Regulator s Corner. John R. Kasich, Governor Mary Taylor, Lt. Governor/Director

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(1)

John R. Kasich, Governor

Mary Taylor, Lt. Governor/Director

Regulator’s

 

Corner

Dale Bruggeman, Tim Biler, and Tracy Snow Chiefs in Office of Risk Assessment

IASA 38th Annual Conference

(2)

Overview

• Re‐organization

• Pure and Protected Cell Captives

Model Audit Rule update

“Day in the Life of an Analyst”

(3)

Office of Risk Assessment

Dwight Radel, Asst Director Dwight Radel, Asst

Director

Tim Biler, Domestic 

Chief 

Analyst/Examiner Tim Biler, Domestic 

Chief 

Analyst/Examiner

Dave Cook, 

AssistantDave Cook, Chief  Assistant Chief

EIC

EIC AnalystAnalyst  SupervisorSupervisor

Jeff Lehr, Assistant 

Chief Jeff Lehr, Assistant 

Chief

EIC

EIC AnalystAnalyst  SupervisorSupervisor

Tracy Snow,  Domestic Chief  Analyst/Examiner,  Captive Chief Tracy Snow,  Domestic Chief  Analyst/Examiner,  Captive Chief Jeff Ebert, Assistant 

Chief Jeff Ebert, Assistant 

Chief

EIC

EIC AnalystAnalyst  SupervisorSupervisor

Rick Rhoades, 

AssistantRick Rhoades, Chief  Assistant Chief

EIC

EIC AnalystAnalyst  SupervisorSupervisor

Dale Bruggeman, 

Chief non‐Domestic 

and Administration Dale Bruggeman, 

Chief non‐Domestic 

and Administration Cam Piatt, Assistant 

Chief Cam Piatt, Assistant 

Chief

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Office

 

of

 

Captive

 

Insurance

• Chief ‐ Tracy Snow, CPA, 

CFE, CPCU

• Experienced Auditor, 

Insurance Professional & 

Regulator

• Risk‐focused, Surveillance 

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• Background

• Industry Statistics

• Basics 

– “Captives 101”

– Why Form a Captive?

• Benefits

• Captive Types & Structures

• Ohio Captive law – key provisions

(6)

• Ohio native, Frederic Reiss, considered the 

founder of the modern captive insurance 

movement

Coined the term “captive insurance” in 

the early 1960s

• Established the first captive insurance 

company in Bermuda – Steel Insurance 

Company of America – a wholly‐owned 

insurance subsidiary of Youngstown Sheet 

and Tube

(7)

Industry

 

Statistics

Captive Growth Worldwide:

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Industry

 

Statistics

(9)

Industry

 

Statistics

B B B B B

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Industry

 

Statistics

US Captive Domiciles:

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Industry

 

Stats

(12)

Industry

 

Statistics

Size of U.S. Captives by net Premium:

(13)

Industry

 

Statistics

Captive Utilization by Parent Co Industry:

(14)

Captives

 

101

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Captives

 

101

Basic Decision: Finance or Retain Risks

Retention / Financing Decision

Self-Fund

Self-Fund

Insurance

Loss Funding Strategies

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• Lower insurance costs

• Cash flow

• Coverage

• Risk management

Access to reinsurance

Potential Tax benefits

(17)

Captives

 

101

 ‐

Comparison

Self

Fund Traditional Captive

Evidence

 

of

 

Insurance

No

Yes

Yes

Access

 

to

 

Reinsurers

No

Yes

Yes

Control

 

Costs

Yes

No

Yes

Retain

 

Investment

 

Income

Yes

No

Yes

Tax

 

deductibility

 

of

 

Premiums

No

Yes

Yes

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• Existence of  insurance risk • Risk shifting /  transfer • Risk distribution • Regulated insurance  company

Captives

 

101

 ‐

Qualifying

 

for

 

(19)

Risk distribution requirement:

Captives

 

101

 ‐

Qualifying

 

for

 

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Pure

 

Captive

Parent

Subsidiary B Subsidiary C

Captive

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Protected

 

Cell

 

Captive

Protected Cell Captive (Core)

Cell C Cell B

Cell A Cell D

Unlimited No. of Cells & Uses

Aircraft Insurance Insurance for Yachts Life Insurance Property Insurance

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Special

 

Purpose

 

Financial

 

Captive

Parent (Life Ins. Co.)

Captive (Reinsurer).

US Financial Institution

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• Law ‐ Ohio Revised Code  (ORC)  3964.01 through  3964.21 • Rules ‐ Ohio  Administrative Code  (OAC) 3901‐11‐01  through 3901‐11‐06

Ohio

 

Captives:

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§3964.01 – Key provisions:

• Defines key terms used

• Authorizes the types of captives that may 

be formed and used in Ohio

(27)

§3964.02 ‐ Key provisions:

• May only offer specified lines unless 

granted an exception by the 

superintendent

May reinsure any risks insured by its parent 

or affiliate as approved by the 

superintendent

May purchase reinsurance for any risk the 

captive writes directly

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§3964.02 ‐ Key provisions (cont.):

• May NOT issue policies to 

anyone other than its parent or 

or an affiliate

May NOT insure or reinsure  

any personal lines

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§3964.02 ‐ Key provisions (cont): Authorized Lines 1. Commercial  multiple peril 2. Medical  Malpractice 3. Ocean Marine 4. Inland Marine 5. Workers’  Compensation 6. Commercial Auto  Liability 7. Commercial  Physical Damage 8. Fidelity 9. Life 10. Other

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§3964.03 ‐ Key provisions:

• Shall organize under chapters 1701, 1702, 

or 1705

• Shall obtain a license, maintain its principal 

place of business in Ohio, have a resident 

manager, and hold at least 1 board 

meeting in Ohio annually 

Shall have coverages, deductibles, limits 

and rates approved

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§3964.03 ‐ Key provisions (cont.):

• Establishes specific guidance for SPFCs 

• Mandates confidentiality (i.e., all 

information filed/obtained during the 

formation process is confidential, save 

certain SPFC)

• Enumerates the filing/application fee and 

directs it to a separate supervisory fund

(32)

Application

 

Requirements

§3964.03(D)

1. Organizational documents (Articles of incorp, 

bylaws, etc…)

2. Evidence of the CIC’s financial condition

3. A statement of the CIC’s assets relative to its 

risks

4. Narrative of the insurance & business 

qualifications of the CICs officers, directors & 

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Application

 

Requirements

 

(cont.)

§3964.03(D)

5. The loss prevention programs of the 

insureds

6. Actuarial assumptions & 

methodologies

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Superintendent

 

Considerations

§3964.03(F) 1. Character, reputation, & 

financial standing of the 

incorporators

2. Insurance experience & 

business qualifications of the 

officers & directors

3. Amount of assets & liquidity 

relative to the risks to be 

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Superintendent

 

Considerations

 

(cont.)

§3964.03(F)

4. Expertise, experience & 

character of the 

captive manager

5. Soundness of the plan 

of operation

6. Adequacy of the loss 

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§3964.05 ‐ Key provisions:

• Minimum capital requirements by captive 

type

• Basis for requiring additional capital

• Acceptable forms of capital and surplus

(37)

Ohio

 

Revise

 

Code

§3964.07

 ‐

Key

 

provisions

 

Requires

 

annual

 

reporting

 

of

 

the

 

captive’s

 

financial

 

condition

Requires

 

an

 

actuarial

 

opinion

 

from

 

a

 

qualified

 

actuary

Requires

 

an

 

annual

 

audit

 

and

 

GAAP

 

(38)

Ohio

 

Revise

 

Code

§3964.07

 ‐

Key

 

provisions

 

(cont.)

Requires

 

preparation

 

of

 

quarterly

 

financial

 

statements

Makes

 

confidential,

 

all

 

reports

 

filed

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Annual Filing Requirements 

Due Date ANNUAL REPORT - DEC 31 YEAR END

Annual Report* 3/1

AUDITED FINANCIAL STATEMENT - DEC 31 YEAR END

Audited Financial Statement 6/1

Report of Evaluation of Internal Controls 6/1

Accountant's Letter 6/1

CERTIFICATON OF LOSS RESERVES AND LOSS RESERVES - DEC 31 YEAR END

Statement of Actuarial Opinion 3/1

Actuarial Memorandum 5/1

PREMIUM TAX FILINGS - DEC 31 YEAR END

Premium Tax Return 3/1

Premium tax checks payable to: Ohio Department of Insurance 3/1

OTHER REQUIRED FILINGS

License Renewal Form 3/1

Licence Renewal Fee - $500.00 payable to: Ohio Department of Insurance 3/1

DELIVERY ADDRESS Hard copy mail to:

Ohio Department of Insurance 50 West Town Street 3rd Floor - Suite 300 Columbus OH 43215

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Ohio

 

Revise

 

Code

§3964.08

 ‐

Key

 

provisions

 

Captives

 

shall

 

be

 

examined

 

in

 

accordance

 

with

 

§3901.07

Confidentiality

 

of

 

reports,

 

working

 

papers

 

and

 

other

 

information

 

obtained

(41)

Ohio

 

Revise

 

Code

§3964.10

 ‐

Key

 

provisions

 

Board

 

determines

 

appropriateness

 

of

 

investments

Investment

 

policy

 

filing

Parental

 

or

 

affiliate

 

loans

 

or

 

(42)

Ohio

 

Revise

 

Code

§3964.13

 ‐

Key

 

provisions

 

Establishes

 

premium

 

based

 

fee

• 0.35% on net direct

• 0.15% on assumed*

Sets

 

limits

 

and

 

directs

 

deposit

 

into

 

a

 

(43)
(44)

• Background

• Industry Statistics

• Basics 

– “Captives 101”

– Why Form a Captive?

• Benefits

• Captive Types & Structures

• Ohio Captive law – key provisions

(45)

Captive Insurance and the Regulation of Captives in Ohio

(46)

Captive Insurance and the Regulation of Captives in Ohio

Contact Information: Tracy snow, Chief

614‐728‐1263

(47)

Model Audit Rule‐Internal Audit

• Added Internal Audit function requirement 

to larger insurers or groups

– Same premium break point as ORSA 

requirement

• > $500 million entity, or $1 billion group

• Annual direct and unaffiliated assumed

• Includes international

(48)

Model Audit Rule‐Internal Audit

• "Internal audit function" definition

– means a person or persons that provide 

independent, objective and reasonable 

assurance designed to add value and improve 

an organization's operations and accomplish 

its objectives by bringing a systematic 

disciplined approach to evaluate and improve 

the effectiveness of risk management, control 

and governance processes

Added “internal audit function of an 

insurer or group” to oversight by Audit 

(49)

Model Audit Rule‐Internal Audit

• provide independent, objective and 

reasonable assurance to the audit 

committee and insurer management 

regarding the insurer's governance, risk 

management and internal controls.

– perform general and specific audits, reviews 

and tests and by employing other techniques 

deemed necessary to protect assets, evaluate 

control effectiveness and efficiency, and 

evaluate compliance with policies and 

(50)

Model Audit Rule‐Internal Audit

• Ensure that internal auditors remain 

objective. Function

– must be organizationally independent

• will not defer ultimate judgment on audit matters 

to others

• appoint an individual to head the internal audit 

function who will have direct and unrestricted 

access to the board of directors

(51)

Model Audit Rule‐Internal Audit

• Reporting

– report to the audit committee regularly, but 

no less than annually

• on the periodic audit plan

• factors that may adversely impact the internal 

audit function's independence or effectiveness

• material findings from completed audits and the 

appropriateness of corrective actions implemented 

by management as a result of audit findings

• For groups – can satisfy requirements at 

the ultimate controlling parent, 

(52)

An Analyst’s Day

• Mission of Department

– The mission of the Ohio Department of 

Insurance is to provide consumer protection 

through education and fair but vigilant 

regulation while promoting a stable and 

competitive environment for insurers.

An analyst is responsible for all aspects of 

the financial solvency of an insurer, 

including the holding company aspects, to 

(53)
(54)

Prioritization System ‐

CARRMEL

Basis for decisionmaking

– Examination timing

– AFS accelerated filing requirements

– Transaction approvals

– Communicating concerns to management and 

board

– Applications for Certificate of Authority

• Continually updated via analysis to 

substantiate priority level

Very hard for company to have overall 

(55)

“M” in CARRMEL

• Overall corporate governance

• Board involvement

Board independence

Internal controls over business risksInternal audit

(56)

An Analyst’s Day

• Working on the annual/quarterly analysis 

of assigned company

– Updating IPS, Priority, Supervisory Plan

Calling the CFO

Reviewing a Transaction

– Holding company requirements ‐Forms D & A

– HIC major mods

Annual Filings – B, C, F, Actuarial, Audit, 

MDA

(57)

An Analyst’s Day

• Group Holding Company Analysis

– Lead state

New domestic COA application • Keeping up with industry news

• Training

• Meeting with examiners after exam to 

update IPS, branded risks, etc.

• Watchlist meeting

• Requests from other states

(58)

Basic Accreditation Reqs

• Part A – Laws – SSAPs, RBC, Exam Auth, 

Confidentiality, HFC, Holding Co, 

Investment code, Reserves, Reinsurance, 

Risk Limits, Receivership, CPA audits 

(internal audits), Actuarial Opinions, 

Guaranty Funds, NAIC filing, Frameworks 

for MGAs, Producer Controlled Insurers, 

Reins Intermediaries, and Companies 

licensing & chg of control

– Based on NAIC models and updates

(59)

Basic Accreditation Reqs

• Part B – Timing of Analysis based on 

Priority, Completion timing of exams and 

report issuance, Appropriate supervision, 

Sufficiently qualified staff, Reporting 

Material Adverse Findings

Part C – Training, Minimum education and 

experience, Retention

Figure

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