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Taking Control with a Captive

Taking Control with a Captive. Introduction. Speakers: Scott Gemmell, Senior Vice President, Marsh Jon Schmieden, Director, Global Insurance & Risk Management, Alcon Laboratories Moderator: Roger Gillett, Member of the Bermuda Insurance Advisory Committee. Gaining Control of Insurance Spend.

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Taking Control with a Captive

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  1. Taking Control with a Captive

  2. Introduction Speakers: • Scott Gemmell, Senior Vice President, Marsh • Jon Schmieden, Director, Global Insurance & Risk Management, Alcon Laboratories Moderator: • Roger Gillett, Member of the Bermuda Insurance Advisory Committee

  3. Gaining Control of Insurance Spend • Retain the premium for expected losses • Capture profits that would otherwise be earned by insurers • Reduce reliance on commercial insurers and avoid market fluctuations • Create flexibility and provide cover for “uninsurable risks”

  4. Risk Retention Decision

  5. Three Key Issues • Understand the capacity and appetite to assume more risk • Determine future expected losses • Gauge market response

  6. Risk Tolerance & Appetite Risk Tolerance is… “the financial ability to pay for own losses from cash flow, provisions and other available liquid funds as a result of risk related events”. OR “an acceptable amount of financial impairment that can be retained without a material impact on the business”. Risk Appetite is… “how much risk an organization is willing to retain.”

  7. Loss Analysis

  8. Loss Analysis

  9. Determine Future Expected Losses LOSS ANALYSIS

  10. Loss Forecasting

  11. Gauge the Market Response

  12. Total Cost of Risk

  13. Future Market Conditions ?

  14. Take Control…. Captive Year 1 Captive Year 2 Captive Year 3 Etc……..

  15. Theory meets Reality Jon Schmieden Director, Risk & Insurance Alcon Laboratories, Inc.

  16. Alcon, Inc. the Largest Eye Care Company in the World!!!

  17. Robert Alexander1912-1985 William Conner1907-1992 • Founded in 1947, Fort Worth, Texas • Founders: Alexander and Conner • Unmet needs of ophthalmologists • Small NYSE company in 1971 • Nestlé 1977 • IPO 2002 / Nestlé • Novartis 2010

  18. c. • > 70 Affiliates (Legal Alcon Entities) • 5 Research Centers • 16 Manufacturing facilities

  19. Alcon’s Product Spectrum • Pharmaceutical • Ophthalmic • Otic & Nasal • Consumer Products • Vision Care, Optifree • Vitamins • Surgical • Therapeutics • IOLs • Instruments • Refractive/Laser

  20. Alcon, Inc. Group Profile Major DivisionsSales $US Millions Pharmaceuticals $2,677 Consumer Products 825 Surgical Products 2,997 Total $6,499 EmployeesHeadcount U.S. 7,100 International 8,500 Total Employees 15,600

  21. Ownership Org. Chart

  22. Trinity River Insurance Co. Ltd. (TRICL) • Bermuda domicile, since 1999 • Over $650 million in assets • Surplus over $250 million • Annual Premiums over $40 million • All lines of P&C direct or reinsured (international and US risks) • All Lines of L&H internationally reinsured and reinsures US risks

  23. TRICL (USA), Inc. • Vermont domicile, since Jan. 2003 • Over $47 million in assets • Annual Premiums over $30 million • All lines of P&C direct or reinsured • Reinsure US employee benefits risks • Reinsure Int’l employee benefits risks

  24. CaptiveStructures“DirectIssueCaptive” ALCON TRICL issues policies and arranges claims handling service and retains risk at agreed level. Alcon pays premium To TRICL TRICL

  25. “Direct Issue Captive”Insurance Programs • Global Excess Product Liability (including extended discovery) • Global Property and Business Interruption (including earthquake) • Crime Insurance • Fiduciary Liability • US Trade Credit • Product Recall • Employment Practices • U.S. Medical Stop-Loss • US Workers Compensation Deductible Buyback • Punitive

  26. CaptiveStructures“ReinsurancetoCaptive" ALCON Fronting insurer issues policies, arranges claims handling service and pays claims. Alcon pays premium to “Front” Admitted Fronting Insurer AIG, Generali or Aetna Reinsurance cessions to TRICL. TRICL retains risk at agreed level and pays claims within retention. TRICL

  27. “Reinsurance to Captive” Premiums Invoiced Locally • Global Primary Auto Liability • Global General Liability (including Products) • Global Clinical Trials Liability • Global Transit Insurance • Japan Trade Credit • International Medical, LTD and Life Insurance • US Life and LTD

  28. DOL Exemption Timeline • March – April 2004 • Retain Consultant/fiduciary • Compile/organize data for DOL submission • May 2004 • Request/obtain Vermont approval for benefits insurance • Submission of PTE application to DOL • Submission of supporting data to fiduciary • July 2004 • Initial approval from DOL • Employee comment/review period • August 2004 • Final PTE Approval

  29. DOL Exemption Requirements • Captive in the United States or U.S. Territory • Captive has at least 1 year audited operations • Fronting Insurer (A Rating) • Independent Fiduciary • Utilize Indemnity Reinsurance only • Market rates/premiums • Enhanced Benefits to Participants/Beneficiaries • No commissions

  30. Information Needed • Captive audited financial statements • Captive Pro Forma’s/Business Plan • Captive Certificate of Incorporation & Articles of Incorporation • Copies of reinsurance agreements • Copies of current insurance policies • Claims / Loss history (3yrs) • Copies of SPD’s • Copies of recent competitive bids (3yrs rate history)

  31. Captive Advantages Reduced premium expenses for operating entities Reduced the group tax expense Supported business (certificates, M&A, etc.) Financed loss prevention Improved risk profiles through risk engineering and BCP Centralize data and consolidate risks globally Reduced administration and risk management expenses Driven down Total Cost of Risk Strengthened risk management organisation in terms of structure, processes and compliance 35

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