Cunningham

Document Sample
Cunningham Powered By Docstoc
					              Finite Insurance: Limiting
                  Transactional Risk
                      World Services Group
                          May 7, 2004

                              presented by:
                           Todd Cunningham
ADVANCING
               Assistant Vice President, AIG Risk Finance
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
                             Agenda

              • Introduction
              • Alternative Risk Financing Techniques
                – Loss Portfolio Transfers
                – Structured Insurance Solutions
              • Scenarios


ADVANCING
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
                            Current Situation

              • Insurance Market
                 –   Higher retention levels
                 –   Loss of certain key coverages
                 –   Layers with rates on line of 20% or more
                 –   Single-year basis only
              • Industries Impacted
                 –   Healthcare
                 –   Construction
                 –   Financial Services
ADVANCING
CORPORATE        –   Manufacturing
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
              Alternative Risk Financing Techniques

              • Retrospective Exposures
                 – Loss Portfolio Transfers
                    • Primary casualty liabilities
                    • Exotic liabilities (asbestos, product liability)
                    • Captive run-off
              • Prospective Exposures
                 – Finite Products - structured insurance solutions
                 – Structured Hedging
                    • Structured derivative and insurance transactions
                    • Financial risks
ADVANCING
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
                 Loss Portfolio Transfers

              • The assumption of liabilities, typically developed
                over a substantial period of time (retrospective
                exposures)
              • May cap potentially devastating balance sheet
                exposures related to prior events
              • May create a more stable financial environment for
                the companies involved
              • Also known as a “liability buyout”

ADVANCING
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
                 Loss Portfolio Transfers
                               - Benefits -


              • Eliminate operational obstacles, advance growth
              • Address volatility of accrued liabilities by
                transferring risks to an insurer
              • Diminish negative impact to future profits
              • Release security behind existing insurance
              • May accelerate tax deduction of the liabilities
              • Manage cash flow with premium finance
              • Facilitate merger, acquisition, or divestiture
ADVANCING
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
                   Loss Portfolio Transfers
                                - Typical Risks -

              •   Medical malpractice & hospital professional liabilities
              •   Warranty liabilities
              •   Merger & Acquisition-related risks
              •   Asbestos and occupational disease liabilities
              •   Primary retentions of WC, GL, AL
              •   Captive insurance companies
              •   Public entity-related liabilities
              •   Intellectual property (patent, copyright infringement)
ADVANCING
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
                Loss Portfolio Transfers
                                   - Pricing -

              • Assumes future liability to an aggregate limit
                 –   Reserve estimate (to ultimate losses)
                 –   Payout pattern
                 –   Discount @ Treasury strip rates
                 –   Insurer profit margin
                 –   Claims handling costs
                 –   Intermediary compensation




ADVANCING
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
                  Loss Portfolio Transfer

                 ABC Inc.                            Insurance Co.


                                                   Assumes future
              Self Insured    Premium $50MM        liab. to agg. limit
              W.C. Reserves                        Pricing Developed:
                                                          •Reserve Est.
                 $55MM
                                                          •Payout Profile
                                                          •Discount
                                                          •Claims
                              Policy Limit $75MM            Handling



ADVANCING
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
                 Loss Portfolio Transfers

              • Facts
                 –   Client - Self insured years 1996 - 2002
                 –   Accrued Liability - $55 million
                 –   Deferred Tax Asset - $18.7 million
                 –   Net Loss - $36.3 million
              • Solution
                 – Policy Limit - $75 million
                 – Premium- $50 million
                 – Tax benefit- $17 million
              • Benefit
ADVANCING        – $3.3 million in net cash
CORPORATE        – $20 million in additional insurance protection
 STRATEGY
                     • (to cover under-valuation of accrued liability)
 THROUGH
ALTERNATIVE
SOLUTIONS
              Structured Insurance Solutions

              • Insurance solutions which often combine
                insurance and capital market techniques
              • May contain:
                 – a component of funding by client,
                 – structured policy limits, and
                 – a provision for insured to benefit from favorable loss
                   experience
              • Highly customized programs to protect insureds
                from financial, strategic or operational risks
ADVANCING
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
              Structured Insurance Solutions
                              - Characteristics -

              • Multi year policy term
              • Customized limits of liability
              • Potential for sharing of favorable loss experience
                (experience accounts)
              • Coverage for uninsurable or difficult to insure risks
              • Customized structures



ADVANCING
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
              Structured Insurance Solutions
                                       - Risks -

              • Difficult to insure risks
                  – Construction defects - Medical/hospital professional
                  – Product liability       - Casualty and property
                  – Financial lines       - Residual Value
              • Capacity constrained risks
                  – Product recall, patent infringement, trade credit
              • Perceived „mispriced” risks
              • Capital Market-based exposures
              • Unique risks
ADVANCING
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
              Structured Insurance Solutions
                                        - Benefits -

              • Quantify maximum losses for a period of time
              • Lock in multi-year pricing (insulate market fluctuations)
              • Address volatility of potential liabilities that affect balance
                sheet
              • Stabilize cash flows
              • Maximize tax efficiencies
              • Benefit financially from favorable loss experience
              • Provide evidence of insurance coverage
              • Facilitate an underlying transaction

ADVANCING
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
                Structured Insurance Solutions
                           - Components -



              15 M
                                                 Risk Transfer



                                                Accumulated Interest



              20 M                              Accumulated Premium



                                                 Accumulated
                                               Experience Balance

ADVANCING
CORPORATE                                            S.I.R.
 STRATEGY
 THROUGH             5M   Yr 1   Yr 2   Yr 3
ALTERNATIVE
SOLUTIONS
              Structured Insurance Solutions
                             - Underwriting Criteria -


              •   Identify client objectives/motivation
              •   Conduct preliminary risk assessment
              •   Develop underwriting data
              •   Preliminary cash analysis
              •   Establish timing objective




ADVANCING
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
                  Structured Insurance Solutions
                              - Pricing Considerations -


              •   Analysis of risk
              •   Loss payout profile
              •   PV costs at current market interest rates
              •   Risk Premium
              •   Profit and administration
              •   Applicable premium taxes
              •   Term
              •   Administration costs

ADVANCING
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
                                       Client Profile
                 Difficult-to-insure, long-tail exposures
                      Medical Malpractice                 Patent Infringement
                      Financial Lines (E&O, D&O)          Trade Credit & Political Risk
                      Casualty                            Property
                      Warranty                            Product Liability

                 Liquidity
                      Sufficient liquidity to address the issue
                      Minimum target premium of $5M
                 Structured solution desired
                      Wants a solution reflective of a specific risk profile
                      Leveraged risk transfer is not the primary motivation
                 Loss data available
                      Has a risk that can be sufficiently analyzed and priced

ADVANCING        Evidence of insurance required
CORPORATE
 STRATEGY
                 Senior decision maker involved
                      Senior decision maker seeking to resolve a material problem in a
 THROUGH
                       defined time-frame
ALTERNATIVE
SOLUTIONS
                                    Scenarios

              • Construction
                 – Construction Defect
              • Healthcare
                 – Managed Care E&O
              • Manufacturing
                 – Product Recall
              • Technology
                 – Shock Loss Protection
              • Other
ADVANCING        – Captive Purchase
CORPORATE
                 – Asbestos Liability
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
                      Construction Defect Risk

                          Situation                                       Solution
               A publicly traded U.S. homebuilder selling       A five-year GL insurance program
               over 2,500 homes annually, averaging             with limits of $5,000,000 per
               $300,000 each, had received a number of
Construction   GL quotes which were expensive given its
                                                                occurrence excess a $500,000 per
                                                                occurrence retention. Aggregate
               good loss history. The market was                policy limits are $10,000,000.
               demonstrating concern for the                    Policy Premium is $7,500,000.
               construction defect exposure in many of
               the states in which the client builds.




                                                     Benefits
               • Policy form modeled after standard ISO General Liability Policy as required by
                 insured.
  ADVANCING
               • Client is able to insulate itself form vagaries of current insurance market cycle.
 CORPORATE
               • Tax efficient solution.
  STRATEGY
  THROUGH
 ALTERNATIVE                                                                                          1
  SOLUTIONS
                             Managed Care E&O

                      Situation                                       Solution
              A regional HMO was seeking alternatives             The three-year policy
              to the traditional insurance market, citing         limits are $40,000,000
Healthcare    an increase in renewal rates. The client            per claim with a
              was interested in an insurance program in           $55,000,000 policy
              which they could benefit from their                 period aggregate.
              positive loss performance while cutting
              back on current insurance costs. Client
              also has to show evidence of insurance.




                                                    Benefits
              • Provided multiple-year coverage.
              • Transaction provides client with a tax-efficient structured insurance solution.
ADVANCING
              • Program enables client to satisfy its certificate of insurance requirement.
CORPORATE
 STRATEGY
 THROUGH
ALTERNATIVE
SOLUTIONS
                                 Product Recall

                          Situation                                   Solution

                 An auto parts manufacturer                  An insurance program
                 faced large volatility in                   covering product recall,
Manufacturing    earnings per share due to its               product extortion and
                 product recall exposure.                    warranty exposures over a
                                                             multi-year term.




                                                  Benefits
                • Allowed insured to fund the cost of recalls over several years.
                • Transferred volatility risk.
 ADVANCING
 CORPORATE
                • Tax efficient solution.
  STRATEGY      • Provided coverage that was otherwise unavailable in the market.
  THROUGH
ALTERNATIVE
 SOLUTIONS
                           Shock Loss Protection

                          Situation                                    Solution
                 A software company may                      An insurance policy that
Technology       have substantial exposures                  provided protection against
                 to future litigation for                    multiple perils that had the
                 copyright infringement.                     potential to adversely affect
                                                             earnings. The policy provided
                                                             this protection for 10 years.




                                                     Benefits
              • Potential to minimize exposure to copyright infringement lawsuits over the
                long term.
              • Client initially retains claims control, which enables it to defend claims in the
 ADVANCING
                manner it deems appropriate.
 CORPORATE
 STRATEGY     • A tax efficient structure.
 THROUGH      • Substantial policy limits that were otherwise unavailable.
ALTERNATIVE
 SOLUTIONS
                                  Captive Purchase

                       Situation                                            Solution
                  A UK entity inherited a                      Three Steps:
Other             redundant reinsurance captive                   • A sale of the captive to an unrelated
                  through a recent M&A                              3rd party.
                  transaction.
                                                                  • A buyout of the insurable risks in the
                  Management wished to shut it                      captive.
                  down in the most tax effective
                  manner.                                         • A closeout of the captive by the
                                                                    unrelated 3rd party.




                                                      Benefits
              • By arranging the purchase of the outstanding shares of the captive, it was completely
ADVANCING
                removed from the client‟s balance sheet.
CORPORATE     • Client was able to record its gain on its investment in the captive.
 STRATEGY     • Client fully transferred all potential future liabilities from the captive (through the 3rd
 THROUGH        party) to the insurer.
ALTERNATIVE
SOLUTIONS
                                    Asbestos Liability

                         Situation                                          Solution
              Client faced claims resulting from the           Solution enabled client to fund periodic
              past use of asbestos in its products.            uninsured or underinsured portions of
 Other        Uncertainty about this liability increased       their existing insurance, as well as a
              on the bankruptcy filing of another              significant limit to cover liability that
              asbestos defendant.                              might exceed the existing coverage.
              Client was forced to make a reasonable           If cumulative paid claims exceeded a
              estimate of the portion of its ultimate          fixed sum, insurer provided a significant
              liability not covered by their existing          amount of risk transfer.
              insurance.



                                                           Benefits
               • Covered claims paid for the next 50 years, or until the limit of liability is
                 exhausted, or policy is commuted.
ADVANCING      • Provided annual policy limits that reimbursed client for paid claims not covered
CORPORATE
                 by existing insurance.
               • Ring-fenced the material liability and potential source of future earnings volatility.
 STRATEGY
               • Share in favorable loss experience.
 THROUGH
ALTERNATIVE
SOLUTIONS
                                        Disclaimer

              This presentation is for illustrative purposes only and should not be
              construed as an attempt to define any of the terms and conditions
              regarding a possible issuance of coverage. Clients are advised to make an
              independent review and reach their own conclusions regarding the
              economic benefits and risks of any proposed transaction, as well as the
              legal, regulatory, credit, tax and accounting aspects of a transaction as it
              relates to their particular circumstances. This presentation does not
              constitute an offer to sell coverage of the type generally described herein.
              Insurance provided by member companies of American International
              Group, Inc.



ADVANCING
CORPORATE
 STRATEGY
 THROUGH
                                                                               08/2003
ALTERNATIVE
SOLUTIONS

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:4
posted:10/12/2011
language:English
pages:26