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May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Captives 101 – An Industry Primer
William Powell – Risk Manager SRPMark Tabler – COO - Innovative Physician Solutions, RRG, Inc.Christina Urias, Arizona Director of Insurance S. David Childers, Esq., - Low & ChildersAnn W. Wick, CPA - Strategic Risk Solutions AZ
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Introduction
• Captive Basics
• Feasibility Study Process
• Meet the Lawyers
• Meet the Regulators
• Meet a Single Parent Captive Representative
• Meet a Risk Retention Group Representative
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Captive Basics
• What is a captive?
• What are the characteristics of captives?
• What types of captives are in Arizona?
• What is the Arizona statutory capital?
• Why do companies form captives?
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Definition of a Captive
• An insurance company that provides coverage to its owners– A form of self-insurance
• (From AICPA Audit and Accounting Guides) – Captive Insurance Companies are WHOLLY OWNED SUBSIDIARIES CREATED TO PROVIDE INSURANCE TO THE PARENT COMPANIES
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Characteristics of Captives• Licensed Insurance Company• Formed to insure or reinsure the risk of its owners
or unrelated parties of their choosing• Regulated under special legislation regulating
captives (regulated less stringently than state insurance laws which govern fully admitted insurance companies)
• Located offshore or onshore• Admitted only in its domicile and non-admitted in
all other jurisdictions.
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Types of Captives• Pure Captive Insurer
– insures only the risks of its affiliates and controlled unaffiliated business
• Branch Captive Insurer
– An alien captive insurer that is licensed to transact the business of insurance through a business unit
• Agency Captive Insurer
– Owned by one or more business entities that are licensed in any state as insurance producers or mga’s and that only insure risks on policies placed through their owners
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Types of CaptivesGroup Insurers
• Risk Retention Group
– Operates similar to a group captive yet is regulated under federal legislation
– Can operate in all fifty states yet only required to be licensed in its state of domicile
– Insureds must be owners and owners must be insureds
– Can only write liability lines of risk
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Types of CaptivesGroup Insurers
• Industry Group Captive
– Two or more businesses or activities similar or related with respect to the liability they are exposed to by virtue of a related, similar or common business, trade, product, services, premises or operations
• Association Captive
– A captive that is completely under the direct or indirect voting control of an association
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Types of Captives (continued)
• Protected cell captive
– Capitalization is provided by one or more sponsors– Insures the risks of participants through participant
contracts– Segregates liability under a participant contract– A sponsor is an entity that the Director has approved
and meets the requirements under 20-1098.06
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Statutory Capitalization• Pure Captive Insurer - $250,000
• Agency Captive Insurer - $500,000
• Risk Retention Group - $500,000
• Group (Industry or Association) - $500,000
• Protected Cell - $1,000,000
• Pure or Group Reinsurers – 50% of the above noted statutory capitalization i.e.$125,000/$250,000
• Branch Captive Insurer - Not an incorporated entity
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Why Form a Captive?• Reduce/stabilize cost of risk funding • Provide access to coverage and the ability to
customize coverage• Take advantage of or add focus to proactive risk and
claims management; create a team approach with policyholders
• Creation of profit center• Permit access to better negotiating power with
reinsurance markets• Improve cash flow timing and investment returns
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Successful Captives Have• A good spread of risk• Predictable losses • Long-term commitment from management
– Risk management – loss control and safety programs
– Treasury and accounting support
• Strong business partners– Captive manager, broker, claims handler, actuary, insurance
and reinsurance markets, attorneys and accountants
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Captive Pre-Feasibility
• Conceptual review• Funding and risk appetite• Commitment to alternative market solution• Parameters of program (lines of coverage,
limits, etc.
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Feasibility Work StepsSample Flow chart of the Process
Commitment to Feasibility Study
Data Collection(Historical Loss &
Exposure)
Draft Feasibility Study Economic
and Financial Analysis
Meeting with Commercial Insurance Market(s)
Final Feasibility Study
Client Review ImplementationGoDecision
Project Termination
No Go
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Captive Feasibility
• Define objectives• Project loss costs• Estimate non-loss costs & premiums• Develop program structure• Analyze tax issues• Compare and select domicile• Determine ownership structure• Identify service providers including fronting insurers
and reinsurers
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Captive Feasibility Results• Actuarial loss projection• Financial model demonstrating flow of funds and complete
financial statements• Five Year Pro-forma financial under various loss scenarios • Structure and program review including fronting and
reinsurance recommendations with special focus on collateral• Proposed ownership structure and potential alternatives.• Detailed individual member premium and capital projections –
for a group• Domicile analysis and recommendation• Legal, tax and regulatory review• Potential exit strategy(ies)• Conclusion and recommendation
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Implementation
• Business plan development• Pro-forma financial development• Meeting with the regulators• Preparation and filing of captive application• Captive incorporation & capitalization• Formalize fronting and reinsurance placement• Formalize engagement of service providers upon
licensing• Creation of governance structure
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Formation of Arizona Captive Insurers
Legal Aspects
Presented by:
S. David Childers, Esq. Low & Childers, P.C.
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Pre-Incorporation: Initial Client Meeting Initial Client Meeting
• Obtain input from client regarding the goals, objectives and scope of the proposed captive insurance program.
• Provide feedback and advice on the suitability of the captive insurance framework to the proposed insurance program.
• Provide counsel and guidance on the general plan of operations for the proposed captive which includes, for example:
• 3-year financial projections• Rate and Price Guidelines• Explanation of Reinsurance Program• Investment Policy• Types of risk to be Insured by line of coverage • Retained Risk• If Association Captive: history, purpose and size of membership
• Provide recommendations for the captive’s other service providers such as captive managers, statutory accountants, actuaries, etc.
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Pre-Incorporation: Initial Client Meeting (Continued) • Based on the parameters of the proposed insurance program, provide advice on the
type of captive and legal entity most appropriate• Arizona law allows four types of captives
1. Pure captives which may be formed as ao stock corporationo non-profit corporation (please see below)o limited liability company
2. Agency Captives which may be formed only as a stock corporation3. Protected Cell Captives which may be formed only as a stock corporation4. Group Captives (including Association Captives and Risk Retention Groups) may be formed as a
o stock corporationo mutual insurero unincorporated reciprocal insurero non-profit corporation (see below)
• Effective August 25, 2004, non-profit organizations can form an Arizona non-profit captive either as a pure or group captive insurer.
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May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Meeting With Arizona Department of Insurance Schedule and Participate in Meeting with Arizona
Department of Insurance The sponsors of each captive insurer are required to
meet with the Arizona Department of Insurance on or about the time the captive application is submitted to the Department.
Topics to be covered at this meeting include:• General summary of the proposed captive insurance
program• Discussion of the company’s projected business volume• Background and qualifications of the captive’s service
providers.
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Incorporation of Captive Determine availability of corporate name for the captive with the Arizona Department of
Insurance and the Arizona Corporation Commission Prepare organizational documents for captive
• Incorporation Questionnaire• Articles of Incorporation
• Three Incorporators, one of whom must be an Arizona resident• One Director must be an Arizona resident• Must maintain its principal place of business in Arizona• Must appoint a resident statutory agent
Bylaws• Must have at least one Board of Directors meeting in Arizona annually• Pure captive must have at least one director and all other types of corporate captive
insurers must have at least three directors Board and Shareholder Resolutions approving formation and licensure of captive insurer Obtain federal employer identification number Act as a liaison with the Arizona Department of Insurance to expedite the review and
approval of the captive application
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May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Incorporation of Captive (Continued) Arizona Application Process
• Two Phases1. Completeness Review Phase
– Arizona Department of Insurance reviews Application and related information to determine that all documentation has been provided, is complete and accurate
– Applicant will receive a Notice of Administrative Completeness from Arizona Department of Insurance
2. Substantive Review Phase– Arizona Department of Insurance may request more
information and documents on which to base licensing decision
– If approved, Applicant will receive a Notice of Granting License
– Risk Retention Groups must secure an NAIC Number
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Incorporation of Captive (Continued) Prepare other supplemental legal documents as needed
• Subscription Agreement• Shareholder Agreement• Policy Forms and Endorsements• Confidential Disclosure Document/Private Placement
Memorandum• Loan Agreements/Surplus Notes• Reinsurance Agreements• Service Provider Agreements• Issue Stock Certificates and Maintain Stock Ledger
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May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Post-Licensure Act as the captive’s general counsel and
provide ongoing representation with respect to the captive’s corporate, transactional and regulatory affairs
Assist in the preparation and submission of periodic regulatory filings
Prepare notices, attend and record minutes of annual Shareholder and Board of Directors meetings and other meetings as needed
Maintain the captive’s corporate minute book and act as the captive’s statutory agent
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona
Christina Urias
Director
Arizona Department of Insurance
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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• Arizona Outlook & Developments
• Arizona Captive Reference Guide
• Arizona Captive Market
• 2008 Arizona Captive Legislation
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Outlook & Developments
• Attitude/Philosophy:
Provide a public service to encourage economic development of the captive insurance industry
• Experience:
Of all active US domiciles, Arizona regulates the most insurance companies and largest premium volume
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Outlook & Developments• Pro-business Governor, Legislature & Director
• Law
Flexibility for all types of captives, including branches, reciprocals, non-profits, etc. New provisions allow groups as well as pures to insure controlled unaffiliated entities
• Accessible, desirable, attractive destination for both professional & personal objectives.
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Outlook & Developments• Cost Effective
No Premium or Income TaxReasonable License FeesPure captives not subject to periodic examinations; examined only as needed, possibly never examinedContract examiners for non-pure captives at reasonable costExperienced in-house actuary, lawyer and financial examiner review application and business plan changes
• Timely Approvals Most licenses issued in less than 30 days following receipt of completed application
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Outlook & Developments• Commitment to quality captive insurance industry
development• Recent “Reference Guide” changes and updates• Eliminated “yellow cover bound” Annual Statement
filing requirement• Automatic Actuarial Opinion exemption for small
companies• Automatic Audited Financial Report exemption for
small companies• Biographical Affidavit updates no longer required
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Outlook & Developments• July 2007, added new Captive Chief Financial Analyst,
Stephanie Lefkowski, BS, MHA, CPCU, with 16 years actuarial research and financial analysis experience
• February 2008, Departure of Rod Morris, the Department’s Captive Administrator; Director assumes administration role
• Reputable Experienced Regulators
• Professional Competent Captive Insurance Evaluation Team
• Efficient Cost Effective Regulatory Processes
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Captive Reference Guide
• Captive “Reference Guide” Update:
www.id.state.az.us/captives.html
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Captive Reference Guide
• Actuarial Feasibility StudiesMust accompany all license applications
Actuary’s letterhead
Description of all document and materials actuary reviewed
3-5 years loss history
Confidence levels, credibility, expected results, worst/best case scenarios with premium/loss components
Automatic small company exemptions Less than $1M total direct plus assumed written premium
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Captive Reference Guide• Annual Audits, Reports & Statements
Pure, Group, Agency & Protected Cell must submit:Report of financial condition verified under oath by two executive officers within 90 days of FY end
Audited financial statements within 6 months of FY end
Risk Retention Groups & Associations must report: On NAIC forms
Annual statements on/before 3/31
Quarterly statements by 5/15, 8/15 and 11/15
Audited financial statements within 6 months of FY end.
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Captive Reference Guide
• Annual Audits, Reports & Statements
Independent CPA required
Small Company Exemption
If less than $1M direct premiums and less than 1,000 direct
written policyholders nationwide (excluding insurers that
assumed premiums pursuant to $1M+ reinsurance
agreements)
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Captive Reference Guide
• Applications
• Bank Confirmations
• Board of Directors
• Books & Records
• Captive Managers
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Captive Reference Guide
• Reporting Material ChangesBusiness Plan, financial position, investments
Dividends (prior approval)
Policy limits (prior approval)
Reinsurance (initiated, cancelled, material changes)
Service Provider AgreementsNo prior approval unless change relates to Captive Manager or Auditor
Type of Captive
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Captive Reference Guide
• Confidentiality
• Conflict of Interest
• Expenditures
• Investments
• Letters of Credit
• Reinsurance Agreements
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Captive MarketLicensed Captives
75
43
23
1
Pure RRG Group Agency Prot. Cell
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Arizona Captive Market
Active Captives
3953
7294
0
20
40
60
80
100
2004 2005 2006 2007
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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2008 Arizona Captive Legislation•HB 2081 Captive insurers; authority
Amends the definition of "industry group" to include
individuals in addition to business entities. Both individuals
and business entities in an industry group must be "engaged
in businesses or activities similar or related with respect to
the liability that they are exposed to by virtue of any related,
similar or common business, trade, product, services,
premises or operations."
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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2008 Arizona Captive Legislation
• HB 2081 Captive insurers; authority
Clarifies that captive insurers may directly insure employment
liability risk.
Clarifies that captive insurers formed as reciprocal insurers
must be organized by three or more subscribers; eliminates
one Arizona subscriber residency requirement.
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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2008 Arizona Captive Legislation• HB 2081 Captive insurers; authority
Clarifies that branch captives may provide any coverage
that a pure captive may provide, and that as such, a branch
captive may not write workers' compensation insurance
unless it is approved as a self-insured plan by the AZ
Industrial Commission.
Amends Title 29 to reflect Title 20 provisions, allowing
pure captives to form as limited liability companies.
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Questions?
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Salt River Project
SRP Captive Risk Solutions, Ltd.
Bill Powell CSP ARM
Manager, Risk Management
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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About Salt River Project
• Salt River Valley Water Users’ Association– Formed in 1903 by Landowners pledging land
for the construction of Roosevelt Dam
– Manages a 13,000-square-mile “watershed”
– Largest Water Supplier in Valley Area with residential, agriculture and city customers
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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About Salt River Project
• Salt River Project Agricultural Improvement and Power District– Formed in 1937 as Political Subdivision of state of
Arizona– Public Power system for Maricopa, Gila and Pinal
counties in central Arizona – Serve to over 900,000 customers within a 2,900
square mile service territory and growing
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Captive History
• SRP participated in a Rent a Captive in Bermuda for various years since 1996
• Emerging issues with captive management services and fees
• Post 9/11, ability to afford property TRIA for utilities created additional need for utilizing captive
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Domestic Captive Formation - Internal
• Gathered internal SRP resources – Legal, Finance, Accounting, Audit and Tax groups to discuss feasibility
• With buy-in presented idea to General Manager Staff for full support
• With Approval from GM Staff, presentation made to SRP Board in Fall 2003
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Domicile Selection
• Arizona was Easy Conclusion
• Politically Expedient
• No Premium Tax
• Low Capitalization Costs
• Ease in working with AZ DOI
• Control Transactional Cost of Captive Operation
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Domestic Captive Formation - Internal
• Once Board Approval received, Articles of Incorporation and Bylaws developed through internal Legal Services
• Investment Strategy Policy developed and managed internally
• Captive Name Selected
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Domestic Captive Formation - External
• Appointed Captive Manager
• Appointment of Legal Counsel (Internal)
• Meeting with AZ Department of Insurance to discuss business plan
• Selected Auditor and Actuary firms
• Captive Manager completed and submitted application to State
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Domestic Captive Formation - External
• Legal Counsel petitions for Certificate of General Good
• Official Incorporation of Captive
• Regulators issue a Certificate of Authority
• Bank Account and Parent Capitalization finalized
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Domestic Captive Formed
• SRP Captive Risk Solutions, Ltd officially formed
• First Captive Board Meeting held January 2004
• First TRIA policy placed February 2004
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Captive Utilization
• Property - $75M Certified Terrorism Risk Insurance
• Excess Liability - $1M excess $1M Self Insured Retention (including Commutation from Bermuda Captive)
• Property – Provided Primary Property Coverage for Subsidiary
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Pure Captive Benefits
• Ability to select Captive Service Providers– Administrative Control– Cost Efficiency
• Can Create Competitive Leverage against Incumbent Insurers
• Facilitates the efficient Use of Premium Dollars to Pay Losses
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Pure Captive Benefits
• Control over Coverage Form and Limits regardless of Insurance Market Cycles
• Creative Coverage Problem Solver for Changing Business Environment
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Innovative Physician Solutions, RRG (IPS)(Columbus, IN)
Why, When, Where, & How
RRG 101
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Innovative Physician Solutions, RRG Background
• Multi County Physicians (MCP)
390 physicians
South central Indiana
Various specialties
Value-added products/programs
Parent company
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Innovative Physician Solutions, RRG Demographics
• 200+ members
• AZ “certificate of Authority” Feb 2006
• $2M+ annual premium revenue
• Medical malpractice liability coverage
• Policies only written in state of “Indiana”
• July policy renewals
• 2008 third year of operation
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Why IPS was created…
To give our MCP physician members an alternative, outside the traditional
marketplace, in obtaining their medical malpractice insurance coverage.
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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First Step
Captive Manager
• Obtain critical mass > feasibility study
• Develop business plan
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Initial Market Research
Three questions to answer
• Comparable premium rate
• Litigation representation
• Company stability
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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RRG or Pure Captive
RRG disadvantages
• Liability insurance only
• Homogeneous risk
• No guaranty fund participation
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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RRG or Pure Captive?
RRG advantages• Avoidance of multiple state filings and licensing
requirements• Member control over risk and litigation
management• Customization of coverage• No fronting fee expenses• Local onshore banking
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Company Formation
• Domicile selection – Arizona
• Capitalization
• Selection – “Board of Directors”
• Selection – risk, underwriting, claims committee members
• Selection – RFP process for legal, claims TPA, auditors, actuaries, banking
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Organizational Chart
Board Of
Directors
Chief Operating Officer
UnderwritingCommitteeMembers
InsuredMembers
Claims CommitteeMembers
Risk CommitteeMembers
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Initial Company Roll-Out(February 2006)
• Informational meetings with practice managers• Informational meetings with physicians• Marketing brochures and letters • Capture policy renewal dates
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Unique to Indiana
Indiana Patients Compensation Fund (PCF)• Est. 1976 to assist in compensating malpractice
claimants • Provides $1M in coverage after med mal insurer
pays up to $250K in damages, fund caps damages to $1.25M per occurrence.
• PCF acts as reinsurance• Currently $140M fund balance
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Challenges
May 6, 2008 Arizona Captive Insurance Company Captives 101 An Industry Primer
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Company Successes
• Third renewal cycle – no premium increase
• 100% member retention
• 5 year member commitment
• Created physician ownership
• Maintain good spread of risk
• Steady growth
• Risk control
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