Today’s Presenters

Nick Kohlhof Sales Executive

Matt Murray Sales Executive

Dave Franson Senior Vice President

Claims & Safety

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Today’s Agenda

1. Cottingham & Butler Captive Credentials

2. Captive Concept

3. Why companies join captives?

4. Captive Mechanics

5. Safety & Claims

6. Member Story

7. Conclusion

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Captive Credentials

• 6 Captives since 1993

• More than 165 members

• More than $110 million of premium

• Over $86,000,000 in dividends paid

• Expert claims administration

• Proven safety services

• Administrators of the two largest transportation captives in the world

• Network of resources:

– Legal – Consulting – Banking – Auditors – Fronting Carrier – Investment Managers – Brokers – Tax Advisors – Reinsurers

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Risk Management Principles

Basic Acknowledgment

• Losses can be controlled but some are inevitable

Basic Approach:

• Retain losses that are predictable

• Transfer losses that are not – losses catastrophic in nature

• Find the best solution for managing risk over a period of time

• Find the most effective method in reducing the total cost of risk

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What is a group captive?

Simply, an insurance company owned by its members created to lower the cost of insurance

over the long-term by bringing together companies dedicated to safety who can take

advantage of group purchasing and sharing risk together

Concept: Retain losses that are predictable (frequency losses) and transfer losses that are

not (catastrophic/severity) losses

Frequency losses that are controlled through:

1. Safety

2. Claims Management

Catastrophic/Severity losses are managed through:

1. Risk Sharing

2. Reinsurance

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The Insurance Dilemma

The Insurance Dilemma: you would be better off not buying insurance and paying

your claims. Unfortunately, most companies can’t survive when they suffer the large

severe claim. Particularly when the severe claim happens early on.

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

4th Prior 3rd Prior 2nd Prior 1st Prior Current Year

$2,600,000 Total Premiums

$1,355,000 Total Losses

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The Insurance Dilemma (continued)

Beating the Insurance Dilemma

1. Fully Self-Insuring

2. Large Deductibles

What if you cannot assume a $250,000 deductible?

3. Joining a Member Owned Group Captive

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Revenues in Millions

- 2012 RIMS Benchmark Survey

COST OF RISK BY REVENUE

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What Happens to those who stay in the standard market:

1. Increased insurance costs

2. Pooled with worst performing companies

3. At the mercy of market swings

4. Loss of control

Best in class companies are leaving the standard insurance market. They want to be

protected from wild swings and take more control of their insurance program.

Insurance Dilemma: Taking Control

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Why companies join captives?

Opportunity for significant return

of premium

Stabilize cost & avoid market

volatility

Development of an elite safety

program

Better control of claims process and

payouts

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Why companies join? (Return of Premium)

Premium paid is all fixed cost. Limited opportunity to reduce

the insurance spend.

Guaranteed Cost

40% in fixed costs. Leaving an opportunity to get 60% of the

premium back.

Captive Program Opportunity

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Why companies join? (Stabilization)

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$0

$5,000

$10,000

$15,000

$20,000

$25,000

Average Indemnity Cost Per Lost Time Claim

NCCI

CBCS

Average Indemnity Cost per Lost-Time Claim Year NCCI CBCS

2000 $15,200 $11,630

2001 $16,600 $14,994

2002 $17,100 $14,361

2003 $17,900 $12,033

2004 $18,200 $13,093

2005 $18,800 $13,063

2006 $19,900 $14,578

2007 $21,100 $14,971

2008 $22,800 $17,176

2009 $23,000 $16,565

2010 $22,300 $14,767

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Average Medical Cost Per Lost Time Claim

NCCI

CBCS

Average Medical Cost per Lost-Time Claim Year NCCI CBCS

2000 $14,200 $8,822

2001 $16,200 $8,992

2002 $17,600 $16,876

2003 $18,900 $9,112

2004 $20,000 $9,171

2005 $21,800 $11,652

2006 $23,100 $12,459

2007 $24,500 $13,292

2008 $25,700 $13,679

2009 $27,100 $14,527

2010 $27,700 $18,730

Why companies join? (Control of Claims)

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Why companies join? (Elite Safety)

Member Entered

Captive1st Year 2nd Year 3rd Year

Company A 1.43 1.17 0.93 0.89

Company B 0.95 0.77 0.71 0.72

Company C 1.11 1.08 1.06 1.13

Company D 0.87 0.98 1.00 0.80

Company E 1.00 1.01 0.81 0.76

Company F 0.99 0.94 1.00 1.00

Company G 1.07 0.97 0.88 0.95

Company H 1.12 1.13 1.05 1.04

Company I 1.22 0.96 0.96 0.97

Company J 0.86 0.85 0.88 0.95

Company K 1.32 1.35 1.51 1.25

Companly L 1.14 1.01 1.01 1.04

Company M 0.91 0.83 0.82 0.86

Company N 0.73 0.74 0.87 0.88

Company O 1.18 1.06 1.11 1.03

Company P 0.94 0.96 0.77 0.94

Company Q 0.89 0.86 0.79 0.81

Company R 0.87 0.84 0.74 0.74

Company S 0.99 0.88 0.68 0.67

1.03

0.98

0.94

0.91

Entered Captive Year 1 Year 2 Year 3

Average Experience Mod

On average, members see a 12 point drop in their experience modification after 3 years

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Mechanics

How does a member owned group

captive work?

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Lines of Coverage

Statutory

Workers’

Comp

General

Liability

Automobile

Liability

Captive Retention

$1,000,000 $300,000 $0

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Captive Structure with Members

$1,000,000

Risk Transferred to Insurance Company

Insurance

Carrier

$300,000

Shared Member Pool

Excess Fund

$75,000

Primary Fund Member Member Member Member Member Member Member Member Member Member

$0 1 2 3 4 5 6 7 8 9 10…

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Member Loss Funds

EXCESS FUND

PRIMARY FUND

Initial Pay-in Premium includes:

1. Primary Fund (Member claims < $75,000) 2. Excess Fund (Group claims >$75,000) 3. Operating Costs

PAY-IN = Primary + Excess + Operating Costs

$0 - $75,000

$75,001 - $300,000

$75,000 $0 -

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Sample Member Premium

Premium Breakdown

Operating Costs: $200,000

Loss Funds:

Primary Loss Fund: $200,000

Excess Loss Fund: $100,000

Total Loss Funds $300,000

Potential Assessment: $200,000

MIN $200,000 PAY IN $500,000 MAX $700,000

Sample member is paying $500,000 in total pay-in premium

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Loss Example #1

$95,000 of total claims less than $75,000 per occurrence

Primary Fund Accounting $200,000 Beginning Balance -95,000 Total Claims less than $75,000

$105,000 Remaining Balance

Excess Fund Accounting $100,000 Beginning Balance

PRIMARY FUND

$75,000

$0

$300,000

EXCESS FUND

REINSURANCE

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Loss Example #1 (cont.)

$ 105,000 Primary Fund

+ 100,000 Excess Fund

+ 5,000 Estimated Interest Income

$ 210,000 Estimated Return

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Loss Example #2 $95,000 of total claims less than $75,000 per occurrence and a $1,000,000 catastrophic

claim.

Excess Fund Accounting $100,000 Beginning Balance

Primary Fund Accounting $200,000 Beginning Balance -95,000 Total Claims less than $75,000 -75,000 1st $75,000 of catastrophic loss $ 30,000 Remaining Balance

PRIMARY FUND

$75,000

$0

$300,000

EXCESS FUND

REINSURANCE

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Loss Example #2

Excess Fund Accounting $100,000 Beginning Balance -100,000 0 Ending Balance

$95,000 of total claims less than $75,000 and a $1,000,000 catastrophic claim

Catastrophic Claim: $ 75,000 From Primary Fund $100,000 From Excess Fund $175,000

Primary Fund Accounting $200,000 Beginning Balance - 95,000 Total Claims less than $75,000 - 75,000 1st $75,000 of catastrophic loss $ 30,000 New Balance

PRIMARY FUND

$75,000

$0

$300,000

EXCESS FUND

REINSURANCE

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Loss Example #2 (cont.)

Excess Fund Accounting $100,000 Beginning Balance -100,000 0 Ending Balance Primary Fund Accounting $200,000 Beginning Balance - 95,000 Total Claims less than $75,000 -75,000 1st $75,000 of catastrophic loss $ 30,000 New Balance -30,000 Additional for catastrophic loss 0 Ending Balance

$95,000 of total claims less than $75,000 and a $1,000,000 catastrophic claim.

Catastrophic Claim: $ 75,000 $100,000 $175,000 $ 30,000 $205,000 $95,000 Shared by All Members’ Excess Funds

PRIMARY FUND

$75,000

$0

$300,000

EXCESS FUND

REINSURANCE

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Loss Example #2 (cont.)

• Majority of Loss Reinsured Away

– $1,000,000 Claim

– $700,000 Transferred to Reinsurer

– $300,000 Retained by Captive

• Impact on Risk Sharing Minimized

– Member contributed $75,000 from Primary Fund

– Member contributed $100,000 from Excess Fund

– Member contributed remaining $30,000 balance from Primary Fund

– Total Member contribution - $205,000

– Group shared $95,000 – Impact on other members minimized

• Interest Income Still Generated

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Loss Example #3

$400,000 of total claims less than $75,000

Excess Fund Accounting $100,000 Beginning Balance

Primary Fund Accounting $200,000 Beginning Balance - 200,000 Total Claims less than $75,000 0 Remaining Balance

Losses Remaining $200,000 Paid from Primary Fund 0 Paid from Excess Fund $200,000 Remaining Primary Fund Losses

PRIMARY FUND

$75,000

$0

$300,000

EXCESS FUND

REINSURANCE

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Loss Example #3

$400,000 of total claims less than $75,000

Excess Fund Accounting $100,000 Beginning Balance Primary Fund Accounting $200,000 Beginning Balance - 0 Total Claims less than $75,000 0 Remaining Balance $200,000 Primary Fund Assessment

PRIMARY FUND

$75,000

$0

$300,000

EXCESS FUND

REINSURANCE

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Loss Example #3 (cont.)

$ 100,000 Excess Fund Balance

+ 5,000 Estimated Interest

$ 105,000 Estimated Results

$ (200,000) Adjustment Paid

$ (95,000) Estimated Additional Cost for $200,000 of

Additional Frequency Claims

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Other Considerations

• Historically, risk sharing has been 6-7%

• Each underwriting year stands on its own

• One time purchase of $30,000 for a share of stock

• There are collateral requirements

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Real Member Examples

Captive Std Market Difference

Pay In: $249,134 $247,720 +1%

Min $76,357 $247,720 -70%

Max $342,728 $247,720 +138%

Net Cost

Captive Std Market Difference

Year 1 $86,608 $234,914 $148,306

Year 2 $357,668 $264,461 ($93,207)

Year 3 $108,412 $256,974 $148,562

Year 4 $90,493 $288,577 $198,084

Year 5 $81,096 $247,720 $166,624

Total Savings = $568,369

($100K risk but over $550K savings over 5 years)

A. Member is a wholesaler of building materials B. Member is a beer distributor on a $350K deductible for WC

Captive High Deductible Difference

Pay in: $469,022 $185,351 253%

Min $149,768 $165,351 -10%

Max $643,836 $1,065,351 -40%

Net Cost

Captive High Deductible Difference

Year 1 $302,197 $524,527 $222,330

Year 2 $458,912 $530,257 $71,345

Year 3 $335,056 $428,926 $93,870

Year 4 $472,102 $439,999 ($32,103)

Year 5 $359,311 $386,894 $27,583

Total Savings = $383,025

($383K savings in 5 years with less risk per claim)

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Safety & Claims Management

Taking Control

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Safety Service Plan – Keys to Success

1. Onsite Consultation

• Safety Gap Analysis

• Risk Improvement Process (RIP)

2. Professional Development

• Risk control workshops

• Safety webinars

3. Safety Communication and Employee Involvement

• Construction Safety Breaks

• Countermeasures

• Access to safety resource website

4. Accountability Process – Continuous Improvement

• Captive scorecard

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Safety Gap Analysis

Process

• Annual scored audit

• Evaluate client’s safety system

– Management Support

– Regulatory Compliance

“Best Practices”

Benefits

• Action plan

• Accountability system

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“THE DRILL DOWN”

Process

• Accident analysis of claims history

• Develop Strategies

– Hiring practices

– Orientation process

– Communication program

– Accountability system

– Incentives & recognition

– Work practices

Benefits – Coaching

• Accident causation

• Corrective action

• Prevent a reoccurrence

Risk Improvement Process (RIP)

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Risk Control Workshop

• Semi Annual

• Sharing best practices

• Networking

Webinar Series

• Periodic

• Creating a safety culture

• Leadership in safety

Professional Development

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Communication Tools

Safety Breaks

• Monthly communication tool

Accident Countermeasures

• Quarterly

• Vehicle accidents

Benefits

• Reduced staff development time

• Reduce accident rates

• Client-specific campaigns

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Performance Scorecard

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Claim Provider

Cottingham & Butler Claims Services ( CBCS).

Overview of Services

A Partnership for Aggressive Claim Management

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Cottingham & Butler Claims Services

• TPA Claim Service Since Early 1980’s

• Experienced Captive Service Partner

– Claim service to Captives since 1993

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Areas of Inquiry CBCS Standard Market Claim reported 24/7/365 Good luck Assignment Dedicated adjuster for all Multiple adjusters claims - Medical only - Indemnity - Subrogation Staff turnover 3% 20-25% Claim reviews Client determines frequency Conference call with multiple adjusters Reserving Fact/experience-based Formula Client in the know - Diagnostic codes - Actuarial study Settlements Client determines settlement Pay it and close it authority

Captive Advantage

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Creating Alignment

My adjuster: 1 2 3 4 NA

1 Demonstrates technical competence. Comment:

2 Conducts prompt and complete investigations and evaluations. Comment:

3 Responds with well-informed answers to my questions. Comment:

4 Acts with an appropriate sense of urgency. Comment:

5 Displays initiative to protect my assets and save me money. Comment:

6 Achieves favorable results on my behalf. Comment:

7 Expresses ideas to me in a clear and concise fashion. Comment:

8 Acts with discretion and conciseness in communicating with those involved in the situation. Comment:

9 Frequency of communication meets my expectations. Comment:

10 Meets my expectations of total satisfaction with CBCS as my claims management service provider. Comment:

I would provide this feedback (positive or constructive criticism) to the adjuster:

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Technology Proclaim

Features Risk Dashboard

Claim Navigator

Claim Details

Incident Reporting

OSHA Logs

Alerts

Exposures

Policies

Reports

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Technology Proclaim

Features Risk Dashboard

Claim Navigator

Claim Details

Incident Reporting

OSHA Logs

Alerts

Exposures

Policies

Reports

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Member Story – SMF, Incorporated

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Fun Facts

Captives can be a competitive advantage for companies. However, some brokers shy away from offering them because:

• Brokers make much less money when they put a client into a captive. Standard commission on Auto and General Liability is 15%. The average captive commission is 6%.

• The brokers role becomes more focused on Safety and Claims and less on “shopping”.

• Many brokers are not familiar enough with captives to recommend one to a client.

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Cottingham & Butler has placed over 168 middle market companies like yours into a

captive.

Is a Captive Right For Your Company?

• Does your company have a favorable loss history?

• Is your company financially sound?

• Is safety a top priority?

• Are you willing to take calculated risks and bet on yourself?

Insanity is doing the same thing over and over again and expecting different results - Albert Einstein

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