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Our Insights from the Tennessee Captive Insurance Association’s 8th Annual Conference

Held on June 19th and 20th, 2018, the Tennessee Captive Insurance Association’s (TCIA) 8th Annual Conference brought together insurance professionals from around the country. The event was held at the Westin Hotel in Nashville, Tennessee. During the conference, insurance professionals shared information about the captive insurance industry, including past industry achievements and developments as well as trends for other professionals to expect in the future.

Chris Murray, President of Caitlin Morgan Insurance Services, had a chance to speak with event attendees at two educational sessions. Chris has been with Caitlin Morgan since 2006, and has many years of high-level experience in the insurance industry, including alternative risk financing. Here is a look at the topics he presented to attendees of the educational sessions.

Collateral for Insurance Captives

In the risk management field, collateral refers to financial assets that are set aside to ensure the satisfaction of a future liability. This is a form of security, and in the captive insurance world, collateral is commonly found in the form of a bank’s Letter of Credit (LOC) or in an insurance trust fund. Captive insurance firms typically provide this collateral to the insurance companies that have issued deductible policies to the firm’s insured parties.

When is collateral required?

Collateral may represent significant expenses; the amount of collateral required may greatly exceed other costs that the captive experiences, and as a cost-saving measure, many captives believe there is no real need to provide future risk losses financing through collateral, choosing instead to finance their own risks. The National Association of Insurance Commissioners (NAIC) has its own requirements as far as collateral is concerned. Admitted rated insurers must be able to show evidence that if they are not utilizing rated reinsurance, sufficient collateral has been secured to provide funding against future claims. NAIC accreditation may require that an LOC is in an amount 200% or more of maximum possible losses for the potential risks of an insured party.


The concept of Schedule F also plays a role in reinsurance. An insurer is required to file an annual insurance statement, part of which discloses reinsurance transactions. Regulators use this information to identify reinsurance arrangements and gives those regulators an indication of whether or not the insurer will be able to cover losses through reinsurance recoverables. According to regulations, insurers must be provided with approved collateral from reinsurers to take credit for reinsurance ceded to a non-admitted insurance carrier. Failure to satisfy this requirement may result in a “Schedule F penalty”, which can mean a significant statutory reduction in a reinsurance firm’s surplus balance.

Captives firms should be aware of several proposed changes to regulations, including the Credit for Reinsurance Model Law and the Credit for Reinsurance Model Regulation. These changes were proposed by the NAIC Reinsurance Task Force, and are being addressed to the collateral provisions of the Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance (Covered Agreement). Proposed revisions and changes include a proposal to eliminate reinsurance collateral requirements for qualified reinsurers having headquarters offices in an EU-member country or other non-US jurisdiction that is recognized by state insurance commissioners as a “Reciprocal Jurisdiction”. This proposal falls under revisions to the Credit for Reinsurance Models.

In the proposed revision, qualified reinsurers have specific requirements, including:

  • Maintenance of minimum capital and surplus not less than $250 million.
  • Maintenance of a minimum solvency or capital ratio – 100% of the Solvency Capital Requirement (SCR) or 300% of the authorized control level of Risk-Based Capital (RBC).
  • Notice of non-compliance to the state insurance commissioner when minimum capital and surplus requirements are not met.
  • Maintenance of practices ensuring prompt payment of reinsurance agreement claim payments.

Captive insurance firms are advised to pay close attention to this proposed revision, as it may significantly impact the company’s financials if adopted. Further details on the proposal may be found here.

Enterprise Risk Management and Captive Assets

In Chris’ presentation to the TCIA conference attendees, the concept of assets was addressed. Financial assets are a critical part of a captive insurance firm’s risk management strategy, and certain aspects should be considered. Chris presented four topics related to captive risk management and assets, including:

  • Market Dialogue – Protecting assets from loss is the core principle behind the formation of a captive insurance company. Businesses need this protection to ensure continued operation, even in the face of an expensive lawsuit, its legal fees and potential for settlement payments. Captive insurance, then, is a powerful risk management tool designed to shield assets while optimizing asset accumulation. There are also significant tax benefits; premiums are generally tax deductible business expenses and do not count as income. Finally, captive insurance companies have the benefit of deflecting spurious legal claims against a company.
  • Understanding Overall Risks – Enterprise risk management is defined as the process of planning, organizing and controlling the activities of a business or other organization to minimize risk exposures of that organization’s financial assets. Traditional insurers may not be adequate in protecting against unusual or unique risks; captive insurance serves as a solution to manage these highly specialized risks. Captives are also excellent at recovering the expenses associated with risk management practices, specifically by focusing on risk prevention and risk mitigation. Finally, captives tend to be more flexible and able to weather changing market conditions, economic ups and downs, and evolving risks a given company may face.
  • Asset Allocation – Because captive insurance companies provide coverage for diverse business types, asset allocation must also follow suit. Some companies may invest in loans to their parent organizations, while others may invest assets in equities, money market funds, and other investment vehicles. The goal of a captive insurance company is to manage risks in a cost-effective manner, and asset investment/allocation should be designed to support this philosophy. Those companies must also balance investment risks against the insurance risks it retains, and must remain flexible in its investment strategies to match the risk appetite of the company.
  • Evaluating Investment Managers – An investment manager may be a great solution in properly and adequately managing insurance assets. To evaluate the potential of an investment manager, it is critical to understand the manager’s investment philosophy, particularly in their rationale for undertaking security transactions and focus on investment strategies such as growth versus value. The process by which investment decisions are made is also paramount; there may be established practices in investment, and deviations from these practices may or may not have long-term benefits. A management firm’s prospectus can help illustrate the philosophy and process behind the firms’ investment practices. Finally, the longevity and experience of an investment management firm should be evaluated to determine overall stability and continuity of investment practices.

Final Words

Chris Murray provided a great level of detail to the attendees of the two educational sessions at the 8th Annual TCIA Conference. With his insights into asset management, collateral needs of captive agencies, and enterprise risk management, he was able to share valuable details to help propel the captive industry forward, even in changing economic conditions. His discussion of proposed regulatory changes were particularly enlightening, showcasing the industry’s need to remain flexible and to stay abreast of trends that may influence future business opportunities.

About Caitlin Morgan Captive Services

Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (317) 575-4440.