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The

Captive Insurance J O U R N A L

1st Quarter 2012

I N

T H I S

I S S U E

Page 2 President’s Message

Page 3-4 Committee Updates: Membership Committee Marketing Committee Education Committee Government Relations Committee

Page 6 Director’s Message: Material Weakness – Communications

Page 7 Director’s Message

Page 8 SCCIA Member Spotlight: Babcock & Wilcox, Creole Insurance

Page 9 2012 Conference Information

Chairman’s Report Mark your calendars for September 17–19, 2012 at Charleston Place Hotel. Details can be found at www.sccia.org and throughout this publication. — Robert L. Johnson Chairman of the Board 2012 SCCIA It is hard to believe that we are almost at the end of the first quarter of 2012. But with that in mind, your board and SCCIA committees have been hard at work conducting business on behalf of membership. Most activity at the moment is focused on the Education Committee as they plan for the SCCIA Annual Education Conference. Mark your calendars for September 17 – 19, 2012 at Charleston Place Hotel. Details can be found at www.sccia.org and throughout this publication. I would like to welcome our newest SCCIA board members who wasted no time getting to work. Mike Coulter of Aon Insurance Managers (USA), Margie Heggie of SC Physician Assurance Co./SCMA and Chris Stormer, Bauknight Pietras & Stormer, joined the board effective January 1, 2012 and participated in their first board meeting in Columbia, SC on March 5, 2012. Mike has been a staple in the captive management community in South Carolina for many years as has Chris as a partner with one of our in-state audit firms. Margie is a captive owner, having formed their captive in 2008. Each has already made valuable contributions by way of time, experience and guidance and I am impressed by the depth displayed by our board this year.

Much appreciation to our departing board members from 2011, Jay Seibels of The Seibels Law Firm, P.A. and Rob Schmid of Energy Insurance Services. These gentlemen showed great passion and resourcefulness to the mission of the board and the SCCIA appreciates their respective contributions. I would also like to thank Ann West for her service over the years but specifically as our 2011 Chairman of the Board. Ann was a great leader and worked tirelessly to make the domicile a better place for all members to conduct business and network. While we miss her at the board meetings, we still have her valuable insight on the CIPAC board. In closing, we received sad news this week with the loss of a member of our captive family. Rebecca “Becky” Di Pietro, Wilmington Trust, passed away on March 17, 2012. A tribute to Becky follows in this publication but with personal reflection, I never met Becky when we did not share a hug, a laugh and a smile. She was a dedicated professional and a gracious person. Her memory leaves us with a smile a bright as her own.


The Captive Insurance Journal First Quarter, 2012

President’s

Message this journal, in addition to being on our website. We are excited about having a great lineup of speakers to bring you the latest information on the captive industry in SC. Be sure to take advantage of the sponsorship opportunities and the Super Early Bird Registration, both available online.

Managing Editor Laura Stuckey Design/Graphics Florence Design, Inc. Editorial and Advertising Office PO Box 1763 Columbia, SC 29202 855-CAPTIVE

All of our SCCIA committees are hard at work recruiting members, marketing the SCCIA and SC as a domicile at other events throughout the United States, and making sure we have the best here at home. The SCCIA has representation within the state legislature to keep us informed of any events.

SOUTH CAROLINA CAPTIVE INSURANCE ASSOCIATION 2012 DIRECTORS & OFFICERS Chairman of the Board Robert L. Johnson Marsh Management Services, Inc. President Thomas A. Brumgardt Nelson Mullins Riley & Scarborough, LLP Treasurer/Corporate Secretary Andrea Bartlett Bartlett Actuarial Group, Ltd. Directors Randy Collins Koppers Assurance, Inc. Michael Coulter Aon Insurance Managers (USA) Margie Heggie SC Physician Assurance Co. / SCMA Chris Stormer Bauknight Pietras & Stormer, PA Executive Director Laura Stuckey Š Copyright 2012 SC Captive Insurance Association

CIPAC also is doing a great job of making contributions on behalf of the organization. CIPAC is very appreciative of all contributions that help to make our name known to all legislators. As my first message to you as the SCCIA President, I want to thank each of you for your membership and support of the captive industry in SC. The SCCIA is dedicated to providing benefits to you as a member, and helping captives grow and succeed in South Carolina. Our organization has been tackling some new and exciting things within the last few months. The SCCIA Board has been meeting regularly to progress the state of captives. As we know education is an important part of membership, we have decided to have an Annual Conference Committee dedicated solely to the conference and also have an Education Committee to assist with other educational offerings throughout the year. The 13th Annual Executive Educational Conference information is located in 2

I hope you take the time to read through this journal as we have included new types of articles. We have a member spotlight / captive spotlight, updates from each of the committees, articles of interest from members and conference information. We hope you like the design and we always welcome your feedback.

Best regards,

T homas Thomas Brumgardt Partner, Nelson Mullins Riley Riley & Scarborough, LLP


The Captive Insurance Journal First Quarter, 2012

Committee Updates Membership The 2012 Membership Committee held its first meeting in early January. The committee reviewed the delinquent and new member reports and discussed ideas of how to boost membership in 2012. Members of the committee will be making phone calls to those that have yet to renew their membership and will also be reaching out to the newly licensed captives offering them the one year free membership. Also, new member gift baskets will be sent out as new members join the SCCIA. We look forward to a year of membership growth in the SCCIA.

Marketing Members: Arthur Salvadori (Chair) Jeff Kehler Linda Danna William Russell Phillip Padgett David Berry Chris Stormer, Board Liaison The Marketing Committee has been focused on several initiatives to help promote the South Carolina Captive Insurance Association (SCCIA) as well as the State of South Carolina as a premier captive insurance domicile. Your 2012 Marketing Committee is comprised of eight individuals all of whom have extensive captive insurance experience and operate within the South Carolina captive insurance arena. First and foremost, we have begun a process to make sure that we stay visible within the State of South Carolina. We have approached the South Carolina Economic Developers Association (SCEDA) for a potential meeting at one of their local economic developers or membership conferences. SCEDA is an organization involved in several initiatives promoting

the development of industries within the State of South Carolina. The Marketing Committee is also exploring opportunities with the State of South Carolina Department of Commerce. One of our 2012 goals is to also increase awareness of South Carolina as a captive insurance domicile outside the State of South Carolina. We have looked into the possibility of SCCIA sponsorship at several different non-domicile specific captive insurance conferences. SCCIA is a 2012 sponsor of the Captive Insurance Companies Association (CICA) International Conference. The Marketing Committee is currently evaluating SCCIA sponsorship opportunities at other captive conferences in 2012. The Marketing Committee has also taken on the responsibility of the quarterly publication of The Captive Insurance Journal beginning with this issue. As Marketing Committee Chair, I would personally like to take the opportunity to thank all the members of the Marketing Committee and Laura Stuckey for dedicating their time and efforts in coordinating the articles and other content that went into this quarter’s publication. The Marketing Committee is continuing to work towards acquiring content for future publications that will benefit the members and keep them informed of current events in the South Carolina captive community. If anyone has an idea for an article that they would like to submit, please feel free to contact me at asalvadori@slbcpa.com. Finally, the Marketing Committee has joined with the Education Committee to form a sub-committee dedicated to the promotion and marketing of this year’s SCCIA Conference. Linda Danna from the Marketing Committee and Bryan Hudson from the Education Committee have 3

volunteered to lead this initiative. Linda and Bryan have developed a comprehensive plan which involves not only the promotion of this year’s conference but also coordinates the distribution of pertinent SCCIA Conference information to the members such as key registration deadlines and topics for this year’s educational seminars.

Education Members: Gavin Foggon, Chair Ronnie Dennis Susan Hodson Bryon Hudson Ron Krebs Dan Kusaila Jeff Tkacz Charlie Wanner Mike Coulter, Board Liaison The SCCIA Education Committee has been hard at work, planning the 2012 SCCIA Annual Conference to be held September 17-19 at Charleston Place Hotel. This year, The Captive Academy will be a full day event on Monday September 17th. The faculty is comprised of seven active South Carolina providers who will be instructing the attendees on their specialty. The Captive Academy will cover a feasibility study, the formation of a captive, and the role of the actuary, auditor, captive manager, legal counsel, bank and investment adviser in the formation and the daily operation of a captive. This year the committee has been working with the South Carolina Association of Certified Professional Accountants (“SCACPA”) so that CPA’s based in South Carolina will be able to obtain continuing professional education credits for attending The Captive Academy. SCACPA has agreed to be a co-sponsor of The Captive Academy and continued on page 4


The Captive Insurance Journal First Quarter, 2012

Committee Updates continued from page 3

DONATE

NOW

As part of the SCCIA’s legislative efforts moving forward, CIPAC (Captive Insurance Political Action Committee) was formed in order to be collectively represented as an industry as it relates to legislative matters. For more information and Pledge Form go to our website www.sccia.org or contact the Association Office at 1-855-CAPTIVE.

Donate online at www.sccia.org.

the committee hopes that this will attract CPA’s based in South Carolina that would

Government Affairs

not otherwise attend The Captive Academy.

During the last week of December 2011, South Carolina’s Director of Insurance David Black resigned. Although Governor Nikki Haley has not yet named a permanent replacement for Director Black, Gwen McGriff is currently serving as the Acting Director.

For the Annual Conference, the committee is organizing sessions that will cover a variety of topics relating to Captives. This year, the sessions will include Employee Benefits, Loss Mitigation in the New Healthcare Environment, Corporate Governance, Strategic Reviews, Loss Portfolio Transfers, Novation and Commutation Agreements, Updates on Federal Tax and Dodd Frank Act, Insurance Market Update and Supply Chain Insurance. There will be time allocated for Roundtables and a Legislative Update will be offered to add further value for the attendees. Capitol Consultants, the SCCIA’s association management and governmental affairs firm, will be on hand to review how they have assisted the Association’s mission and what it means going forward. In addition to the educational sessions, we are working on having a number of speakers, including the keynote speaker, to add to the conference experience. Updates on the conference will be available on the SCCIA website. As detailed by Art in the Marketing Committee report, details of the conference will also be posted on various websites to promote this year’s event. We look forward to another informative and successful conference.

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South Carolina Director of Insurance

The SCCIA Government Affairs Committee has been in contact with Governor Haley’s office. The Committee and the SCCIA Board of Directors stressed to the Governor the importance of the captive insurance industry on the State’s economy and the need for a Director who understands captive insurance, supports growth of the industry in our State, and is willing to work with Department staff and other agencies within government to promote the captive industry. We look forward to working with the new Director in support of captives in South Carolina. Amendments to South Carolina Captive Insurance Law to be Proposed During 2013 Legislative Session Perhaps the biggest issue facing the Government Affairs Committee going into 2012 was the amendment of the South Carolina captive insurance statutes to, among other things, amend the section on sponsored captives (i.e. “protected cell captives”). Among the changes contemplated are eliminating the requirement that only an insurance company may be a sponsor and providing for incorporated cells.


The Captive Insurance Journal First Quarter, 2012

changes to the captive statutes to be introduced during the 2013 legislative session.

A Drafting Committee was formed consisting of Gwen McGriff of the South Carolina Department of Insurance; Tom Brumgardt, President of SCCIA; and Steve Dyer, Chair of the SCCIA Government Affairs Committee; and Annie Wilson of Capital Consultants, Inc. The Drafting Committee met and discussed proposed changes to the statute and a first draft of proposed revisions was drafted. Upon further consideration, the Drafting Committee and the SCCIA Board of Directors decided to include additional enhancements, some of which were suggested by the SC DOI.

The current economic climate has had a significant impact on the development of new captive companies in every domicile around the country. In the case of South Carolina, the domicile has also been operating without a Director. Some may view this as a reason to disregard South Carolina as a home for their captive company.

The Government Affairs Committee and the Board of Directors are continuing to refine a bill proposing more substantial

The truth is, the South Carolina Alternative Risk Transfer Division has continued to process applications and business plan

State of the Domicile

change requests with efficiency and dispatch. They have hit their mark of 30 days from application to licensing consistently with receipt of timely, complete applications. In one case, they responded to a last minute request and licensed a captive in 16 days from receipt of the application to issuance of a license. According to the SC DOI, they are busier now with new applications than they have been since 2007, and there are new prospects arriving. We as service providers, especially those of us who have seen first-hand the excellent results the Department is producing, need to continue to support and talk about the dedication of the Department and the benefits of South Carolina as a domicile.

Rememberance Rebecca Ann DiPietro (Becky to all of us) passed away March 17, 2012. Becky was one of the early pioneers of the captive industry in South Carolina having joined Aon as their first South Carolina captive management employee in November 2004. She worked with Aon over the next four years before leaving to take the leadership role at Wilmington Trust’s South Carolina office in July 2008. Over her career she worked with approximately 25 South Carolina – domiciled captives. Throughout her tenure, she could always be counted on to pitch-in and help the South Carolina Captive Insurance Association with whatever may be needed. Over the years, she served on the Association’s marketing and membership committees, participated in the 2007 Critical Issues Forum, and most recently was instrumental in arranging an interview with the risk manager of one of her largest captive clients for this issue of The Captive Insurance Journal. Becky could always be counted on to help. She will be greatly missed.

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The Captive Insurance Journal First Quarter, 2012

Material Weakness– Communications With the implementation of new risk assessment auditing standards in recent years, financial statement auditors have been required to gain a much greater understanding of the entity and its environment, including its internal controls, as part of their risk assessment during the planning stages of an audit engagement. Although auditors have always been required to gain an understanding of a client’s internal control, implementing the new standards has helped to identify internal control weaknesses over financial reporting that may not have otherwise been identified. Most control deficiencies have a common theme: lack of adequate communication. Below is a brief discussion of common deficiencies as well as best practices to implement to improve a captive insurance company’s internal controls.

Bryan Hudson

The objective of any company’s financial statements is to provide information about the company’s financial position, results of operations and performance that is useful to a wide range of users in making economic decisions. Captive insurance company financial statement users include management and the board of directors, stockholders, investors, reinsurers, and regulators, among others. Since these users rely so heavily on the financial statements to assess and monitor performance, it is imperative that the statements are relevant, reliable, and comparable. In order to ensure the financial statement reporting process produces relevant, reliable, and comparable financial statements, management must give ample attention to the internal control structure including the implementation of proper procedures and controls to minimize the risk of financial statement misstatement.

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Oftentimes, captive insurance companies outsource one or more of their business processes. A captive may outsource their management and accounting functions, underwriting, claims administration, investment management, and all captives engage an independent actuary to estimate loss reserves. With multiple parties involved, communication between these parties is essential to the premium and loss cycles which feed into financial reporting. Inadequate controls surrounding the flow of financial information between these parties can result in incomplete and/or inaccurate financial reporting. Premium Cycle Communications Within the premium cycle, the underwriting function may be outsourced to a third party. The third party underwriter will issue policies and endorsements as needed. On-going communication between management and the underwriter (third party or inhouse) is critical to ensuring that all premiums written are recorded and invoiced on a timely basis. Policies and endorsements should be numbered sequentially and a policy register should be maintained. Without a numeric accountability control process, issued policies and endorsements could go unrecorded and the oversight may not ever be discovered. The best practice is for management (accounting) to obtain policy records from the underwriter on a daily, weekly, or monthly basis; review the records for missing policy numbers and/or endorsements; and investigate any discrepancies. Management should implement processes to verify that policy records are complete and accurate to ensure that premiums written and


The Captive Insurance Journal First Quarter, 2012

In addition to the above, there is sometimes a lack of monitoring of related party companies. For example, a captive insurance company may use a related party as their managing general agent. Although most companies are very thorough with their monitoring of unrelated third party entities with which they conduct business, this is not always true of those activities with related parties. Many companies fail to properly or timely reconcile receivables and payables with related party entities. Unidentified or unresolved discrepancies between the reporting company and a related party oftentimes result in material misstatements to the financial statements. In many instances, captives fail to maintain proper oversight over related party entities performing outsourced services for the captive. For example, in the case of a managing general agent that underwrites, bills, and collects premiums for a captive, a captive may fail to maintain a supporting schedule of uncollected premiums receivable and corresponding reconciliation to its general ledger, relying instead on the related party managing general agent’s records without independent verification. Captives that transact business with related parties should ensure that proper reconciliation of intercompany balances occurs and that adequate oversight of the related party exists.

administrator with another party, such as a captive manager processing claims disbursements. Failure to reconcile paid losses as recorded on the reporting company’s general ledger to the loss data maintained by the third party claims administrator may result in unidentified discrepancies in the captive’s loss data which is ultimately submitted to the actuary to estimate loss reserves at yearend. In another instance, a captive’s risk management division may administer smaller, less complex claims in-house and outsource larger or more complex claims to a third party claims administrator,. Because of this structure, overlap may occur between the in-house loss runs and the third party administrator’s loss runs whereby a particular claim may be included in the loss data of two or more claims administrators. For example, a small claim handled in-house may ultimately become a much larger, complicated claim and handling may be transferred from the in-house administrator to the third party administrator but not removed from the in-house loss run. Such duplication of claims data can result in overstatement of paid losses and reserves on the financial statements. Best practices suggest that claims disbursements reflected in the general ledger be reconciled to the loss reports regardless of whether claims administration is outsourced or not, at a minimum at the end of each reporting period. Further, companies that use multiple claims administrators should ensure controls are in place to mitigate the risk of duplicate claims.

Claims Cycle Communications

Communication with the Actuary

More communication breakdowns may occur within the claims cycle. Claims may be managed by a third party claims

The independent actuary engaged by captive insurance companies rely on loss data provided by management, or

recorded in the captive’s general ledger represent all policy activity. Related Party Communications

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sometimes, provided directly by a third party claims administrator. It is essential that a captive insurance program’s insurance activities are fully communicated to the actuary including policy limits, loss data, existence of reinsurance contracts, etc. Also, any changes to reserving methodology, including changes in third party claims administrators, should be communicated to the actuary. The loss data provided to the actuary should be reconciled to the reporting entity’s general ledger. Further, management should perform a similar reconciliation between the general ledger and the actuarial information included in the actuarial report to ensure that the actuary has used loss information that agrees with the reporting entity’s financial statements. If the loss data provided to the actuary is inaccurate or incomplete, it could ultimately impact the accuracy and reliability of a captive’s reserve estimates. Because financial reporting relies so heavily on each of these functions, it is critical that captive insurance companies place an importance on communications between all parties involved in its business processes. Companies should evaluate their internal control framework to ensure that the best practices discussed above are properly implemented and working effectively. Failure to maintain an effective communications environment substantially increases the likelihood that financial data is incomplete or inaccurate, and the resulting financial reporting is unreliable. Financial statement users are unable to make sound decisions based on unreliable financial statements which can have severe consequences to the company.


The Captive Insurance Journal First Quarter, 2012

SCCIA Member

Spotlight

Babcock & Wilcox, Creole Insurance An Interview with Chris Ryan, Director of Risk Management Background of Babcock Babcock & Wilcox (B&W) formed in the late 1800s as a boiler manufacturer, and has since been a leader in the steam (generated) power industry. Shortly after the boiler patents were issued, B&W continued to move forward in the business, establishing itself in the forefront of power generation utilizing coal and steam.

Chris Ryan Director of Risk Management

“The team at the SC Department of Insurance is knowledgeable, and the experience of re-domestication was positive. The team in South Carolina has been extremely receptive and welcoming.”

Fast forward to the 1950s, B&W began researching and getting involved in nuclear power and nuclear research, including the Manhattan Project. The company continued to grow in the industry manufacturing parts for nuclear and steam generators. The nuclear expertise paved the way for establishing contracts with the federal government and other government facilities. Today B&W’s four business units provide quality fossil, environmental, commercial and government nuclear operations products and services. The future is bright at B&W. Formation of Captive In 1979, B&W was acquired by McDermott International, and while it operated autonomously, it became a part of a larger group. In the late 1970s McDermott formed captives in Bermuda; one of which was B&W risk specific. For B&W, workers compensation was the main driver for the formation of the captive and is where a majority of the Company’s premiums have been spent. The ability to manage their own claims and integrate the captive into their overall risk financing strategies has provided the Company with flexibility in their risk management and has helped

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to make the captive an asset to the Company. Recently, B&W was spun-off from McDermott International. With its new found independence and significant volume of business conducted with the US government, the Company decided to redomesticate its captive to an on-shore domicile. With a thirty year history in the captive insurance industry in Bermuda, and a captive insuring general liability, workers’ compensation and automobile liability, the Company knew exactly what they were looking for in an on-shore domicile. Why SC? Out of the states that were visited, all seemed to be similar from a cost perspective, but South Carolina was consistently at or near the top in all criteria that B&W was looking for and seemed especially enticing because of location. In summary, Chris said, “The team at the SC Department of Insurance is knowledgeable, and the experience of re-domestication was positive. The team in South Carolina has been extremely receptive and welcoming.” The South Carolina Captive Insurance Association welcomes Chris Ryan, Creole Insurance and Babcock & Wilcox. Special Thanks to Chris Ryan, Babcock & Wilcox; Rebecca DiPietro, Wilmington Trust; Chris Stormer, Bauknight & Pietras CPAs; and Jeff Kehler, SC Department of Insurance.


The Captive Insurance Journal First Quarter, 2012

13th Annual Executive Educational Conference September 17-19, 2012 Charleston Place Hotel South Carolina: Made

for Captives

This year’s conference continues the long tradition of enriching the knowledge of captive and alternative risk transfer professionals by presenting a cutting edge educational program. The Conference also offers the opportunity to network with like-minded industry professionals. Networking breaks, a hosted lunch, the golf tournament and other social events during the conference give you ample time to interact with your fellow professionals. Whether you are a seasoned veteran, new to the industry, a captive owner, a Risk Retention Group member, a captive Director, a service provider, or a risk management professional you will gain from attending the conference.

Keynote Speaker: Patrick Hickey, Climbing Your Own Everest: The Seven Summits of Your Life www.7summitsoflife.com

Confirmed Sessions: • The New Healthcare Environment: Your Insureds’ Success is Your Success! James W. Saxton, Esquire, Stevens & Lee • Loss Portfolio Transfers, Novation and Commutation Agreements Josh Partlow, CPA, Johnson Lambert and Co. • GETTING IT DONE – Employee Benefits in Captives (Panel) • Keeping Up With the Times: Our Contemporary Captive Charlie Woodman • A Guided Tour Through Advanced Taxation Thomas Jones, MBA, JD, Partner, McDermott Will & Emery, LLP; Daniel Kusaila, CPA, Tax Partner, Saslow Lufkin & Buggy, LLP; Gary Bowers, CPA, Tax Partner, Johnson Lambert & Co., LLP

Visit www.sccia.org to view the conference information and register online. Make your reservations now at Charleston Place Hotel. $259 room rate – mention SCCIA 1-800-831-3490 • www.charlestonplacehotel.com

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Palmetto Captive Journal  

1st Quarter 2012