CNLA - ALTERNATIVE RISK FINANCINGIntroduction of Concepts of Group Risk FinancingJULY 10, 2012

Trevor Mapplebeck & Lyne Erwin

2MARSH

Agenda

• Background of CNLA HortProtect Program & Marsh– Program participation and performance– Risk Profile

• Group Funded Deductible– Goals of risk sharing– Structure– How claims are paid– Risk Management Benefits

• Next Steps

• Success Story from CURIE (Canadian University Reciprocal)– Presented by Keith Shakespeare

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Background

• CNLA tendered the insurance broker services in summer of 2010

• Marsh appointed September 15, 2010

• Newly sponsored program exclusive to members launched October 15, 2010 with RSA– Member of CNLA and in good standing– Duly completed application in order to obtain quotation– Overview of current best practices including contracts– Claims details – Snow removal up to 40% of overall revenue

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Program Overview

• 101 members participating in the program for a total written premium of $1,382,301

• Membership breakdown– 91 members less than $25,000 in annual premium (small)– 5 members between $25,001 and $50,000 in annual premium (medium)– 5 members over $50,001 in annual premium (large)

• Breakdown by line of business Property $ 615,047 Liability $ 173,119 Automobile $594,135

• Incurred losses by line of business– 5 slip & falls $38,180 = 22% loss ratio– 5 property (theft, water damage, windstorm damage) $49,479 = 8% loss ratio– 11 auto (collision and third party liability) $160,083 = 29% loss ratio

• Total incurred losses $247,743 for an overall loss ratio of 18%

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Why Share Risk?

• Recognition of superior risk profile

• Long term control

• Better insulation from cyclical marketplace/hardening market

• Premium savings of higher retentions used to finance group fund (Member’s losses determine premium within the fund)

• Efficient/high-quality service from independent service providers

• Return of profits/investment income potential

• Cost of excess liability reduced with volume purchase

• Quality membership selection – minimum risk management standard to gain entry

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Goals for Risk Sharing

• Develop critical mass to generate economies of scale

• Ensure ongoing best practices in terms of safety, compliance and risk management– Accountability within the risk sharing pool

• Develop a loss pool– Capitalize for expected and unexpected losses – Centralize loss control and claims data to evaluate loss pool –

anonymous when shared – Create risk management education/awareness programs– Develop capital base to evaluate more formalized alternative risk

financing programs (captive, reciprocal, mutual)– Dividends back to members based on their pro rata share of profits from

positive results of group fund

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Key Considerations

• Long term commitment

• Management of claims

• Governance/oversight of the Fund– Committee or full participation

• Set up costs – analysis and implementation

• Operating costs

• Insurance premium related costs

• Risk of adverse underwriting results

• Capitalization requirements

• Potential Letter of Credit requirements

• Risk transfer program excess of Group Fund will be marketed with the main program for Members not participating in the Group Fund

• This will ensure benefit of the group insurance program for Members choosing not to participate is not lost on the creation of the Group Fund

• Fund can remain open to Members who see future value in the Group Fund

For Members not participating in a Group Funded program

For Members participating in a Group Funded program

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Group funded deductible – first stage of risk sharing

• Each member carries a “working layer” deductible

• Losses above deductible are paid out of a risk pool that is shared by all members– Premiums are based on risk and exposure– All members pay for losses of one another– Avoid trading dollars with insurers for predictable losses– Control over management of claims within the Group deductible– Investment income potential on funds not required for claims

• Group fund financial risk is capped

• Excess insurance needs are marketed as a group– All members marketed as a group - lower overall premium paid– Develop critical mass to generate economies of scale

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Risk share through Group Funded Deductible - example

IndividualExcess cover

$ 1M

$100K

$5K

Group Risk Transfer to insurer for minimum common requirements

Individual Member Deductible(each Member)

Group funded deductible Excess of Individual

deductible Group deductible aggregate (stop loss)

$ XXM

Maximum group exposure to ensure

Group is not exposed to more than the

Group risk appetite

$250K

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How claims are paid in group funded deductiblePremium savings by taking group deductible used to capitalize the fund

Paid by Insurer

Paid by Fund and funded by OLA Group Member

$

Amountof Claim

Each Loss/Claim

Group

Deductible

Individual

Member Deductible

Paid by Insured (Group Member)

Stop Loss (Each Loss / Loss Aggregate)

Insurance Payout Subject to Insurance Policy Limit (per claim & annual)

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There are various fund structure alternatives which vary in terms of relative cost and regulatory complexity

Co

st

Regulatory requirements

Federal licensed ReciprocalInsurance Exchange

Federal licensedinsurance company

Ontario licensed ReciprocalInsurance Exchange

Ontario licensedinsurance company/mutual

Captive insurance company

Self administered Loss Fund /

Group Funded Deductible

Low High

High • Licensed insurance companies and reciprocals carry significant regulatory and reporting requirements – Minimum capital requirements– Annual financial filings– Committee reports (audit, etc.)– Actuarial reports

• These additional requirements and complexities result in higher operating costs– Licensed insurance companies can cost

several hundred thousand dollars to operate annually

• Captive insurance companies (“captives”) require feasibility costs ($35K - $50K), implementation costs ($25 K-$30 K) as well as annual operating costs (~$100 K), but have relatively low regulatory requirements, especially if incorporated offshore

• Self-administered loss funds have the lowest operating cost of any alternative structure ($20 K-$50 K) and have little regulatory requirements outside of income reporting for tax purposes

Relative program comparison

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Each alternative program structure addresses growers needs differently

Self-administered

loss fund

Captive insurance company

Reciprocal insurance exchange

Licensed insurance company

Regulated entity, licensed under a regulatory body

Extensive, detailed documentation (financial reports, actuarial reports, etc.)

Need to hire and maintain own staff

Freedom of operation (Offerings/coverage, limits, premiums, capital levels, etc.)

Set up and operating costs (focus member contributions on loss funding)

Lean operational structure

Responsiveness of fund to losses (timeliness of loss payments)

Fund solvency requirements

Member “premiums” are tax deductible

Relative program comparison

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Risk Management Benefits

1. Flexibility in program design

2. Broader and simpler insurance contracts

3. Captive funding operational expenditures geared to risk improvement

4. Advanced premium allocation

5. Control of risk management (i.e. loss control)

6. Deductible buy-downs

7. Bargaining strength

8. Coverage for uninsurable risks

9. Less dependence on commercial insurers

10. Segregation of funds

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Evolution for risk sharing – Next Steps

• Comfort with sharing risk with other companies– Minimum risk management, safety, compliance standards– Cultural/philosophical business management meeting of the minds– Appetite to retain risk– Captive advantages – greater than 10 Members can potentially create additional benefit

• Creates– Long term control– Better insulation from cyclical marketplace/hardening market– Member’s losses determine premium – Return of profits/investment income potential– Cost of excess liability reduced with volume purchase– Quality membership selection – minimum risk management standard to gain entry

• Group funded deductible is the least costly and administratively time consuming alternative risk finance option to develop and manage but can serve as a proof of concept for risk sharing before evolving to a captive insurance company

• The answer to that is would need to approach the markets with the potential structure and determine if the combined premiums from the group fund and transfer are achievable to be no greater than the current cost structure.

• Next steps is to determine if a committee of growers works with Marsh to evaluate the option, and/or if all prospective interested members participate in a follow on meeting to get more into the details.– Obtain copies of policies– Claims experience– Premiums

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