The Captive Alternative: Controlling Your Destiny
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The document outlines the workings of captive insurance, specifically through the SCOP Group, which has been active since 1999. It discusses different types of captives, the financial structures involved, benefits of ownership, and loss examples to illustrate risk management. The document also highlights the potential for operational improvement and investment income for businesses utilizing these insurance models.
The Captive Alternative: Controlling Your Destiny
- 1. The Captive Alternative: “Controlling your Destiny”
- 2. “DOING BUSINESS BOLDLY” SINCE 1999 Scop Group Captives (PC & EB) Single Captives Rental Captives 831b Captives Consulting AGENCY PARTNER FOOTPRINT (HEADQUARTERS)
- 3. Hogs in the United States
- 4. Hogs in the United States
- 5. 6 hogs per 1 person Value of production exceeding $6.5 Billion Over 60% of operations have over 1,000 head 1 to 99 head 100 to 499 head 500 to 999 head 1,000+ head
- 8. WHAT IS A GROUP CAPTIVE? A group of companies that come together to form their own insurance company. Captive Insurance Company Company Company Company Company Company Company Company Company Company Company
- 9. NUMBER OF CAPTIVES WORLDWIDE Source: Captive Insurance Company directory 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000
- 11. IDEAL CANDIDATE Captive Owner Premiums > $350,000 Entrepreneurial Spirit Desire Control Commitment to Loss Control & Safety Financially Secure
- 13. CAPTIVE FLOW $ $$ Policy Issuance Agency Partner Shareholder/ Policyholder Agency Partner Policy Issuance Group Captive ClaimsLoss Control Reinsurance Underwriting Profit & Investment Income
- 15. CAPTIVE STRUCTURE Each company has own cell with own loss funding.
- 16. COMPANY STRUCTURE Board of Directors Risk Control Finance Underwriting Executive Committee
- 17. PREMIUM STRUCTURE Captive Premium Fixed Expenses - Fronting & Reinsurance - Claims/Loss Control - Operating Expenses - Captive Management Loss Fund - Actuary Determines - Based on Exposures and Claims History
- 18. BENEFITS OF CAPTIVE OWNERSHIP • Ownership • Partners • Claims Process • Loss Experience/ Funding Control • Best Practices • Accountability • Relationships with Quality Business Owners Operational Improvement • Underwriting Profit • Investment Income Returns
- 19. Loss Examples
- 20. CAPTIVE GOALS Fund for expected losses Reinsurance catastrophic or unexpected shock losses Each company pays for own losses Minimize risk sharing
- 21. Sample Company Loss Fund $450,000 Fixed Cost $300,000 Total Premium $750,000 Loss Fund $450,000 Fixed $300,000
- 22. LOSS EXAMPLE 1 Severity Fund 30% Frequency Fund 70% $350,000 $100,001 $100,000 $0 $135,000 $315,000 Total Loss Fund $450,000 $ per claim
- 23. LOSS EXAMPLE 1 $240,000 Total Claims $240,000 in Frequency Claims (claims < $100,000) *Regardless of when the claim occurred during the policy period, largest loss is accounted for first.
- 24. Severity Fund Frequency Fund $350,000 $100,001 $100,000 $0 $135,000 $315,000 Results: $75,000 FF SF Remaining Balance (240,000) $75,000 Year 1 $ per claim $240,000 of Total Claims less than $100,000 $135,000 $210,000 LOSS EXAMPLE 1
- 25. RETURNING THE PROFITS Year 5Year 4Year 3Year 2 $210,000 + Investment Income Year 1 DISTRIBUTIONS BEGIN
- 26. SAMPLE COMPANY YEAR 2 Loss Fund $450,000 Fixed Cost $300,000 Total Premium $750,000 Loss Fund $450,000 Fixed $300,000
- 27. LOSS EXAMPLE 2 Severity Fund 30% Frequency Fund 70% $350,000 $100,001 $100,000 $0 $135,000 $315,000 Total Loss Fund $450,000 $ per claim
- 28. LOSS EXAMPLE 2 $2,250,000 Total Claims $150,000 Large Loss $2,000,000 Large Loss $100,000 in Frequency Claims *Regardless of when the claim occurred during the policy period, largest loss is accounted for first.
- 29. $2,000,000 LOSS I-35 Bridge Collapse (this really happened in an ICS captive)
- 30. CAPTIVE ONLY RETAINS… Now let’s look at the company who had the loss… $350,000 $650,000 $1,000,000 $350,000 Per Occurrence $1,000,000
- 31. LOSS EXAMPLE 2 Severity Fund Frequency Fund $350,000 $100,001 $100,000 $0 $ 135,000 $315,000 Captive Retention $350,000 FF (100,000) $250,000 SF (135,000) $115,000 FF (115,000) $0 (100,000) $215,000 (135,000) $0 (115,000) $100,000 Severity Fund Frequency Fund $ per claim
- 32. LOSS EXAMPLE 2 $2,250,000 Total Claims $150,000 Large Loss $2,000,000 Large Loss $100,000 in Frequency Claims *Regardless of when the claim occurred during the policy period, largest loss is accounted for first.
- 33. LOSS EXAMPLE 2 Severity Fund $350,000 $100,001 $100,000 $0 Captive Retention $350,000 Second Large Loss $150,000 FF (100,000) $50,000 $100,000 $ per claim $0 (100,000) $0 Share with other members Severity Fund Frequency Fund
- 34. Captive Structure $0 A B C D E F G H I J $50,000 is Shared Across All Members on Pro-rata Basis. Member Responsibility Shared Layer $350,000 $100,000 K
- 35. LOSS EXAMPLE 2 $2,250,000 Total Claims $150,000 Large Loss $2,000,000 Large Loss $100,000 in Frequency Claims *Regardless of when the claim occurred during the policy period, largest loss is accounted for first.
- 36. LOSS EXAMPLE 2 Can be assessed up to another 100% of Frequency Fund Second Frequency Fund ($315,000) $100,000 $0 ASSESSED $100,000 PAID OUT OVER 3 YEARS, UNLESS THE LOSS PAYS OUT SOONER $100,000 in Frequency Claims
- 37. MAXIMUM POTENTIAL PREMIUM Assessment Premium Paid $315,000 $315,000 $250,000 $1,015,000 Second Frequency Fund Loss Fund (Frequency Fund & Severity Fund) + Fixed Costs 2 (FF) + SF + FC = Severity Fund Frequency Fund Fixed Expenses $135,000
- 38. RETURNING THE PROFITS 25% Assessment Payment (from year 2) Year 5 25% Assessment Payment (from year 2) Year 4 50% Assessment Payment (from year 2) Year 3 ($100,000) Year 2 $210,000 + Investment Income Year 1
- 39. CAPTIVE CONSIDERATIONS Capital Contribution Collateral Requirement Potential to Share Risk Assessment Potential
- 40. FINANCIAL CONSIDERATIONS Year 5 Three Year Stacking Collateral Year 4 Year 3 Collateral Year 3 Year 2 Collateral Year 2yEAR Year 1 Collateral $25,000 Capitalization Year 1
- 41. • 14 Group Captives – 350 members • Total Annual Premium: $150,000,000 • Average Loss Ratio: 38% • Average Return: 21% ICS GROUP CAPTIVES
- 42. • Total Distributions: $128,000,000 • Underwriting Surplus: $171,000,000 • Total Investable Assets: $265,000,000 • Total Investment Gains: $51,000,000 ICS GROUP CAPTIVES
- 45. BENEFITS OF CAPTIVE OWNERSHIP • Ownership • Partners • Claims Process • Loss Experience/ Funding Control • Best Practices • Accountability • Relationships with Quality Business Owners Operational Improvement • Underwriting Profit • Investment Income Returns