The Changing Marketplace

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The Changing Marketplace Of Alternative Risk
Financing
January 30, 2004 Presented by
Tom Veale Doug Deitch President
Principal Tristar Insurance Group
Keystone Risk Partners
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• There may never be a
• better time to consider alternative solutions

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Todays Agenda

• State of the Marketplace
• Types of Alterative Insurance Structures
• Overview of Mechanics of Risk Financing
• Things to Consider Things to Avoid
• Sample Program Design

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Market Conditions - General

• Upward Pressure on Historical Reserves
• Inadequate Investment Yields
• Rising Medical Costs
• Lingering Impact of 9/11
• Crisis in Medical Professional Liability

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Market Conditions - California

• Twenty Eight carrier insolvencies - 3 years
• Political environment unstable
• Insolvency of CIGA on an incurred basis
• State Fund dominance
• Low price leader 1997 2002
• Lost rating, cut commissions, slashed credits
• Over 50 of premium and 80 of policies
• Commercial carrier / reinsurers disbelief

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The Insurance Spectrum
Guaranteed Cost
Dividend
Retro/Ded
Rent-A-Captive
Captive
Self-Insured
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Overview of Alternative Market Commercial Lines
Market
Alternative Market
Self Insurers Captives Rent-A-Captives Risk
Retention Special Purpose Vehicles
Traditional Placements
45
55
Total Commercial Lines
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Alternative Market Features
Stable Premiums Control of Claims Lower Net
Cost Access to Investment Income Limited
Exposure Insure the Uninsurable
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Access to Investment Income
Workers Compensation
100
100
86
80
84
77
71
60
62
47
40
20
25
0
1
2
3
4
5
6
7
8
Years
Reserved Claims
Paid Claims
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Key Qualifiers for Prospects

• Premium Volume
• Lines of Coverage
• Motivations
• Control of Claims
• Funding Today for Tomorrows Losses
• Risk Assumption

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Considering Self Insurance

• Long Term commitment
• Lowest overall total cost over time
• Very low frictional costs
• Maximum flexibility

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Captive Vehicles Defined

• Single Parent Captive
• Rent-a-Captive
• Segregated Cell Structure
• Mutual Insurance Company Structure
• Group Captives

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Compare Contrast Captive Vehicles

• Ownership
• Expenses
• Capital Requirements
• Ease of Entry and Exit
• Control

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Latest Buzz - Segregated Cells

• Individual Accounts Established
• Legal Separation of Assets Liabilities
• Specific Contracts For Each Cell
• Reinsurance Contract and/or
• Insurance Contract
• Share Subscription/Participation Agreement
• Protection for Sponsor Participant

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Segregated Cell StructuresCaptive Schematic
Cell 1
Cell 2
Cell 3
Cell 4
Cell 5
Core Capital of Sponsor/Owner
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Key Tenets of Risk Financing
Loss Exposure Risk Retention Risk Transfer
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Alternative Risk Financing Programs Risk Transfer
Insurance Company Provides Excess
Risk Transfer Severity Basis
Severity of Losses
Loss Limit
Insured Retention Via Captive
Risk Transfer Frequency Basis
Frequency of Losses
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Alternative Risk Financing Programs Accessing
Underwriting Profits
Premium from the Insureds Perspective
100
Profit (10)
80
Actual Losses (55)
Expected Losses Plus Expenses (100)
60
40
Expenses (35)

20
0
Alternative Risk Financing
Traditional Insurance
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Relationship of Parties Corporate Insured
Insured
Premium
Profits
Captive Vehicle
Carrier
Loss Fund
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Things to Consider

• Investment of time and resources
• Difficulty to unwind
• Effect on mergers and acquisitions
• Effect on borrowing
• Regulatory environment

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Things to Avoid

• Assumption of risk in excess of ability
• Going bare
• Confusion over simplicity of insurance
• Incomplete buy-in of all parties
• Operational managers
• Senior managers
• Board of Directors / owners
• Regulators

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Sample Structures
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Healthcare ProviderSituation

• No Professional Liability Coverage
• Complicated Corporate Financial Picture
• Third Party Compliance Requirements
• Willing to Self Fund for Future Claims

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Healthcare ProviderSolution

• Analyze Policy Limit Requirements
• Arrange A Rated Policy
• Provide 100 Reinsurance of Policy via Segregated
  Cell Captive
• Tailored Premium Collateral

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Management CompanySituation

• Parent Company Wants Risk Position
• Vendor Compliance Challenges
• Regulatory Challenges - Third Party Risk
• Increase Efficiencies
• Stabilize Cost

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Management CompanySolution

• Individual Policies by Participant
• Centralized Administration
• Tailored Risk Management Services
• Underwriting Results Benefit Parent

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Relationship of Parties Management Company or
Multi Policy Programs
Management Company
A
B
C
D
Premium
Profits
Captive Vehicle
Carrier
Loss Fund
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Privately Held CompanySituation

• Traditional Insurance Buyer Mindset
• High Insurance Expense Relative to Peer Group
• Wealth Estate Planning Objectives

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Privately Held CompanySolution

• Plan Designed to Equal Market Premium
• Unbundled Services
• TPA
• Managed Care Strategy
• Unique Beneficiary

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Leave Your Comfort Zone
Approaches Beyond the Insurance
Transaction Unlock Hidden Value in Clients
Balance Sheet or Business Access Risk Transfer
Market on Wholesale Basis