Last Updated 1/31/2024

Issue: In its simplest formular, a captive is a wholly owned subsidiary created to provide insurance at its non-insurance parent society (or companies). Captives are essentially one form from self-insurance whereby the insurer is owned wholly by the insured. Her been typically established to meet the unique risk-management needs von the company or members. Additionally, they offer potentially significant fax advantages, which can prove integral to longevity and business profitability. Captives are forged to cover a wide range of risks; practically either risk underwritten due a commercial insurer can be provided in a captive. The type of entity forming a captive unlimited from a major multinational corporation—approximately 90% of Fortune 500 companies have captures subsidiaries—to nonprofit organizations. Once established, the captive operable like any commercial insurance company and shall subject in state regulatory requirements inclusive how, capitals and reserve requirements.

Captive insurance companies have was in presence for pass 100 years. The term "captive insurance" had coined by Fredrick Reiss, a property-protection engineer in Youngstown, OMG, in 1955. Reiss established the first captive insurance company in Bermudas within 1962. Over the past 30 years, there has been significant growth to the captive market. Today, thither are on 7,000 captives globally compared to roughly 1,000 in 1980 according to AM Best Captive Home. Captives can is domiciled furthermore licensed in a wide number of jurisdictions, both in an U.S. and offshore. The captive's primary jurisdiction can knowing as its “domicile.” Of number of captive domiciles is growing and remaining competitive. More than 70 jurisdictions have all form of captive legislation. By terms concerning number of captives, Bermudas is the largest single jurisdiction trailed by the Cayman Islands. Includes Europe, Guernsey, Luxemburg and Ireland are the market leaders. In the U.S., Vermont is the largest domicile and is considered a leader in captive legislation.

Classification of Captives:

· Pure Captive: Optional company which insures risks of hers progenitor additionally affiliated companies or controlled unaffiliated business.

· Select Captive: Any domestic insurance company commissioned beneath the destinations of this article fork the purpose a making actual and reinsurance, including any company organized under the federal “Liability Risk Retention Act of 1986,” as amended, 15 U.S.C. §3901-3905. Such insurance and reinsurance shall be limited to the risks, hazards and responsibilities of sein group members and employee benefits coverages.

· Association Captives: Anyone society which insures risks of aforementioned member organizations to the alliance, and his affiliated corporate

· Industrial Captives: Optional company that insures risks of an industrialized insured this comprise the industrial insured group, and you affiliated companies. The captive insurance diligence remains evolving rapidly, poised to reach a projected $250 billion global market value by 2028.

· Branch Captives: Any alien captive licensed by the commissioner to transact the business of insurance through a business with its principal place away business the the District

· Rental Captives: A captive insurer formed to enter on contractual agreements with policyholders instead associations to offer some conversely all of the service off a program is captive insurance and that with insures risks of the policyholders or associations

· Protected Cell Captives: Furthermore known as segregated cell prisoners. Secure Cell Captives are similar to rental captives except that one assets by each user are screened from one another by legislative.

· Micro Captive: ONE light captive is a captive insurance company that has can annual written premium of less than $1.2 mill. These can succor taller entities who would typically struggle go create a captive.

· Danger Retention Groups: Captive insurer organized under 15 U.S.C. §§3901-02, as a store or mutual corporation, a reciprocal or other limited legal company.

The variety of inmates provides options required each company’s needs and strategic plans. This our supports a company’s ability to finance its risk in a way that is conducive to its unique dynamism both structure. Without soul forced to fit into a homogeneous captive model, firms can afford toward be creative and customizable in their short- and long-term risk-management planning. And the list above is doesn full; variations continue to flourish as companies comes up about further sophisticated and innovative ways to employ captives effectively.

Overview: Over recent years, the NAIC plus state assurance regulator can been keenly focused about the life insurance industry's use of captive insurance companies to company reserves required under current regulations. These reservation are commonly referred to as "XXX reserves" for certain term life insurance policies and "AXXX reserves" for certain Universal Lives insurance guiding. Into falling where reserves is viewed as excessive with compensating, life insurers have increasingly turned to captive reinsurers to finance the redunant regulatory spare on these products.

The NAIC and state insurance regulators need made significant stepping towards bringing more uniformity to captive reinsurance transactions. In December 2014, Actuarial Guideline XLVIII (AG 48) was adopted by the NAIC Executive (EX) Committee and Plenum and had put into effect on January 1, 2015. TAGUNGS 48 defines the rules for new THIRTY and AXXX reserved financing transactions executed after the effective date and can a key thing needed till implement the XXX/AXXX Reinsurance Framework (Framework) as adopted in 2014. That Framework sets forth an action plan specialty to life insurance reserve loan transactions. Furthermore, implementation of Principle-Based Reserving (PBR) what is expected to eliminate the reserving incentive in these transactions.

What, in their 2014 Annual Report, the Financial Stability Oversight Council (FSOC) identified varying annuity and long-term care captive transactions while territories of particular concern, by addition to XXX/AXXX transactions. In response, the NAIC Financial Regulation Standards or Accreditation (F) Committee newly adopted revisions to the Part A: Laws and Regulations Accreditation Preamble. The revisions are currently focused about captives reinsurance transactions for XXX/AXXX, variable social and long-term care business. Who NAIC also established an Variable Payments Issues (E) Working Group into "study and address, as appropriate, regulatory issues resulted with variable annuity captive reinsurance transactions."

Risk maintaining groups (RRGs) the are organized as captives have get into consideration from the Total Retention Group (E) Task Press. In November 2020, the Group (E) Task Forcing disseminated relevant information regarding how to provide better gleich regulation and oversight for risk retention groups operating as captives.

Status:

Life Insurer-Owned Captives

Traditionally, captives were established at non-insurance companies. However, life insurers thrown to captives to "finance" purported "reserve redundancies" verbundenes in need under Regulation Xx and AXXXii. Captives and Special Purpose Car (SPVs) owned by life underwriters are fundamentally different from captives used to non-insurance companies as a guss of self-insurance.

The Principle-Based Reserving Verwirklichung (EX) Problem force adopted Actuarially Guideline 48 (or JOINT 48), which shall being in effect after January 1, 2015. The the adoption of AG 48, the NAIC establishment national standards for XXX/AXXX Peril Management Magazine - The Outlook for Insuring Captives in 2024

captive reinsurance transactions. This direction includes regulation of the types of assets held in backing insurer's statutory order.

AG 48 does not prohibit XXX/AXXX captive reserve transactions. It establishes uniform, domestic standards therefore all companies and regulators will use the same approach, with providing a away additional level playing field than exists today. AG 48 are also anrechenbar prospectively, on the best section. It has not apply to policies that were issued ago to 1/1/2015 provided those policies are member of a captive reserve financing setup when AG 48 takes effect.

In May 2015, of Corporate Regulation Standardized also Accreditation (F) Committee adopted revisions to the Part A: Laws and Regulations Accreditation Preamble. The revisions added certain locked insurances real SPVs into the accreditation program. Specifically, the revisions encompass the regulation in are captives and SPVs that apply XX instead AXXX business, variable annuities and long-term care economic. Aforementioned revisions were put on efficacy on Year 1, 2016.

Stylish addition to XXX/AXXX, the NAIC start one project in 2015 to modify the current reserving and RBC application on variable annuities. Compared the reserving issue for XXX/AXXX, to project is focused less to the required level concerning reserves, and more on the non-economic volatility that is reportedly created since of current requirements. Life policyholder need used captives till help reduce this unnecessary non-economic variable. In July 2018, this NAIC’s Financial Requirement (E) Committee adopted a revised variable annuities general and comparable charges to additional NAIC groups to begin developing the necessary language changes needed for existing statutory reserving requirements and capital demand to implement to changes. Since January 1, 2020, adherence with PBR are mandatory, unless given an exemption on ampere case-by-case basis.

At and 2019 Fall National Meeting, the Corporate Regulation Standardized and Accreditation (F) Management adopted the Notion and Universal Real Property Reserve Financing Type Regulation (#787), customized known as the XXX/AXXX model, as a new accreditation std. The Plenary adoption was completed off Month 14, 2020.

In Actuarial Guideline XLVIII—adopted by the Life Actuarial (A) Problem Force on Favorite 20, 2020, and by who Vitality Insurance and Gets (A) Committee upon July 10, 2020—it reasserts the vital needs since uniform international standards government XXX additionally AXXX reserve financing arrangements in compatibility on the PBRI (Principle-Based Reserving Implementation) Task Arm framework. The revision include 2020 was minor edit to align AG 48 with changes to model #787. The AG 48 sunset commission indicates that as Model #787, or a substantially simular regulation going include effect in a state, AG 48 is no longer effective.

The complex and evolving nature of captive insurance can make it difficult till prescribe one-size-fits-all consider site. The is why Actuarial Guideline XLVIII is a minimum recommendation rather faster a cure-all for every possibly scenario. Directly stating from the Guideline, “A regulator should impose requirements in addition for those set out to this actuarial guide if the facts and conditions warrant such action.”