January 17 2007 Captive Insurance Overview ORIMS Note

January 17, 2007 Captive Insurance Overview ORIMS

Note that Marsh does not provide tax advice. Marsh F: GraphicsClientORIMS200770101 VM. ppt 2

Definition of a Captive? n Insurance company that is owned by one entity or a defined group of entities and that is limited to writing insurance for its owners and their affiliates. Marsh F: GraphicsClientORIMS200770101 VM. ppt 3

What is a Captive? n Captive insurance = self insurance n Captive is a funding for self-insured risks Marsh F: GraphicsClientORIMS200770101 VM. ppt 4

What Can a Captive Write? n n Any risk retained by the parent – Within the accepted notions of “insurance” Policy retentions and deductibles – Deductible buy-down for business units Uninsured exposures – Environmental – Credit – Litigation, etc. Third party risk – Additional risk vs additional reward – Customers, partners, franchisees, etc. Marsh F: GraphicsClientORIMS200770101 VM. ppt 5

Types of Captive n Group captive/Reciprocal/Pool n Rent-a-captive/Cell captive n Single parent captive Marsh F: GraphicsClientORIMS200770101 VM. ppt 6

Group Captive n n n Multiple owners Insures risk of all owners Sharing of risks – pooled retention n Group purchasing n Mutual concept Marsh Owner Captive F: GraphicsClientORIMS200770101 VM. ppt 7

Group Captive – Benefits and Issues Benefits n Group buying power n Higher attachment of insurance - Lower premiums n Cost effective pooling of risk - Lower cost Issues n Critical mass n Commitment among members to share risk n Premium rating structure n Tax FIE rules Marsh F: GraphicsClientORIMS200770101 VM. ppt 8

Single Parent Captive n n One owner Parent Insures risk of parent group Controlled Foreign Affiliate Subs Captive Potential tax deferral and savings Marsh F: GraphicsClientORIMS200770101 VM. ppt 9

Rent-a-Captive n n n Sponsor owns captive “Rents” out a segregated account to members Pref. shares Parent Sponsor Subs Captive Effectively, single parent without ownership Issues are cost and control Marsh F: GraphicsClientORIMS200770101 VM. ppt 10

Benefits of a Captive n Focus – Centralized management of retained risks – Reporting and recognition of claims n n n Allocation – Variable deductible structure – Reward/motivate risk prevention Structure – Access to reinsurance? Tax – Saving – Deferral Marsh F: GraphicsClientORIMS200770101 VM. ppt 11

Tax Structure Canadian parent Tax free from Barbados Dividend Premium Non-Cdn subs Captive Premium deduction No FAPI Marsh Premium Local tax - minimal Cdn subs Premium deduction Taxed in Canada FAPI F: GraphicsClientORIMS200770101 VM. ppt 12

Tax Summary Canadian Risk Non-Canadian Risks Captive’s loss reserves Tax deferral Captive’s net income Tax neutral Tax saving Marsh F: GraphicsClientORIMS200770101 VM. ppt 13

Captive Costs n n n Insurance costs – Fronting and premium taxes - depends on type of insurance and jurisdiction – Up to 10% Administration – Management, legal, audit, secretarial – $75 -100 k per year Opportunity cost – Captive accumulates funds from other entities – May avoid opportunity cost of passive funds by re-investing in operations Marsh F: GraphicsClientORIMS200770101 VM. ppt 14

Captive Domiciles Options n Offshore – Barbados, Bermuda, Cayman, etc. n Europe – Dublin, Luxembourg, etc. n Onshore – British Columbia, U. S. states Issues n Infrastructure and stability n Local costs and taxes n Tax status relative to Canada Marsh F: GraphicsClientORIMS200770101 VM. ppt 15

Marsh Credentials n Manage - 1, 000 captives worldwide n Premium volume - $6 billion n HQ in Bermuda n Offices in all major domiciles n Captive consulting practice in Canada Marsh F: GraphicsClientORIMS200770101 VM. ppt 16

Marsh Canada Captive Team n Les Rowley – Toronto – 416 868 2615 – les. g. rowley@marsh. com n n Stephen White – Toronto – 416 868 2627 – stephen. white@marsh. com Michelle Smith – Vancouver – 604 692 4890 – michelle. a. smith@marsh. com Marsh F: GraphicsClientORIMS200770101 VM. ppt 17

Disclaimer The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy. It should be understood to be general risk management and insurance information only. Marsh makes no representations or warranties, expressed or implied, concerning the financial condition, solvency, or application of policy wordings of insurers or reinsurers. The information contained in this presentation provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation, and should not be relied upon as such. Statements concerning tax and/or legal matters should be understood to be general observations based solely on our experience as risk consultants and insurance brokers and should not be relied upon as tax and/or legal advice, which we are not authorized to provide. Insureds should consult their own qualified insurance, tax and/or legal advisors regarding specific risk management and insurance coverage issues. Marsh is part of the family of MMC companies, including Kroll, Guy Carpenter, Putnam Investments, Mercer Human Resource Consulting (including Mercer Health & Benefits, Mercer HR Services, Mercer Investment Consulting, and Mercer Global Investments), and Mercer specialty consulting businesses (including Mercer Management Consulting, Mercer Oliver Wyman, Mercer Delta Organizational Consulting, NERA Economic Consulting, and Lippincott Mercer). This document or any portion of the information it contains may not be copied or reproduced in any form without the permission of Marsh Canada Limited, except that clients of any of the companies of MMC need not obtain such permission when using this report for their internal purposes, so long as this page is included with all such copies or reproductions. Copyright 2007 Marsh Canada Limited. All rights reserved. Marsh F: GraphicsClientORIMS200770101 VM. ppt 18

Thank You Marsh F: GraphicsClientORIMS200770101 VM. ppt 19