Captive Insurance Guide A review of captives and the Bermuda captive insurance market Adding strength and balance to risk management — September, 2020 Contents © 2021 KPMG, a group of Bermuda limited liability companies which are member firms of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. KPMG Captive Insurance Guide 2 Additionally, a business won’t know the cost or terms of their insurance program for the upcoming year until policy renewal. This makes insurance a very difficult cost to budget against. Even if a business has a great year with very low claims, it is still possible for the premium Introduction to increase if the insurers portfolio (that includes your risk) has experienced a large volume of losses. These factors are receiving increased attention across businesses globally as the commercial insurance market has seen significant price increases globally. Businesses are now reviewing alternatives to commercial insurance and questioning whether their current insurance programs are still fit for purpose. Insurance premiums are a significant This guide provides a comprehensive background to one such alternative, captive insurance. Within the guide we will provide: operating cost for any business, irrespective of its location or industry. Unfortunately, the An overview of captives underwriting process isn’t as simple as an insurer pricing a risk to cover the potential loss for that business in the upcoming period. The insurer will also factor in the cost of Potential captive structures using their capital to insure the risk, including a margin for profit, as well as the overall performance of all their clients within the The drivers and benefits of captives for decision-makers: Risk Managers, CFOs, & CEOs risk concerned. A fundamental principle of insurance being that the premiums of the many cover the losses of the few. Major captive jurisdictions, and why Bermuda is a market leader The process of setting up a captive We will also include several case studies for projects we have completed, and background to the KPMG team in Bermuda that is leading the way as a captive centre of excellence. © 2021 KPMG, a group of Bermuda limited liability companies which are member firms of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. KPMG Captive Insurance Guide 3 An introduction and background to captives Captives – The captive insurance industry is experiencing change driven by the shifting regulatory landscape, the introduction of Solvency II, international tax developments and the hardening of the commercial an overview insurance market. More than 90% We see a number of trends in the use of captives: of Fortune 500 companies have A significant increase in small to mid-size captives, a captive up to US$5m net premium, created in recent years. An introduction and background to captives A growing trend for increased diversification within A ‘captive’ insurance company is an insurance company that captives to cover new risks, such as terrorism, 2018 net premiums for captives in is established to predominantly insure or reinsure the risks cyber and employee benefits. This has been led by Bermuda, Cayman and Barbados of its parent, or organisations affiliated with its parent(s). an increased drive for capital efficiency and building surpassed $3.5 bn out the captive based on success. Captives have existed in some form since the 1870s, when the first protection and indemnity clubs were created. Captives have also witnessed growth in insuring However, growth of the captive market was slow up until third party risks, such as insuring contractors hired the 1960s when only about 100 captives were formed. by the captive’s parent under an owner controlled program. By doing this the captive achieves The Bermuda market was where the significant growth In 2017 there were greater risk management, as well as recapturing of captives began in the 1970s, with greater growth in underwriting profit from the commercial 6,647 active captives worldwide the 1980s and 1990s due to a hard insurance market and insurance market. the difficulty in obtaining traditional insurance to cover organisations’ exposure to liability claims. A wide range of companies, not-for-profit organisations and government agencies worldwide rely on captives as part of their programs for managing risk. Emerging risks that are difficult to insure within traditional insurance markets have acted as another driving force behind the growth in captive insurance. A captive can also include risks that are generally excluded in traditional insurance policies. © 2021 KPMG, a group of Bermuda limited liability companies which are member firms of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. KPMG Captive Insurance Guide 4 Captives – There are a wide range of potential structures that can be adopted, including: Third party captives such as rent-a- 01 A single parent captive 02 structures captives and protected cell captives, and 03 A group/association captive. 01 02 03 Single parent captives Third party captives Group/association captives The captive is 100% owned by it’s parent who sets the risk Segregated Account Companies offer a business a softer Here multiple businesses, usually from the same industry, appetite and decides which lines of insurance the captive approach to incorporating a captive. The business can own will join together to pool their risk for one or more lines of underwrites and how capital should be utilised. Additionally, shares or a governing instrument within a segregated account insurance into one structure. This generally offers greater the parent also sets the investment strategy and can from the segregated account core. Most large insurance economies of scale and diversification if a business isn’t large decide how to distribute profits, should they be generated, managers operate a segregated account company. The core enough to warrant its own individual captive. This structure remains the most used within the industry comprises of a board of directors providing minimal regulatory and is accepted globally, proving an effective alternative to or operating capital. The liabilities of each cell is independent commercial insurance. and attributable to the shareholder. The liability of each cell owner are independent. © 2021 KPMG, a group of Bermuda limited liability companies which are member firms of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. KPMG Captive Insurance Guide 5 01 02 03 Captives – Captive Managers Fronting Insurer Reinsurance Solutions Captive managers provide a wide range Typically, captives are not licensed to Direct access to the reinsurance of services including: issue policies internationally, and some markets is a significant benefit of insurance products can only be provided creating a captive. The advantage of stakeholders Being the primary contact for the by locally regulated insurers. Through a purchasing reinsurance direct is that regulator, ensuring the captive is fronting arrangement a licensed insurer there is generally greater flexibility compliant with all regulations will issue the policy in the relevant within the policy terms, and the country, and then reinsure the risk, either wholesale pricing is comparably There are three primary stakeholders Preparing the captive’s financial and in whole (gross) or part (net) back to the lower than the commercial insurance for a captive: operational records captive. Today, many fronting insurers market. The cost for reinsurance will Providing insurance, risk prefer to retain a portion of the risk being heavily depend upon the risk appetite management and fronted. The major insurers who offer of the captive. underwriting expertise fronting services include: Preparing quarterly and annual AIG; financial reports Chubb; Coordinating captive board meetings Zurich; and Providing the link between the captive’s other service providers, AXA XL such as auditors and actuaries In terms of program structure fronting Bermuda is home to many of the largest partners offer a wide range of captive managers. services, including: Policy administration; Cash flow management; Claims management; and Compliance support © 2021 KPMG, a group of Bermuda limited liability companies which are member firms of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. KPMG Captive Insurance Guide 6 Captives – drivers and benefits for decision-makers: Risk Managers, CFOs, and CEOs Risk Manager Chief Financial Officer Chief Executive Officer Improve the operational performance of the business Control cost management within the business Achieve stability and growth for the business Remove insurance pricing and coverage Reduce the insurance spend Remove any unwelcome surprises uncertainties Price risk in line with your experience and Long-term risk management strategy Create a program that meets the needs of not the market’s experience the business Internal company focus Control the claims process Allow staff to take greater accountability