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The Regulatory Difficulties Faced by Insurance Captives

The captive insurance market has experienced dramatic changes over the past decade. New regulations, coupled with an ever-increasing demand for self-insurance solutions, has led the captives market to implement wholesale changes in their business operations and in their coverage areas. Regulatory hurdles will continue to shape the captives industry, and in 2019, these insurers will face significant regulatory revisions and proposals.

Proposed Regulations for 2019 in the Captives Market

Among the many regulatory updates proposed for 2019, one group stands out. Proposed by the National Association of Insurance Commissioners (NAIC) Reinsurance Task Force, collateral agreements between the United States and the European Union may strongly influence how reinsurers do business. These changes are targeted for several standing regulations such as the Credit for Reinsurance Model Law.  Changes to the existing Bilateral Agreement between the two governments include a proposal to do away with reinsurance collateral requirements for certain qualified reinsurers – those that have headquarters offices in a EU-member country or other non-U.S. jurisdiction (known to the NAIC as a “reciprocal jurisdiction”). Other proposals include:

  • 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 reinsurer’s home of record state insurance commissioner when minimum capital and surplus requirements are not met.
  • Maintenance of business practices ensuring accelerated payment of reinsurance agreement claim payments.

Changes to regulations introduce new risks into the reinsurance model. It is uncertain what direction the U.S. government will take in regards to legal updates and regulatory provisions, which may include risks associated with the Internal Revenue Service (IRS) and other agencies. Traditionally, the IRS has viewed captive insurance companies as a high risk in terms of potential tax abuses. The agency has proposed certain changes that would more severely penalize captives if violations of the Tax Code were to take place.

Avoiding Risks in the Captives Insurance Industry

Captive insurance is a valid insurance solution for companies that may face prohibitive costs of traditional insurance products. It may also be beneficial for companies that have unique business-related risks that cannot or will not be insured by traditional insurance policies. There are certain cost and tax benefits to the reinsurance model, but some of the potential risks inherent in this insurance model are poorly understood.

One of the primary risks is that of whether captive insurance is right for a given company. Smaller firms, such as small medical or dental clinics, do face unique risks in their practices, but may not be able to handle the numerous regulatory and statutory requirements involved in setting up and managing a captive. A related risk is that of the premiums, shares, and capital paid into the captive. Would a captive even be able to pay a major claim if one were made? What if multiple claims were made – is there sufficient funding set aside to pay out claims? These are important questions, and should be carefully reviewed by any entity interested in pursuing a captive insurance model.

To handle regulatory requirements, there are companies that specialize in providing service in setting up, managing, and handling compliance issues for captives in exchange for a fee. Another solution is to form a reinsurance pool with other related companies, such as a group of dental practices. Premiums are paid into the reinsurer fund, allowing for protection against a single dental practice having to pay claims on its own. This can mitigate substantial financial risks, but again, this model may not be suitable for all business applications.

There are many benefits to the captive insurance model. Cost savings and an ability to gain valuable insurance protection against unique risks are some of the reasons that many companies choose this insurance model over traditional commercial insurance policies. With research and the help of tax and insurance professionals, companies can balance the benefits against potential risks, allowing the company to determine if captive insurance is the logical path forward.

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.