“I have seen small captives
that are well-run insurance
companies and expect to see
more small, well-run captives
in the future.”
• Whether the pooling captive is subject to regulatory control and meets
minimum statutory requirements.
The review should also include a reasonable enquiry and request
for documents into the claims paid history, reinsurance arrangements
including reinsurance premiums and retroceding arrangement. This
regulator has even requested information on whether the manager or
any of the manager’s clientele has been audited by the IRS.
Pooling arrangements do not always take the form of a pooling captive.
This regulator has seen a “risk pool” that is a contractual agreement
among several captives to pay another captive insurer’s claims after a limit
has been breached. The common denominator is, as with the Avrahami
and Reserve pooling entities, that the captive manager manages all
the contracting captives. I believe that the reviewing regulator should
approach this arrangement as he/she would a pooling captive situation.
Avrahami and Reserve have rocked the captive world regarding small
captive insurance companies. As a regulator, I feel that those decisions
have validated my belief that the captive is an insurance company, first
and foremost. Even in the light of those decisions, I have seen small
captives that are well-run insurance companies and expect to see more
small, well-run captives in the future. I have seen good, solid captive risk
pools that do not have circular ceding and retroceding premiums.
Have Avrahami and Reserve hammered the final nail in the coffin
of micro-enterprise risk small captives? I guess time will tell, but from
my perspective, captives will continue to provide risk management
benefits and there will always be a place in Missouri for captives that
are formed for the right reasons.
John Talley is the captive program manager in the Division of
Insurance Company Regulation at the Missouri Department
of Insurance, Financial Institutions and Professional Registration. He
can be contacted at: firstname.lastname@example.org
The capital funds held in the company should be sufficient to
cover the risk of loss in the present and future years, including the
limit amounts of the policy. This review can cover any reinsurance
programme the captive can obtain to cover any major losses.
Policies, premiums and claims
US domicile regulators are concerned about the solvency and
liquidity of the operating captive. For this reason, the captive is
required to file an unaudited annual financial statement reporting its
yearly operations. In addition to the balance sheet reporting of assets
and liabilities, the company will report an income statement, which
will indicate the premiums collected and the claims and expenses
during the reporting period.
A review of the financial statement will indicate the health of the
captive. Missouri statutes also require an audited financial statement
with an actuarial review of the soundness of the captive premiums
and reserves for future claims.
Generally, US domiciles are not mandated to review the captive’s
policies issued to the insured(s). However, Missouri’s statutes require a
description of the coverages, deductibles, and coverage limits. Common
risk policies such as general liability, property loss, or even business
interruption due to weather-related events, are not reviewed if the
reasonable explanation of each is given in the business plan.
However, captives can tailor their coverage to risks peculiar to
the insured. For the “exotic” risk coverage being proposed, this
regulator has found it prudent to review the proposed policy to
determine the type and scope of coverage and probability of losses
A major part of the captive application review is the actuarial
assessment of the actuarial feasibility study proposing premium amount
and the reserving requirements. This is an essential review to determine
whether the captive will be financially viable for the foreseeable future.
If the business plan presented does not have an actuarial component,
the actuary will deduce whether the method used to determine the
premium and reserves was rational and reasonable. Although a regulator
may not have had access to the owners’ prior commercial insurance
information, the amount of premium proposed for the coverage will be
reviewed for its sufficiency or overstatement.
States such as Missouri that utilise third party actuarial contractors
to opine on the sufficiency of the captives plan, can add another layer
of comfort for the captive owner that their proposed captive will be
The judges in Avrahami and Reserve allocated much of their decisions
to the risk pool insurance companies in which the captives participated.
Each judge noted that risk distribution may be recognised in the subject
captive if the entity ceding the risk was, in fact, an insurance company.
Citing prior case law, both decisions listed several factors to
consider. I believe the prudent regulator should review a proposed
risk pool captive arrangement for the factors enumerated, such as:
• Whether there is a circular flow of funds;
• Whether there are actuarially determined ceding and retroceding
26 US Captive 2018 www.captiveinternational.com