroupcaptivecanbe do serviceprovidersseemtobecallingthe Are themembersactiveandengaged?Or member shouldasktoattendaboardmeeting. to ensureoptimalperformance. A prospective the variousaspectsofcaptiveoperations highly engagedownerswhoactivelyoversee Successful group captives typically have each memberisunderwritten. who is participating in the group and how It shouldreviewcaptivefinancialsandknow GroupCaptives

Brenda Pickering Account manager USA Risk Group (BVI) EuropeUpdate

Solvency II and you With not long to go until Solvency II’s 1 January 2016 deadline, insurers are going through the last stages of implementation in time for the big day BECKY BUTCHER REPORTS

With pressure mounting in Europe in the The work to comply with further additional Captive connotations run up to 1 January 2016, when Solvency II requirements set by member states, which will be fully implemented, Insurance Europe augment Solvency II, is slowing down Solvency II is meant to establish a common recently conducted a survey to see how the implementation process, with several ground between regulatory requirements insurers are progressing. respondents reporting that their member state throughout the EU, according to Dirk Wegener, is “gold plating” Solvency II when transposing it vice president of the Federation of European The survey revealed that although many into national law. Risk Management Associations (FERMA). insurers are making good progress, a fair number are concerned about the pressure Due to the volume of items that require approval “Ideally, there will be no difference they face due to additional last-minute from supervisors under Solvency II, a flurry of between EU-level and local laws. Although, requirements being imposed in the run-up applications for approval could be submitted at realistically we will see local interpretations to the regime coming into force. a time when supervisors’ resources are already of the EU-regulations, and moreover, their considerably stretched. application in the regulation process as The survey, which covered companies that such may be different.” account for 90 percent of European insurance The extensive documentation requirements premium, found a clear majority are making good are also delaying the approval process of He believes that captives are in a good position progress in implementing the first two pillars of internal models, with nearly all respondents to ride out the EU-national mismatch, as they Solvency II. Positive results uncovered that the warning that supervisors’ demands in this area are mostly domiciled in one location and majority of insurers feel that risk management are too burdensome. do not operate subsidiaries as opposed to and governance have already improved as a multinational companies. result of the introduction of the new regime. Since the implementation process of Solvency II began, insurers are finding that However, he says, inter-country mismatches But many respondents were still concerned that risk management has evolved. are a concern and expected to be at least an the final version of the quantitative reporting additional cost burden. templates, which insurers need to comply But according to Aubin, Solvency II “has become with for the third pillar of Solvency II, will only very much a rule-based system and extremely European insurers had €9.9 trillion in assets be adopted by the European Commission in expensive to implement and operate”. He under management in 2014, according to September, just four months ahead of when the argues that even though the industry is pleased Insurance Europe, and Solvency II could new regime starts. that risk management has been improved, the exaggerate the risk that insurers’ long-term enhancement could have been achieved without investments present. The head of prudential regulation at Solvency II becoming quite so dogmatic. Insurance Europe, Igotz Aubin, says: “It is This would make it unnecessarily expensive for encouraging to see that Europe’s insurers Aubin believes that this requires them to insurers to continue making these investments, have made such substantial progress in allocate a huge amount of resources and which will limit their ability to continue delivering their journey towards implementing Solvency so, given the challenging environment that such a significant contribution to society. II, especially given that this task has been they face externally, the fact that so many completed during a particularly challenging insurers are doing so well really stands Aubin says: “We hope that, as part of the time for the industry. However, this survey as testament to the European insurance EU investment plan to stimulate growth in has also revealed a number of serious issues industry’s commitment to making Solvency Europe, the European Commission will adjust that need to be acknowledged.” II work as intended. the calibration of capital charges on insurers’ long-term investments under Solvency II so The concern keeping insurers up at night is But Solvency II has imposed a huge drain that they are commensurate with the actual that most national supervisors are intending to on the resources of insurers of all sizes. risk posed by these investments.” fully comply with approximately 700 guidelines issued by the European Insurance and According to Aubin: “Some very small He adds: “We also ask that regulators Occupational Pensions Authority (EIOPA). To companies will not actually be covered by and supervisors stop imposing additional add to the pressure, the guidelines are going to Solvency II, so it depends on the individual requirements on insurers at a time when they add approximately 1,100 pages to Solvency II company as to the exact effect that Solvency only have a few months left to implement and increase the implementation burden. II will have.” Solvency II.” CIT 34 EuropeUpdate A clear view of the risks ahead.

Milliman provides new insights into the risks in today’s insurance environment. We are a leading provider of actuarial and management consulting services to captives and risk financing organizations worldwide. We bring depth, clarity, and context to the issues and challenges that our clients face every day.

Milliman has over 60 years of experience and offers consulting services related to enterprise risk management, loss and expense liabilities, risk retention alternatives, pricing and funding, financial modeling, claims management, and underwriting consulting.

milliman.com/captives New horizons Vanuatu is a friendly jurisdiction willing and ready to do business, according to Kevin Lindsay, chairman of the domicile’s captive insurance association In March 2015, our beautiful island country part of that thought process. Incorporating your Flexibility for captives Vanuatu was hammered by tropical Cyclone capital insurance entity in Vanuatu presents a Pam. A category five cyclone, it was the largest number of benefits and advantages. Vanuatu’s captive legislation has been purposely in recorded history to ever hit our South West designed to offer a full suite of insurance options Pacific Islands. Port Vila, our capital, came Since its beginnings as a financial centre in including incorporated insurance companies through relatively unscathed, an endorsement the 1970s, Vanuatu has been at the forefront and incorporated and protected cells. of our sturdy infrastructure. Communications of commercially driven legislative reform. with our offshore clients were not disrupted Whether you are seeking to establish a Capital requirements and reporting systems and it was business as usual. captive programme or converting from another are similar to other well regulated offshore jurisdiction, we can facilitate the process easily jurisdictions. As in other jurisdictions, The event did, however, provide a stark and seamlessly. resident insurance managers, licensed by the reminder of the impact that a ‘one-off’ event can regulator, are required to manage captives. have. It also provided a dramatic illustration of We are an accessible, vibrant and reputable the dangers that can be avoided by critically domicile. Our regulators and legislators work with A significant feature of Vanuatu’s legislation is its examining your risk protection programme on an our licensed captive managers to enable them ability to deliver flexibility while understanding ongoing basis. An appropriately tailored captive to achieve their client’s objectives. Our captive the challenges faced and outcomes sought by insurance programme should be an essential clients benefit from this proactive approach. the captive insurance industry. 36 Given that riskmanagers facetheongoing structures were overlookedasoptions. (PCC) andincorporated cellcompany(ICC) consequence that theprotectedcellcompany a separateparentcaptivecompany withthe undertake afeasibilitystudyon incorporating managers andtheirserviceproviders wasto Until recently, the path most travelled by risk PCCs andICCs Some ofthecaptiveoptionsaredetailedbelow. to launch any captiveinsurance programme. platform fromwhich and stable an accessible costs environment. Minimalcomplianceprovide client baseinVanuatuas abusiness-friendly international our of confidence the maintained thathas It toprudentregulation is thisadherence financial serviceindustry. will addtothecredibilityandintegrityofour reputation ofanynewapplicantforalicence regulators must be satisfied that the Although flexibleandaccessible,our challenge ofkeepingtheircorporatecaptive can also commercially (andconveniently) to ‘governance’ economies of scale. The ICC incorporated cell were the same, giving rise The directorsof theICC(thecore)andeach to manypotentialclients. separate identityandliabilitythat isunfamiliar The PCC, by contrast, offers a diluted form of arrangement beingimplemented. have confidenceinthearchitecture ofthe easily understoodandallowedtheclientto own legalidentity and limited liability, was own right.Eachincorporatedcell,havingits separate legalentity, couldcontractinits was thateachincorporatedcell,withitsown The most practical advantage for the client without havingtoreapplyforapproval. incorporated cellwhenconvenientforthem, position tocreateandactivatetheadditional approved, thedirectorsofICCwere in a captive licence issued and business plan allowed. As theclientalreadyhad point intime,ifandwhenmarketconditions cell that would come on-stream at a future a riskclasstobewritteninanadditional In itsbusinessplan,theclientidentified incorporated cell. licence alongwithwrittenapprovalforeach The regulatorapprovedtheonecaptive plan for each of its three incorporated cells. licence fortheICCsettingoutonebusiness with thedraftapplicationforonecaptive the firststepwastopresentregulator appropriate structure to house certain risks, Having decidedthattheICCwas have beenasfollows. lessons from our own recent ICC experience a goodtrackrecordinmanagingcells. The the needtoselectaserviceproviderthathas can present challenges and this highlights Financial reporting around cell structures client managementtime,energyandcapital. time to establish the captive; and (iv) reduced in lead reduced (iii) protocols; reporting and capital, accounting,auditing,management (i) a single board of directors; (ii) consolidated ICCs can offer significant economies of scale: For captiveownersandsponsors,PCCs operate withinitareattunedtotheseissues. Vanuatu and the professional advisors that the mostconventionalofscenarios. the potentialusesaPCCorICChas,beyond and their advisors may not be fully aware of in thosejurisdictions that do,riskmanagers operation ofPCCsandICCs.However, even environment thatisconducivetotheeffective For one,noteveryjurisdictionhasaregulatory There aretwopossiblereasonsforthistrend. potentialarsenal.from ariskmanager’s frequently PCCsand/orICCsareexcluded structure ‘fitforpurpose’,itissurprisinghow 37 be under the sole dictate of the insurer; (ii) the (ii) insurer; the of dictate sole the under be otherwise over thebookofbusinessthatwould control and influence has broker or agent the have been:(i) In eachcasetheadvantages captives. a varietyofagency I havemanaged write highqualityrisksthattheycontrol”. insurance agentsandor insurance brokersto “formed andowned by one or more independent as This typeofcaptivecanbedescribed Agency captives additional regulatorycost. in Vanuatu) withnocellfeesresultingin licence for the ICC and its cells (standard client hadatidyarrangementwithonecaptive flexibility andcertaintyfortheclient. The cells inthefutureandtherebycreated option toestablishadditionalincorporated signed off bytheregulator, identifiedthe Furthermore, theclient’s businessplan,as incorporated cell. loan, ifneeded,additionalriskcapitaltoeach structures andtherebycreatenewhorizons.CIT sized client,agentor broker is to consider all point for a corporateorsmall-andmedium- of that is complex. programme starting The simple architecture specific the and captive a available, the appropriate vehiclefor forming ready to do business. Giventhe many options Vanuatuand willing isafriendlyjurisdiction understand any downsides as well as the benefits. is theneedbythemtocommitandbuy-in Finally, aswithanycaptiveprogramme,there all ofthesetraits. agents andbrokersIhavecomeacrosspossess and clients.Interestingly, mostofthesuccessful both withinsurers reputation and experience spirit, skill,knowledge, the entrepreneurial and brokerswhohavethecombinationof The keytosuccessisdealwithagents pricing; and(v)tocementtheirmarketposition. client; the and coverage of scope the around flexibility (iv) of requirements the all meets and creating aninsuranceproductthat is unique (iii) ‘in-house’; business writing of convenience

Kevin Lindsay Chairman of the Vanuatu Captive Insurance Association President and CEO of Riskman International DomicilePositives

More than 80 years of thought, effort and favourable location for ownership of intangible Regulation and regulators are subject to independent cooperation have produced ideal conditions assets, and the operation of corporate offices assessments by the Caribbean Financial Action for the efficient management of wealth in the and businesses involved in international trade. Task and the International Monetary Fund. Bahamas—in comfort and style. Political and economic stability Wealth and asset management options Its mature financial services industry, established infrastructure, progressive government, tax The Bahamas has an outstanding record of political The Bahamas offers owners of capital a broad neutral environment and luxury lifestyle all have and economic stability, progress and stewardship, choice of financial institutions that deliver myriad been carefully cultivated to satisfy the specific with more than 285 years of uninterrupted services, including banking, private banking and needs of the most exclusive clientele. parliamentary democracy. trust services, investment fund administration, capital markets, investment advisory services, The advantages of doing business in the It has been an independent nation since 1973, accounting and legal services, ecommerce, Bahamas are as clear as the crystal waters and retains a Westminster-based system of insurance, and corporate and maritime services. surrounding the 700 islands of the archipelago. government and an English-based legal system. It maintains a high ranking for civil liberties and It is home to more than 250 licensed banks and Strategic location political rights from the World Bank. trust companies including 16 of the top 100 global banks. The Bahamas is a favourable The Bahamas is situated at the crossroads of Regulation jurisdiction for the establishment of family the Americas, just 65 miles off the east coast offices, which help wealthy families achieve their of Florida, and on the same time zone as New The Bahamas encourages the growth of goals while dealing with increased regulations, York and Toronto. its financial sector through adherence to and complex issues of taxation, distribution internationally accepted regulatory principles, and planning and charitable giving. It is an ideal hub for regional investment and efficiency in their administration. Independence business in the Eastern US and Canada, and is maintained through the separation of roles of The range of professional investment management much of Central and South America, offering a policymakers and regulators. services available in the Bahamas continues to 38 home. Gated waterfront communities packed communities Gated waterfront home. relocate permanently orestablishasecond to may wish attractive features forthosewho has many and settings intheworld idyllic The Bahamasislocatedinone of the most Lifestyle choice forwealthandassetmanagement. to establish the Bahamasasaninnovative (ICON) the BahamasInvestmentCondominium Executive Entity,Bahamas andmostrecently, products such asSmart@Funds,the innovative this partnershiphascreatedawide range of Services Board(BFSB), Bahamas Financial by to standards.Spearheadedthe international to market needsandatthesametimeadhere to respond Bahamas actinclosepartnership interests inthe Government andbusiness Public-private sectorpartnershipandinnovation imported skills. upon dependent largely locations than in in theBahamas more consistentservice receive and build deeperandmorelastingrelationships to the localcommunity, clients can expect to committed professionals financial experienced financialWithmorethan6,000 and trustedworldwide. in that isrecognised experience and tenureofskill pool long whichhascreatedadeep aservicesexcellence, and workforce The Bahamas has a highly educated local People lease low-costindustrialspace. terms, and on concessionary developments lands for acquire publicly-ownedapproved and overseasinvestments.Investorsmay friendly climateandcomplementsBahamian tosupportaninvestment- Policy isdesigned Investment National Its flourish. can enterprise an economicenvironmentinwhichfree is committedtobuilding The government Investment policyandincentives agreements towhichitisaparty. and transparentprotocolsunderbilateral As such,itwillonlyshareinformationonagreed the conductoftheiraffairs. persons have a right to privacy with respect to Bahamians. as The Bahamasadherestotheprinciplethat benefits tax same the receive platform uponwhichinternationalpersons The Bahamasremainscommittedtoataxneutral Taxation than $135billion. with assets under management totalling more excess of800fundsarelicensedintheBahamas, and registrartransferagencyservices.In provide fundadministration,corporateservices agent services. More than 60fund administrators corporate servicesandregistrartransfer investment management services, custodial offer that firms advisory investment grow. There are more than 145 broker-dealers and with lifestyleamenitiesfrom golf andtennisto they come totheBahamas. family offices will all find a warm welcome when equal measure. Individuals,companiesand in of life the enjoyment and business supports that cultivated assetstocreateanenvironment its and developingnaturalresources and simply: the Bahamas is committed to growth of these advantages may be summedupvery standard. Development and Co-operation All with data protection at the Organisation for Economic networks, cable optic fibre healing, self- separate, fullyredundant, three through globally connected are facilities office Modern focus offacilitatinginternationalbusiness. and fit-for-purpose infrastructure with the singular The Bahamas has developed its land, premises Physical resources otherwise locallyavailable. skills and expertisethat specialised arenot The with country welcomesnon-Bahamians recruit additionalpeopleabroad. to families and individuals firms, international immigration flexible Bahamian talentbut recognises the needs of a has policy that encourages companiesto develop Bahamas The Work permitsandimmigration consideration ofapplications. of $1.5millionorgreater, thereisaccelerated a residence. Formoresubstantive investments persons whospendaminimumof$500,000on Economic permanentresidenceisavailablefor Bahamians, exceptfortherighttovote. are forallintentsandpurposestreatedlike and work.Personswithpermanentresidence their money’ with respect to where they live that makesiteasierforindividualsto‘follow granting economicpermanentresidency(EPR) The Bahamashasaliberalprocessfor Permanent residencyopportunities accommodate thelargestyachts. countless portsofentryandmarinasthatcan situated throughoutthearchipelago,aswell airports andmorethan50other The Bahamasiseasytogetto,withsixmajor Freeport alsoenjoypre-clearancetotheUS. passengers, privatejetsandgoodsshippedfrom exists fromNassau,whilecommercial US pre-clearance for commercial passengers numerous portsofentryandmarinas. UK, EuropeandPanama,thecountryhas to the Bahamas from all major US cities, Canada, the available are flights Direct residence. services for homeowners who are not in provides concierge residential management The Bahamas is a service economy that America, EuropeandtheFarEast. and third-homebuyersfromNorthSouth spas and marinas are attractingmoresecond 39 Commission of the Bahamas was established Commission oftheBahamaswasestablished standards. based oninternational The Insurance domestic insurers and regulating licensing The Insurance Act provides a system for approach tothesector. in recent years consolidated this jurisdiction’s insurance legislationbutlegislativechanges The Bahamas always has had market-friendly array offinancialservices. important additiontoitsgrowingandimpressive to strategicallynurturecaptiveinsuranceasan unmatched intheregion,Bahamascontinues With this wealth management pedigree insurance market. it tofacilitatesynergieswiththe has enabled management areas, which in these as aleader reputation wealth and industry. The jurisdictionhasdevelopeda asset diversified and experienced is supportedbyahighly The captiveenvironmentintheBahamas The captivatingadvantages satisfying internationalstandards. enterprises while for small-tomedium-sized into captiveorself-insurance means ofentering response to the demand for a cost-effective isaclear regime intheBahamas The regulatory of scalecreatedwithinsuchstructures. Cell captives benefit from the natural economies and distinct. are trulyseparate of eachaccount liabilities and that theassets statutory protectiontoensure The Bahamas’s cell legislationprovidesrobust environment tothecaptivemarket. its wealthmanagement applying jurisdiction is aprimeexampleof the legislation Cell A uniquecell-ingpoint supervision overinsurancecompanies. holding powersofregulation,inspectionand function asanindependentsupervisoryauthority The actallowsfortheInsuranceCommissionto under thisact. DomicilePositives CIT

Aliya Allen CEO and executive director Bahamas Financial Services Board TaxTalk

Navigating diverted profits tax Matthew Fountain of AIG discusses the UK’s diverted profits tax In response to concerns about multinational DPT was announced in December 2014 and rules. This article will provide an overview of corporations shifting profits out of the UK, the is effective for transactions occurring from the legislation and then examine how it could government has enacted a new diverted profits 1 April 2015. Her Majesty’s Revenue and apply to captive arrangements. There may be tax (DPT), which targets a number of areas Customs (HMRC), the UK tax authority, has other transactions caught by the rules, and all of perceived profit shifting, including certain issued interim guidance to assist taxpayers transactions with affiliates should be reviewed arrangements involving captive insurers. in the application of DPT with further updated for DPT applicability. The comments in this DPT targets UK companies transacting with guidance expected by the end of the year. article are only intended as a general discussion affiliates in low tax jurisdictions that lack of the issues. Companies should carefully sufficient economic substance and foreign There are several common insurance examine each of their transactions with their companies avoiding a UK taxable presence. transactions that could be caught by the DPT own tax advisors before coming to a conclusion. 40 TaxTalk TaxTalk

tax rate of 12.5 percent and therefore Captive insurance transactions with an affiliate in this country would potentially be caught by the rules), In this example, a UK manufacturing company such that the corporate tax deduction in the pays insurance premiums to a group captive UK is higher than the corporate tax paid in the insurer located in a jurisdiction with low or affiliate’s jurisdiction. no corporate tax, for instance, Bermuda. It is possible that the first part of the legislation However, the detailed rules focus on the may be triggered as it would produce a tax actual tax rate applied, rather than merely mismatch. The UK manufacturer would looking at the statutory corporate tax rate therefore be required to demonstrate that the in the affiliate’s jurisdiction. For example, group captive insurer has sufficient economic differences in reserving methodology could substance, including the contribution from be a factor. staff to the insurer’s income.

Insufficient economic substance arises if it The interim DPT guidance issued by HMRC is reasonable to assume that the transaction includes a captive insurance example, but the was designed to secure a tax reduction. To fact pattern is weighted towards a scenario avoid this characterisation, two conditions where there is low substance, including low must be met: (i) the tax benefit is less claims history, the insurance risk is managed than all other financial benefits; and (ii) by the parent, the risk is not reinsured more than half of the affiliate’s income externally by the captive, and little activity is from the transaction is attributable to the carried out by the captive’s employees. The affiliate’s employees, including externally answer also assumes that there are no capital provided staff (contractors), as opposed efficiencies arising from the transaction. to other assets. This assessment requires considerable judgement and the conclusion In order to demonstrate the substance of the reached will need to be documented. transaction, groups with captive insurers in low tax jurisdictions may wish to consider If there is a tax mismatch and the affiliate supporting their position with reference has insufficient substance, the UK company to their economic substance. This could is subject to 25 percent DPT on the diverted involve highlighting: profits (plus an amount equivalent to • Capital and premium savings that arise interest). When calculating the DPT charge, from pooling group global risks and HMRC would look to the relevant alternative reinsuring this more diversified risk to the provision—the transaction that would be market; reasonable to assume would have taken • The captive insurer being a regulated entity; place with an affiliate had tax not been a • Employment of staff with underwriting or relevant consideration. actuarial experience; and • The potential for losses (as well as The second scenario applies where a non- profits) to arise. UK company carries on a trade, and a person is carrying on activity in the UK in connection Captive insurers will also need to demonstrate with supplies of services, goods or other that more than half of their income is property by the non-UK company in the attributable to its employees or contractors. course of that trade. Given that the specific captive example in the interim guidance does not favour captive This provision is effected when two conditions structures, UK companies that feel they can are met: (i) it must be reasonable to assume demonstrate the economic substance of that the non-UK company has structured its the captive may still wish to notify HMRC to activity in such a way as to ensure that it is test their view, rather than rely on their own not treated as carrying on a trade through a judgement without notifying HMRC. Whether UK permanent establishment (with the result or not the UK company decides to approach that it does not have a UK corporation tax HMRC, it should maintain documentation to liability); and (ii) it must also be reasonable support its conclusions. to assume that arrangements are in place to The rules provide that DPT arises in two avoid UK corporation tax or that the non-UK When calculating DPT, HMRC would look to scenarios: (i) transactions with affiliates in company is party to arrangements with an the transaction that would be reasonable to low tax jurisdictions; and (ii) where non-UK affiliate that produces a tax mismatch and assume would have taken place with an affiliate companies avoid a taxable presence in the lacks economic substance. had tax not been a relevant consideration. The UK (known as a permanent establishment). aim would be to demonstrate to HMRC that If the second scenario applies, DPT arises the alternative provision would have resulted The first scenario is where a UK company at 25 percent of the profits that are just and in the same expenditure as under the actual is party to a transaction or a series of reasonable to assume would have arisen if transaction, for example, insurance premiums transactions with an affiliated company that the activities in question had been carried paid to another group company. both produces a tax mismatch and lacks on through a UK permanent establishment. economic substance. The DPT charge will also include an The inclusion of a third-party insurer as an element equivalent to interest, and can be intermediary between the UK manufacturer Broadly, the tax mismatch arises when the collected from UK affiliates. There are some and the group captive insurer may not change affiliate’s corporate tax rate is less than 16 exemptions, including de minimus rules and the analysis. In this case, there is a series of percent (for example, Ireland has a corporate for certain debt transactions. transactions between the UK manufacturer 41 DDSCAPTIVE 14412_Ad_Bullets 7.437x10.625_Layout 1 7/2/13 1:29 PM Page 1

TaxTalk and the group captive (instead of a direct a permanent establishment. This could result • It is reasonable to conclude that transaction) that might be caught by the DPT in the allocation of profits arising on non-UK sufficient information has been supplied rules, with the result that the outcome would risks insured by the captive. to HMRC for it to decide whether to be the same. issue a charging notice and HMRC has Freedom of services business examined that information; • An officer of HMRC has confirmed that In the example of a European insurer that is the company does not have to notify; or based outside of the UK, it is possible for the • There is no change in circumstances non-UK insurer to write a UK policy under the from the previous period for which EU’s freedom of services provision without notification was or was not given. the need to be UK regulated. However, in these cases it would often be the case that Upon notification, HMRC will consider the non-UK insurer engages the support of whether a DPT charge arises and issue an affiliated UK entity for certain activities, for a preliminary charging notice within two example claims handling. years (or four if there is no notification). Taxpayers have the right to respond to this In this case, the non-UK insurer is potentially within 30 days. At this point a final notice caught by the second scenario as it could be will be issued or confirmation of no charge seen to be avoiding a UK taxable presence. will be provided. A 12-month period follows DPT targets There could be arguments that the activity in which the notice can be reviewed by was not structured in this way to avoid UK HMRC (the charge can be increased or UK companies corporation tax, particularly as freedom of decreased). Following this, taxpayers have services is intended to promote business 30 days in which to contest the DPT charge transacting“ with activity and is widely used throughout Europe by appealing to the first-tier tribunal. for commercial reasons. affiliates in low The DPT charge includes an interest tax jurisdictions However, if it were not possible to component calculated for the period from demonstrate this, then the arrangement the date notification was due to the date that lack could be caught, particularly when the non- of the notice. Failure to notify by the due UK insurer is located in a low tax jurisdiction date may result in penalties should a DPT sufficient economic (for example, Ireland) where it would likely charge subsequently arise. DPT is not substance and be left with a tax mismatch because of the an allowable expense when calculating Irish tax rate (12.5 percent). corporate tax liabilities. foreign companies The Irish insurer would need to demonstrate Practically, if taxpayers wish to obtain a avoiding a UK that the transaction has a sufficient degree of degree of comfort, a dialogue with HMRC is substance by documenting that the non-financial required. The interim guidance notes that UK Enjoy your insurance freedom in Delaware. taxable presence benefit of the transaction is greater than the tax companies serviced by the large business benefit associated with the transaction. section of HMRC should engage with their • Top 10 domestic domicile in terms of written premium customer relationship managers in the first This could involve showing the business would instance. It is likely that the specialist DPT • Efficient and well-run Department of Insurance team will be consulted before any response not be accessible to the insurer were it not for • Collaborative regulators ” the transaction. is received. • Low premium taxes DPT arises on the profits that it is just and The DPT team may issue an opinion on a reasonable to assume would have arisen if taxpayer’s DPT compliance, but this will not • Well-established service provider infrastructure the activities had been carried on through a be a formal statutory or non-statutory sign-off. UK permanent establishment. The allocation Companies should therefore document their • Legal home to two-thirds of the Fortune 500 of insurance profits is generally driven by assessment of the application of DPT to their the underwriting activity and assumption of business. CIT • Preeminent body of corporate and alternative entity law insurance risk, both of which are by the Irish insurer in this case. • Stable legislative environment Where any captive underwriting activity is Therefore, there should not be any additional • Flexible leading-edge insurance statutes undertaken in the UK, there is a risk that DPT profits (over services fees paid to the UK entity) applies under the second scenario. DPT could to allocate to the UK had the activities been • 150 traditional commercial insurers, 600+ captives apply where the captive structures its activity undertaken by a permanent establishment of in such a way as to ensure it does not have and regulators who understand the difference the Irish insurer, and DPT may not arise. a UK permanent establishment, for example, by designing its structure to avoid the use • Delaware —WHERE BUSINESS GETS DONE of dependent agents that contract on the Duty to notify captive’s behalf (dependent agents generally give rise to a permanent establishment). If an entity believes it is potentially within the scope of DPT, it has a duty to notify HMRC You DEcide. DCI If it is also reasonable to assume this was (within six months of year-end in the first year; DelawareCaptive.org Delaware Captive to avoid UK corporation tax, DPT would and within three months of year-end in future Insurance Association be charged on the profits that would be years). However, notification is not required if: reasonably allocated to the UK had the • It is reasonable to assume that no charge DCIA business activities been carried on through to DPT will arise for the current period; Matthew Fountain EMEA Regional tax director, AIG 4023 Kennett Pike, #801 • Wilmington, DE 19807

This article cannot be relied upon as advice on the application of DPT. Any particular transaction needs to be considered on its own facts. Any questions should be directed to companies’ tax advisors. Email: [email protected] 42 Phone: 888-413-7388 DDSCAPTIVE 14412_Ad_Bullets 7.437x10.625_Layout 1 7/2/13 1:29 PM Page 1

TaxTalk

Enjoy your insurance freedom in Delaware. • Top 10 domestic domicile in terms of written premium • Efficient and well-run Department of Insurance • Collaborative regulators • Low premium taxes • Well-established service provider infrastructure • Legal home to two-thirds of the Fortune 500 • Preeminent body of corporate and alternative entity law • Stable legislative environment • Flexible leading-edge insurance statutes • 150 traditional commercial insurers, 600+ captives and regulators who understand the difference • Delaware —WHERE BUSINESS GETS DONE You DEcide. DCI DelawareCaptive.org Delaware Captive Insurance Association DCIA

Matthew Fountain EMEA Regional tax director, AIG 4023 Kennett Pike, #801 • Wilmington, DE 19807 Email: [email protected] Phone: 888-413-7388 Safety by the numbers Using safety management will pay you more dividends as your programme matures by preventing losses and minimising the impact of losses that do occur, says George Gibson of Charles Taylor Safety Management Services LossControl

Various industry groups and insurers conducting a risk analysis of your exposures, groups in the workplace, as well as people- have recognised and applied loss control which entails creating a risk register and to-people interactions related to supervision methods to stabilise their losses and add keeping it up to date.” This drives your risk and management. These are also useful at predictability. Some examples of loss control planning and loss control to help reduce both site-specific level through management level. methods among insurers include loss control frequency and severity of loss, according to departments, underwriting guidelines and Christopher Moss, director of risk consulting How this may apply to a specific risk? Let’s increasing deductibles and retentions, while for Charles Taylor. take a look at reputational risk from today’s among clients, they can include incident headlines, Blue Bell ice cream. This is an investigations, specific personal protective Creating a risk register seems simple but requires established, well-respected 108-year-old brand equipment policies, and training. All are aimed good judgement and deep understanding about that was distributed in 23 states, mostly in at reducing or eliminating claims to stabilise the risks you have or may face in the future. The the Southern US, as well as at least 27 other the loss cost. components of a risk register are: description of countries. It offers both institutional and retail risk; risk type; likelihood of occurrence; severity products. The company almost went out of In the extreme, insurers drop a specific line of of effect; countermeasures; potential additional business due to a listeria outbreak linked to insurance and/or related industry because the mitigations; risk owner; and status. its products by DNA testing. The following is a losses are not predictable. Even though they select outline of events from the Food and Drug have loss controls in place, the customer base Listing the countermeasures or mitigations Administration’s (FDA) website. is not consistent with applying them. This has assumes that you will follow through and driven some companies in those industries to implement them. A very common method The FDA was notified that the three strains create their own captive insurance company. is a claims review with your adjuster. What related to the illnesses reported in Kansas you learn from that review should be brought and four other rare strains of listeria Along with those companies with established forward to the loss control (countermeasures) monocytogenes were found in samples of controls in place and stable losses, they may applied. From the captive insurer point of view, Blue Bell Creameries single serving Chocolate choose a captive to retain the underwriting the dividends should be: avoiding injury to Chip Country Cookie Sandwich and the Great profits (or losses) for insurable risks. These employees, customers or the public; meeting Divide Bar ice cream products collected by actions have yielded high dividends in the your risk transfer/insurer requirement; your the South Carolina Department of Health and form of cost reduction and exposure reduction. business operates better; lower costs; less Environmental Control during routine product down time; and higher customer satisfaction sampling at a South Carolina distribution Then there are some organisations that and retention. centre, on 12 February 2015. These products just buy coverage. They don’t think of loss are manufactured at Blue Bell Creameries’s control and don’t pay much attention to How will I know when the dividends Brenham, Texas facility. managing those risks. Then when they can’t have stopped? get insurance or the rates have gone through On 13 March 2015, Blue Bell Creameries the roof, it becomes an all-out war against reported that it had removed the affected ice the causes for the poor performance, which I think it really involves the stability of losses. cream products from the market by picking then can include the insurance company’s claims If they are stable then you can predict with up directly from the retailers and hospital settings department, the loss is a one-off exception to a good confidence level the funding for your it serves. The company also shut down the the rule, or the injured party is to blame. captive, which would be the first indication. This also means if nothing changes you will production line where the products were made. In the captive insurance world we don’t have still get those losses. Additionally, if you’re not the luxury of blaming someone else for our looking at the leading indicators then expect The Center for Disease Control reported that as results or lack of dividends. We have become the unexpected. of 20 April 2015, a total of 10 patients infected the insurance company and the client. As with several strains of listeria monocytogenes Esperanza Mead, president of Actuarial Factor, What’s next? Safety management were reported from four states: Arizona (one), puts it: “The key to insurance is to control the Kansas (five), Oklahoma (one), and Texas losses and the expenses. If you don’t mitigate Safety management is all about forward thinking (three). Illness onset dates ranged from losses, then paid losses, case reserves, and and looking at the leading indicators and January 2010 through January 2015. All 10 incurred but not reported losses (IBNR) will balancing that with lagging indicators such as patients were hospitalized. Three deaths were increase. This translates into underwriting loss experience. reported from Kansas. losses and higher/unaffordable premiums.” There is an excellent study by the Campbell Blue Bell Creameries announced that on 27 So how do we get the loss control dividends Institute benchmarking leading indicators. Its April it would carry out an intensive cleaning and what do we do when they stop? focus is on the environmental, health and safety and training programme at all of its production performance, which can be applied to insurance facilities. On 14 May, Blue Bell Creameries First and foremost, you need to take a lesson coverage areas. announced that it had entered into voluntary from insurance carriers and brokers. They agreements with the Texas Department of State invest heavily in loss control staff and practices. When referring to the leading indicators, the Health Services and the Oklahoma Department These set the standard for providing a stable Campbell Institute references the following areas: of Agriculture, Food, and Forestry outlining a environment to underwrite the risk. We can’t series of steps and actions it would take as part ignore the fact that insurance companies have Operations-based: indicators that are relevant to of its efforts to bring its products back to market. solid reasons for not covering certain things. the functioning of an organisation’s infrastructure What are you doing to control your exposure? (for example, machinery and operations), which According to Blue Bell Creameries: “The could be potentially site-specific. actions include rigorous facility cleaning and Looking at your risk and controls are essential sanitising, revised testing protocols, revised to the long-term success of the captive. Some Systems-based: indicators that relate more production policies and procedures designed of the coverages are very low frequency to the management of an EHS system, which to prevent future contamination, and upgraded of loss, but when losses occur you are the can be rolled up from a facility level to a region/ employee training initiatives.” insurance company. business unit or corporate level. The firm also stated that the agreements “Adopt loss control methods consistent Behaviour-based: indicators that measure include provisions specific to addressing listeria, with your exposures. Determine this by the behaviour or actions of individuals or including: conducting root cause analyses 45 LossControl to identify its potential or actual sources; Monetary retaining an independent microbiology expert to establish and review controls to prevent the • No engagement of senior management future introduction of listeria; notifying the Texas • Focus on the claimant and Oklahoma health agencies promptly of • Company resources assigned limited to any presumptive positive test result for listeria cost reduction monocytogenes found in ingredients or finished • Regulatory fines drive programme focus product samples, and providing the state agencies full access to all testing; ensuring that Culture is focused on managing the risk by the company’s pathogen monitoring programme consistently monitoring the environment and for listeria in the plant environment outlines how demonstrating commitment to the various the company will respond to presumptive positive systems and risk/safety initiatives. tests for listeria species; and, instituting a ‘test and hold’ programme to assure that products are The monetary approach is more of a delegate safe before they are shipped or sold. and report system. It could be thought of as a ‘no The company news is good news’ approach. An established firm such as Blue Bell Creameries leadership needs has loss control programmes in place and has How should you incorporate safety “to determine their successfully served its customers for 108 years. management into your captive? It knows the right procedures and is an expert at level of commitment. making ice cream. Unfortunately, its loss control Safety management’s purpose is to have a programme stopped paying dividends. system in place that does not wait to act. This Start by completing is very much like the quality revolution. Looking at the lagging indicators of claims/losses a risk register. did not predict the failures in the manufacturing Instead of waiting for customer complaints This will chart process. Reading regulatory inspection reports to trigger a change in production, we prior to its crisis didn’t tell the management they continuously conduct monitoring of our your path to the had a problem. operations and make changes as variances are identified. exposures, controls Some items that stood out from the FDA facility available, lagging inspection reports during the course of this The company leadership needs to determine listeria outbreak include: paint deteriorated their level of commitment. Start by completing and leading above food processing equipment; ingredient a risk register. hoppers not kept clean; employees not indicators to monitor, wearing appropriate clothing; dripping water This will chart your path to the exposures, from pipes over production lines; and an controls available, lagging and leading indicators and highlight the inadequate sampling programme. to monitor, and highlight the resources needed. resources needed Behaviour, systems and operational indicators Then engage the executive leadership to would have revealed the company’s issues determine the overall approach and content. and facilitated resolution with a proactive Service providers, both internal and external, safety management approach. such as brokers, third-party agents, legal, human resources and so on can provide valuable input ” An example is a safety management dashboard to this process. that indicates key metrics on a weekly and monthly basis. An example of a typical captive programme’s safety/risk control structure for a similar This may include: senior management visits; industry with multiple employers may entail a incident occurrence and resolution (near loss pre-membership and membership track of loss investigations included); conversations with controls and safety management initiatives. associates; tracking the number of outstanding For example: maintenance issues; and vendor reviews. Pre-membership: review of safety plans; Safety management cultures assistance in plan development; onsite visit; underwriter risk information; expert advice With good reason, we focus on the monetary on risk control. impacts of risks. Managing those losses with a focus on the claimant and individual cases makes Membership: risk control committee; safety sense, but that may put proactive management resources; executive training; loss-specific approaches in a reduced role. Let’s compare the abatement programmes; incident investigation; two approaches: and monitoring ‘at risk’ members.

Culture Review and monitoring of the results and changes in exposure should be part of the • Management actions indicate a focus overall process. on prevention/elimination of hazards to customers and employees Using safety management will pay you more • Accountability of management dividends as your programme matures by • Resources equal for loss control preventing losses and minimising the impact of

• Visibility losses that do occur. CIT George Gibson president Vice Safety Management Services Taylor Charles 46 LossControl CITCAPTIVEINSURANCETIMES “

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George Gibson president Vice Safety Management Services Taylor Charles www.captiveinsurancetimes.com

RRC Group ad.indd 1 27/03/2015 16:43 35th Annual National Educational Conference & Expo

Location: Washington DC Date: 18-20 October 2015 www.siia.org

SIIA’s National Educational Conference & Expo is the world’s largest event dedicated exclusively to the self-insurance/alternative risk transfer industry. Registrants will enjoy a cutting-edge educational program combined with unique networking opportunities, and a world-class tradeshow of industry product and service providers guaranteed to provide exceptional value in three fastpaced, activity-packed days. HCIC Annual Forum

Location: Kauai, Hawaii Date: 27-30 October 2015 www.hawaiicaptives.com/hcic-annual-forum/

We invite you to join us for the HCIC Annual Educational Forum at the Grand Hyatt Kauai Resort and Spa! Forum sessions will focus on the most relevant topics and key issues facing the captive industry. Don’t miss this excellent opportunity for learning and networking with captive insurance company owners, industry service providers and others.

48 To find out more about the CIT Domicile Guidebook, contact: [email protected]

Untitled-2 1 24/07/2015 10:21 PeopleMoves Industry appointments Allied World Global Markets has added two Gerard Naisse, chairman of Oil Insurance and executives to its casualty team. Oil Casualty Insurance, commented: “We are pleased to have Olsson at the helm of our James Emerton has joined as vice president operations going forward and expect a smooth and Martin Fisher has arrived as assistant vice transition between now and Stauffer retirement president. They will be responsible for building in early January 2016.” out the UK and international corporate business Allied World and will be based in London. “He is a well-known and highly respected energy insurance professional and brings with him a Fisher most recently spent three years working wealth of energy insurance experience and as a senior casualty underwriter responsible for knowledge. We are confident that he will provide underwriting a large renewal portfolio comprised effective leadership within the executive team to of domestic, multinational, multi-line and captive continue to grow our respective businesses.” insurance programmes. Michael Halsband has joined Drinker Biddle Emerton was previously at Zurich where he & Reath as a member of the firm’s insurance spent nine years working as a senior underwriter transactional and regulatory team. He will be within the global corporate casualty and product based in the New York City office. recall teams. Halsband brings 25 years of leadership experience in the insurance and reinsurance Denis Burniston, senior vice president of general casualty at Allied World, commented: industry to the firm. His transactional work is focused on complex structured reinsurance “Emerton and Fisher are great additions to transactions, products and entities. our current casualty team and will allow us to continue expanding in London and Europe He also advises clients on corporate and more broadly. They both have extensive regulatory matters. experience in the industry and a wealth of knowledge that will be valuable to our growth Prior to his new role, he was the founding senior going forward.” executive and president of the capital markets and insurance-linked securities convergence Beazley has appointed Tim Allen to head its initiative at Sirius Group. transaction liability business from March 2016. CAPTIVEINSURANCETIMES Neil Haimm, chair of the corporate and securities Allen previously served as a transaction liability practice group, commented: “As an insurance- CIT underwriter at Beazley and returns at a time when focused deal lawyer, Halsband broadens the the market is experiencing increased demand for capabilities of our insurance transactional and Editor: Mark Dugdale mergers and acquisitions-related insurance. regulatory team.” [email protected] Tel: +44 (0)203 750 6022 Neal Wilkinson, Beazley’s management liability “He brings significant knowledge and focus group leader, said: “I am delighted that experience to help our clients capitalise on the Reporter: Becky Butcher Allen will be returning to Beazley. He has many influx of institutional capital into the insurance years’ experience in transaction liability and is and reinsurance industries.” [email protected] greatly respected in the market.” Tel: +44 (0)203 750 6019 The British Virgin Islands Finance marketing “Transaction liability insurance is an important manager Alicia Green has been appointed to Account manager: Joe Farrell growth market for Beazley. We have been the executive board of the International Center [email protected] writing this class of business since 2010 and will of Captive Insurance Education (ICCIE). Tel: +44 (0)203 750 6027 continue to invest in growing the team.” Green becomes the first ICCIE alumna to be Publisher: Justin Lawson The OIL Group of companies has appointed appointed to the board in the organisation’s history. [email protected] Bertil Olsson to succeed Robert Stauffer as Tel: +44 (0)203 750 6021 president and CEO. She received her associates of captive insurance (ACI) from the institution in 2013, Design and business development: bringing the total number of ACI alumni fellows Olsson joins from Marsh & McLennan John Savage Companies, where he was managing director from the BVI Islands to five. [email protected] and head of South Central Region, Marsh USA. Green stated: “I am delighted to have the Tel: +44 (0)208 663 9648 opportunity to work with leaders in the industry Marketing director: Steven Lafferty He brings over 25 years of energy insurance to promote the captive business and the BVI’s experience. His career began in Europe with international offer. I look forward to working with Published by Black Knight Media Ltd Marsh in the Stockholm office, where he worked the existing board and utilising my marketing Provident House, 6-20 Burrell Row on programmes for integrated oil companies. expertise to further grow the organisation.” CIT Beckenham, BR3 1AT, UK He then moved to the firm’s Houston office and Company reg: 0719464 continued working as a marketing specialist concentrating on energy industry programmes. Got a hire, promotion or new office to Copyright © 2014 Black Knight Media Ltd. shout about? Let us know: All rights reserved. Olsson will succeed Stauffer upon his retirement [email protected] in January 2016. 50 PeopleMoves

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