US Captive 2018 25
In its rendition of the pertinent facts, the court noted that Peak
paid premium for its commercial insurance coverage in 2006 and
2007 in the amount of $38,810 and $95,828 respectively. In all years
in question, Peak maintained the commercial policies and Reserve
wrote only excess policies.
The court indicated that Reserve issued 13 excess policies from
December 4, 2008 through January 1, 2009 in the face amount of
$13 million and $419,089 in aggregate premium. The total premiums
for the excess policies written in 2009 and 2010 were $448,127 and
The Tax Court, in both cases, ruled against the petitioners, finding
among other things that the captives were not insurance companies
and the risk pools were not viable insurance entities. It’s important to
note that the judges in each case followed the same reasoning and
rationale for their decisions.
Although the cases were primarily decisions on tax matters, the
courts cited many insurance company practices and regulatory issues
in reaching their decisions My purpose in this article is to review those
elements that are or should be essential to captives regulators.
Both court opinions placed a fair amount of weight on the premise
that the arrangement must “look like insurance in the commonly
accepted sense” (Avrahami at page 76, and Reserve at page 48).
Both courts set forth some factors they considered in making this
A. Whether a company was organised, operated and regulated as an
B. Whether the company was adequately capitalised;
C. Whether the policies were valid and binding;
D. Whether the premiums were reasonable and the result of an arm’slength
E. Whether claims were paid.
The court in Reserve noted that “the feasibility study was not complete
when Reserve issued the direct written policies for 2008 or 2009.”
Donald J. Riggin, writing for the International Risk Management
Institute in February 2016, stated: “There are three types of captive
feasibility studies: comprehensive, close-to-comprehensive (financialonly),
and self-serving (non-feasibility).” Riggin further indicated that
the only two feasibility studies of merit are the comprehensive and
Missouri Department of Insurance
close-to-comprehensive. What is a captive feasibility study, and is it
important to the regulator?
There are a variety of definitions for a captive feasibility study and
most are too long to explain in this article. In general, elements of a
comprehensive captive feasibility study are:
• Examination of the owner’s current insurance and risk financing
• Review of the business (or businesses) claims history;
• Determination of uninsured or unfinanced risk and the proposed
cost of coverage including future costs (actuarial determination or
other viable method);
• A determination of the best domicile for the captive with a review of
the domicile requirement; and
• Whether the business is financially capable of forming and
operating a captive.
Most US domiciles either require the feasibility study to be filed with
the application or, like Missouri, have specific requirements that are a
part of a good, comprehensive feasibility study. Hence, US domiciles
are mandated under their state’s laws to review and approve the
study, or the elements in the study, before licensure is granted. In
addition to the feasibility study, Missouri, as most US domiciles,
requires filing of the following before receiving a licence:
• Amount and liquidity of the assets relative to the risks to be assumed;
• Soundness of the plan of operation;
• Adequacy of loss prevention programmes of the proposed insureds;
• Any other information relevant to ascertaining whether the proposed
captive will be able to meet its policy obligations;
This information will help the US regulator determine that the entity
seeking licensure is operating and will operate as an insurance company.
Consensus among US regulators is that we license and regulate
insurance companies, and that includes captive insurance companies.
Both courts held that adequate capitalisation for their purpose means
that the captive meets the statutory requirements of the domicile.
In most domiciles, this is usually stated as a minimum requirement.
However, a regulator is concerned with the operation of the captive
and adequate capitalisation means more than the statutory minimum
capital and surplus.