Assembling a Captive Management Team: Key Players Responsibilities

1. Assembling a Captive Management Team:Key Players & Responsibilities By Peter H. Reilly, AIC, ARM, MS Senior Vice President & Healthcare Practice Leader William Gallagher Associates September 18, 2006

2. Assumptions Looking to either create a captive or beginning the exploratory process. Varied industries represented; although much of my focus and expertise in in healthcare. Well coordinated and sophisticated risk management functions within your organization. Risk financing efforts are coordinated between risk manager and CFO or responsible party.

3. Areas to be Covered

4. Who are the Key Players? Insured Broker Captive Manager Commercial insurance company (Fronting Carrier) Claims admin & loss control RMIS services Legal & Regulatory Counsel Actuarial & Investment Services

5. Key Players: Insured The ultimate responsibility for management rests with the captive's board of directors. Management must provide direction, coordinate the work of contracted services providers, ensure that loss control programs are executed and attend board meetings, among other responsibilities. Appropriate management participation is critical to achieving success in a captive program. Many of the day-to-day operations of the captive, including accounting, regulatory compliance and routine claims handling are typically handled by contracted service providers. Commitment must be for the long-term; short-term objectives must not be the primary reason for the decision to explore a captive.

6. Key Players: Broker Organizes and orchestrates the day-to-day running of the insurance program and functions as primary source for questions and problems which may arise in the administration of the members' insurance program. Liaison among attorneys, actuaries, auditors, claims management, loss control, investment management and fronting commercial insurance carrier and reinsurance for day-to-day functions. Direct any Feasibility Study for domicile and captive type determination Assistance with selection of other service providers, local brokers and intermediaries and markets One key aspect is that the broker must be willing to relinquish some control over risk management as other providers are now a partner in this effort too.

7. Key Players: Captive Manager A captive manager is a contracted service provider that specializes in running the day-to-day operations of captive insurers. The captive manager will often perform the accounting function, interface with the domicile government and regulators on compliance issues and provide general consulting assistance. A captive manager can also be helpful in steering management through the captive formation process. Oversees the administration and proper functioning of all the independent contractors such as the fronting company, reinsurer, etc. as the direct consultant to the captive company and its shareholders.

8. Key Players: Claims, Loss Control & RMIS Provides claim adjustment management services. Third party administrator is the extension of the captive insurer Provides loss control engineering consulting services. Acts as independent eyes and ears of the underwriters involved at all levels. Provides RMIS management services. Committee and Board Reports: Incidents Claims Litigation Summaries

9. Key Players: Insurance & Reinsurance Markets When required, issues insurance policy to the insured in the format of a conventional insurance policy. Issues all needed filings and certificates. Provides ultimate financial protection to the shareholder/policyholder. Provides reinsurance behind the front, for the limit excess of that being retained by the captive on a per claim basis. Provides a form of stop loss insurance excess of the loss fund identified as being available to pay loss in the captive.

10. Key Players: Legal Counsel Legal counsel should specialize in advising on the establishment, regulatory compliance and business operations of insurance and reinsurance in Bermuda market. They should also be schooled in working with captive insurance managers and brokers, based in both domestic and offshore jurisdictions in which the organizations practice. Counsel should also advise companies seeking to carry on business in any of these jurisdictions or transact business with locally-based insurers.

11. Key Players: Actuarial & Investment Services Actuarial services must interact with captive managers, auditors, fronting carriers, reinsurers and other service providers on a regular basis, presenting analysis of the captive�s financial condition regarding loss reserves and funding. Investment management should manage the assets of the captive in accordance with the guidance of the captive Board. This requires excellent investment skills, as well as a deep understanding of the industry's complex regulatory and tax environment.

12. Other Responsibilities Broker: Periodic reporting to senior management. Coordination with overall risk management plan. Benchmarking On-going strategic planning Policy management and delivery Loss run analysis Day to day coverage questions Constant seeking of ways to improve the program