Financial Institution Captive Insurance Overview
Financial Institution Captive Insurance Overview
Middle Market Risk Management for Financial Institutions • A Captive is a Property & Casualty Insurance Company that can be formed to cover the unique risks of an financial institution • Provides coverage for specialized risks which may not be available or may be too costly to obtain through traditional insurance providers • A bona fide insurance company, subject to approval and regulatory oversight by the insurance regulators in a chosen domicile • IRC Section 831(b) 954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 2
Enterprise Risk Exposures • Billing Errors and Omissions
• Defense Cost Reimbursement
• Business Interruption
• Difference in Conditions
• Computer Systems Failure
• Directors & Officers Excess
• Core Deposit Intangibles
• Privacy Liability
• Data Breach
• Regulatory Audit
• Deductible Reimbursement
• Reputational Risk
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 3
Why Implement a Captive? Risk Management and Other Benefits • Greater Control over Claims • Fill Gaps in Existing Coverage
• Pricing Stability • Purchase Based on Need • Investment Income
• Underwriting Flexibility
• Capture Underwriting Profit
• Incentive for Loss Control
• Improved Claims Review and Processing
• Reduced Insurance Costs
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 5
How Does it Work? Financial Holding Company Dividend Distributions
Reinsurance Captive
Financial Institution
Reinsurance
SPC FCB
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 6
Structure FCBI
SPC FCB
Reinsurance Captive
Financial Institution
Reinsurance Captive
FHC Ownership
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 7
Exposure to Claims Reinsurance Captive with the Related Party Claim
$500,000
Claim
$500,000 Claim from Financial Institution
SPC FCB Fronting Carrier Pays Claim All Other Captives Share Risk on Quota Share Basis
Assumptions: • Your Captive Premium is $1,000,000 • Total Written Premium = $50MM • Your Quota Share of Claim Pool = .02 • Your Captive is Responsible for $5,100
$5,100
Your Captive
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 8
Underwriting Assemble Current Insurance Information • Review Current Policies and Endorsements • Analyze Five Year Loss Runs • Three Year Summary of Coverage • Identify Trends in Premium History Underwriting • Understanding the operating company • Discuss reasonable coverage applicable to industry and unique business • Identify Self-Insured Exposures • Identify Uninsured Loss Experience Adequacy of Policy Limits
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 9
Third Party Review and Analysis Independent Third Party Risk Analysis • Coverage Chart • Gap Identification • Total Cost of Risk (TCOR) Analysis • Enterprise Risk Exposure Review • Deductible Optimization Supplement Risk Selection • Identify Relevant Coverage • Avoid Duplicate Coverage Independent Third Party Actuarial Analysis • Rate Promulgation • Peer Review of Pricing Methodology • Feasibility Study 954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 10
IRS Scrutiny of Abusive Structures • Not Following the Safe Harbor Guidelines
• Insuring Unreasonable Risks
• No Real Distribution of Risk
• Paying Excessive Premium for your Coverage
• No Claims Experience or Claims Layering • High Deductible Risk Pools or Retroactive Policy Issuance • Lack of Business Purpose • Tax Opinion Written by an Interested Party
• Treating Captive Assets as a Personal Checkbook • Circular Transactions • Investment Plans that Don’t Make Sense • 2016-66 Notice
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 11
Captive Implementation Process Initial Consultation
Refundable Engagement for Feasibility Analysis
Board Presentation
Board Approval for Captive Implementation and, if needed, FHC Designation
Approval Process
Selection of Coverage with Financial Institution P&C Agent
Captive Closing
Application to Insurance Regulators and Bank Regulatory Agencies
Establishment of Captive Investment Account
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 12
Captive Advisory Group Captive Manager Actuarial
Legal Counsel
Firm
P&C Agent* and Risk Analysis Firm
Audit Firm
Tax Counsel*
Financial Advisor*
*Advisors are unique to each client and are not independent service providers associated with Oxford
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 13
Who is a Candidate? • Pursuant to the Bank Holding Company Act of 1956, Financial Institutions that that are well managed and well capitalized with a CRA rating of at least “satisfactory” can elect FHC status. By electing FHC status it is legally permissible to form a captive subsidiary. • Financial Institutions with an asset size of 350MM+
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 14
Middle Market Risk Management for Financial Institutions • A Captive is a Property & Casualty Insurance Company that can be formed to cover the unique risks of an financial institution • Provides coverage for specialized risks which may not be available or may be too costly to obtain through traditional insurance providers • A bona fide insurance company, subject to approval and regulatory oversight by the insurance regulators in a chosen domicile • IRC Section 831(b) 954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 2
Enterprise Risk Exposures • Billing Errors and Omissions
• Defense Cost Reimbursement
• Business Interruption
• Difference in Conditions
• Computer Systems Failure
• Directors & Officers Excess
• Core Deposit Intangibles
• Privacy Liability
• Data Breach
• Regulatory Audit
• Deductible Reimbursement
• Reputational Risk
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 3
Why Implement a Captive? Risk Management and Other Benefits • Greater Control over Claims • Fill Gaps in Existing Coverage
• Pricing Stability • Purchase Based on Need • Investment Income
• Underwriting Flexibility
• Capture Underwriting Profit
• Incentive for Loss Control
• Improved Claims Review and Processing
• Reduced Insurance Costs
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 5
How Does it Work? Financial Holding Company Dividend Distributions
Reinsurance Captive
Financial Institution
Reinsurance
SPC FCB
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 6
Structure FCBI
SPC FCB
Reinsurance Captive
Financial Institution
Reinsurance Captive
FHC Ownership
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 7
Exposure to Claims Reinsurance Captive with the Related Party Claim
$500,000
Claim
$500,000 Claim from Financial Institution
SPC FCB Fronting Carrier Pays Claim All Other Captives Share Risk on Quota Share Basis
Assumptions: • Your Captive Premium is $1,000,000 • Total Written Premium = $50MM • Your Quota Share of Claim Pool = .02 • Your Captive is Responsible for $5,100
$5,100
Your Captive
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 8
Underwriting Assemble Current Insurance Information • Review Current Policies and Endorsements • Analyze Five Year Loss Runs • Three Year Summary of Coverage • Identify Trends in Premium History Underwriting • Understanding the operating company • Discuss reasonable coverage applicable to industry and unique business • Identify Self-Insured Exposures • Identify Uninsured Loss Experience Adequacy of Policy Limits
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 9
Third Party Review and Analysis Independent Third Party Risk Analysis • Coverage Chart • Gap Identification • Total Cost of Risk (TCOR) Analysis • Enterprise Risk Exposure Review • Deductible Optimization Supplement Risk Selection • Identify Relevant Coverage • Avoid Duplicate Coverage Independent Third Party Actuarial Analysis • Rate Promulgation • Peer Review of Pricing Methodology • Feasibility Study 954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 10
IRS Scrutiny of Abusive Structures • Not Following the Safe Harbor Guidelines
• Insuring Unreasonable Risks
• No Real Distribution of Risk
• Paying Excessive Premium for your Coverage
• No Claims Experience or Claims Layering • High Deductible Risk Pools or Retroactive Policy Issuance • Lack of Business Purpose • Tax Opinion Written by an Interested Party
• Treating Captive Assets as a Personal Checkbook • Circular Transactions • Investment Plans that Don’t Make Sense • 2016-66 Notice
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 11
Captive Implementation Process Initial Consultation
Refundable Engagement for Feasibility Analysis
Board Presentation
Board Approval for Captive Implementation and, if needed, FHC Designation
Approval Process
Selection of Coverage with Financial Institution P&C Agent
Captive Closing
Application to Insurance Regulators and Bank Regulatory Agencies
Establishment of Captive Investment Account
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 12
Captive Advisory Group Captive Manager Actuarial
Legal Counsel
Firm
P&C Agent* and Risk Analysis Firm
Audit Firm
Tax Counsel*
Financial Advisor*
*Advisors are unique to each client and are not independent service providers associated with Oxford
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 13
Who is a Candidate? • Pursuant to the Bank Holding Company Act of 1956, Financial Institutions that that are well managed and well capitalized with a CRA rating of at least “satisfactory” can elect FHC status. By electing FHC status it is legally permissible to form a captive subsidiary. • Financial Institutions with an asset size of 350MM+
954 Ridgebrook Road │ Suite 100 │ Sparks, Maryland 21152 │ 410.472.6490 T. │ 410.472.6496 F. │ www.OxfordRMG.com 14
