Captive Insurance Times Domicile Guidebook 2020 - Vol. 4 by Captive Insurance Times

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2020

A GUIDE TO TRAVERSING THE CAPTIVE TERRAIN

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A time to thrive www.captiveinsurancetimes.com Published by Black Knight Media Ltd 16 Bromley Road, New Beckenham Beckenham, BR3 5JE Editorial Editor Becky Bellamy beckybutcher@blackknightmedialtd.com Tel: +44 (0)208 075 0927 Reporter Maria Ward-Brennan mariawardbrennan@blackknightmedialtd.com Tel: +44 (0)208 075 0923 Contributor Maddie Saghir Marketing and Sales Associate Publisher/Designer John Savage johnsavage@captiveinsurancetimes.com

The Captive Insurance Times Domicile Guidebook continues to be a major success. This year marks the fourth edition, providing the latest legal and regulatory environments of every major captive insurance domicile in the world. The captive industry has been at the behest of a soft market for a considerable amount of time. Now, as the industry moves into a hard market, industry professionals expect new companies to form captives and existing captive structures to expand the use of their captives. Whether you are new to the industry or looking to expand, the Domicile Guidebook boasts a long list of service providers to help meet your needs. Adding on last year’s Captive 101 section, US tax law and legacy and run-off educational information, Volume 4 of the Domicile Guidebook include new articles focusing on blockchain and AI, employee benefits and the role of an actuary. For those wanting information on individual domiciles, our domicile profiles return in the same concise format as before. These have been updated to reflect any changes to individual domiciles. Remember to look out for 2019’s captive statistics from almost every domicile in the world.

Tel: +44 (0)208 075 0932 Publisher Justin Lawson justinlawson@captiveinsurancetimes.com Office Manager Chelsea Bowles Tel: +44 (0)208 075 0930 Follow us on Twitter: @CITimes Published by Black Knight Media Ltd Company reg: 0719464 Copyright © 2020 Black Knight Media Ltd All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without permission in writing from the publisher.

We have added in a number of new domiciles that we were previously unable to obtain information for such as Abu Dhabi, China, The Netherlands, Germany and Kazakhstan. On top of this, the guidebook features updates from the captive insurance industry’s three largest associations: CICA, ECIROA and PARIMA. These articles focus on what each association will be working on for 2020 as well as current market trends, opportunities and challenges. We would like to thank all of our sponsors for their help in our research, especially those who have been with us since the start. Everyone here at Captive Insurance Times hopes you enjoy the Domicile Guidebook’s fourth edition and, as always, we’d love to hear your feedback, so please do get in touch.

Becky Bellamy, Editor

Index

Captives 101

St Lucia

196

Switzerland

198

Tennessee

200

Texas

202

The Bahamas

204

134

The Netherlands

210

Isle of Man

138

Turks and Caicos

212

Jersey

140

US Virgin Islands

214

Utah

220

Guernsey

124

Actuary

US Tax Law

Hawaii

128

EB - Medical Stop-Loss

Hong Kong

130

Legacy and Run-off

34 Illinois

132

Ireland

Solutions Blockchain and AI

Association Profiles

Abu Dhabi

Alabama

Kansas

142

Anguilla

Kazakhstan

144

Vanuatu

224

Arizona

Kentucky

146

Vermont

226

Arkansas

Virginia

232

Aruba

Barbados

Bahrain

Bermuda

Labuan

148

Liechtenstein

152

Captive Figures

236

Luxembourg

154

Glossary

240

Malta

156

Service Provider

252

British Columbia

Mauritius

162

Sponsored by

Captive 101

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Captive Insurance Times Domicile Guidebook

The Role of An Actuary in Captive Insurance

o matter where a captive is in its

though, that actuaries may also be involved in

lifecycle, actuarial analytics is a crucial

more tertiary roles, such as through fronting

ingredient to successful management.

companies to determine excess pricing and

Whether it’s through feasibility studies,

through

ongoing reporting, or assistance in a

independent review work.

domiciliary

regulators

provide

captive’s windup process, key decision-makers should remain closely engaged with their actuary.

Loss projections: Due to their use in feasibility studies, loss projections serve as one of the first

Doing so will ensure both a fuller understanding

steps in the captive formation process, but their

usefulness doesn’t end there. On an ongoing

the

analytics

being

provided

and

opportunity to explore any additional benefits.

basis, loss projections are used to determine a captive’s premium and funding levels. Confidence

Below is a brief overview of the most direct

intervals are also typically included in this type

ways

own

of analysis and allow captives to examine “worst

appointed actuary. It’s important to understand,

case” loss scenarios and how they impact

that

captives

work

with

their

Actuary

financial strength. Beyond those core uses, loss

entities disclose specific information related

projections can also allow captives to explore

to the liability for unpaid claims and claims

alternative retention structures for their current

adjustment expenses. Actuarial reports can be

programmes and create portfolio analyses to

used by auditors to facilitate these disclosures

determine how additional programmes would

for captive insurance companies.

affect the loss portfolio. These disclosures relate to ultimate incurred Reserve analyses: Once a captive is formed and

development, paid development, claim counts,

in an ongoing state, reserve analyses are required

IBNR summaries by year and a reconciliation of

for

sheet

net to gross losses. Some domiciles may have

reporting. This reserve estimate is calculated

a process to obtain a waiver for the disclosures

using the captive’s historical retentions as of

for regulatory purposes. However, a waiver would

specific accounting date. Crucially, it considers

lead to a qualified audit opinion related to the

not only the case reserves established on existing

disclosures. The disclosures do not affect the

open claims but also incurred but not reported

statement of actuarial opinion in terms of the

(IBNR) reserves for additional development on

reasonableness of loss reserves.

financial

statement

and

balance

open claims and claims that have occurred but not been reported. At the end of a captive’s

Pro-forma analysis and stress testing: As part

lifecycle, reserve analyses also provide important

of most captive feasibility analyses, five-year

information for the windup process, as they

pro-forma financial statements are completed

determine the required funding levels needed to

by either the captive manager or the actuary.

cover the remaining losses.

The balance sheet pro-formas help illustrate the surplus emergence over the five-year period at

Statement of actuarial opinion (SAO) letter: For

the expected loss level. Because loss projections

captives, the SAO is the document that an actuary

have variation (and possibly significant variation

issues to opine on the reasonableness of the

for low frequency/high severity risks) stress

reserves carried on the captive’s balance sheet.

testing the financials is an important analytical

The opinion is normally issued subsequent to

step. Most domiciles do not specify specific

and in conjunction with a reserve analysis that is

adverse scenarios, and these should be selected

tied to a financial statement as of the same date.

considering the variation in the loss projections

The letter normally includes relevant comments

and the programme structure.

related to the reserves, specifies a risk of material adverse deviation (RMAD) and highlights other

Proforma

disclosures related to reinsurance, discounting,

feasibility stage and can be extremely helpful in

and subrogation. Most domiciles require an

developing strategies as the captive risk profile

annual SAO.

changes over time.

ASU

disclosures:

Standard

The

Financial

Accounting

limited

the

Special analytics: The majority of captives typically use a combination of the actuarial services listed above, but the list of benefits

contracts (ASU 2015-09) requires that insurance

provided by actuarial analytics doesn’t stop

disclosures

accounting

not

short-duration

(FASB)

are

update

Board’s

analyses

about

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Captive Insurance Times Domicile Guidebook

there. Allocation analyses can help analyse the reserves or funding levels needed for various entities the captive is insuring; loss projections can be incorporated into a financial statement and portfolio modelling; and cash flow analyses can assist in determining payout patterns and investment portfolios. Finally, actuaries can be extremely helpful in assessing emerging risk profiles that are difficult to quantify, such as cyber risk. Using a combination of benchmark analytics and worldwide historical data, an actuary can provide valuable input in deciding whether a specific risk profile is a good fit. While the actuary serves an important role in captive management, the shape of that role is largely determined by the captiveâ&#x20AC;&#x2122;s domicile (whether prospective or current).

Enoch Starnes Actuarial analyst SIGMA Actuarial Consulting Group

As many captive professionals will tell you, maintaining a close relationship with your regulator is one of the keys to a successful captive. Discussing their actuarial requirements on a regular basis will help ensure that the full breadth of analytics covered above will always fall within with domiciliary guidelines. Beyond analytical topics, these discussions may also include the general approval process, approved international and domestic actuarial organisations, and actuarial reporting by captive structure. If you have any questions about domicilespecific

actuarial

topics,

donâ&#x20AC;&#x2122;t

hesitate

contact a regulator for more detailed guidance. 18

L. Michelle Bradley Consulting actuary SIGMA Actuarial Consulting Groups

Actuary

SIGMA Actuarial Consulting Group, Inc. An independent property and casualty actuarial firm serving captive managers, risk managers, brokers, risk management consultants, TPAs and CPAs since 1995

C O N S U LT I N G l All

Property & Casualty Coverages

l Loss

Projections

l Reserve l Captive

Analyses & Opinions Analyses

l Confidence l Loss

Intervals

Payout Schedules & Net Present Values

l Optimum

Retention Analyses

l Benchmarking l Regulatory

Loss Experience

Reviews

Contact: Al Rhodes, ACAS, MAAA President & Senior Actuary 866.228.8279 x 202 AL@SIGMAactuary.com

l Allocations

A N A LY S E S l Captive l Letter

Feasibility

of Credit Negotiations

l Budgeting

for Self-Insured Program

l Evaluating

a Carrierâ&#x20AC;&#x2122;s Estimate of Losses

l Input

to Underwriting Submissions

l Input

to Stewardship Reports

l Risk

www.SIGMAactuary.com

Management Due Diligence Evaluations

l Determining

the Effectiveness of Loss Control Programs

SIGMA Actuarial Consulting Group, Inc. | 5301 Virginia Way, Ste 230, Brentwood, Tennessee 37027 | 866.228.8279

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Captive Insurance Times Domicile Guidebook

Alan Fine Tax partner and insurance industry group leader Brown Smith Wallace

US Tax Law

019 brought many developments in the

entered into and conducted improperly, without

federal income tax arena that impact the

sufficient non-tax business purposes for doing so.

captive insurance industry in the US.

There are some situations in which taxpayers try

History

to reduce their overall tax liability by utilising the micro-captive strategy, rather than entering into it for risk management purposes. The Avrahami case, for example, reads like a list of what not to do when creating and operating a captive

The Internal Revenue Service’s (IRS) aversion

insurance company.

to captives dates to the late 1970s and early 1980s, when it attacked a large number of

Portraying the entire micro-captive industry as

captive insurance companies. Those early cases,

abusive, however, subverts congressional intent.

like cases in recent years, generally resulted in

When congress implemented the changes to

victories for the government.

Section 831(b) as part of the Protecting Americans Against Tax Hikes Act (PATH Act), diversification

Currently, the IRS operates under the assumption

requirements were also included that only apply to

that most micro-captive transactions have been

captive insurance companies. These diversification

Alan Fine is the partner in charge of the Brown Smith Wallace Insurance Industry Group, where he specialises in the taxation of insurance companies. Alan has 24 years of tax experience and has worked closely with insurance companies for 22 years. Alan is responsible for serving insurers writing fidelity, personal and commercial lines; medical and life insurance; other professional malpractice coverages; and captive insurance companies. His areas of specialty include consulting and compliance tax services, captive insurance services and structuring and review of complex GAAP and statutory accounting tax provisions. Alan regularly consults with insurance companies in tax planning and minimisation, and he represents clients on tax issues before the IRS and state and local authorities. Alan serves as the president of the Missouri Captive Insurance Association and is also a member of the Finance Committee for the St. Louis Chapter of the MS Society.

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Captive Insurance Times Domicile Guidebook

there are likely to be a significant number of new examinations in the next 12 to 18 months 22

US Tax Law

requirements serve to eliminate combining the

The accuracy-related penalties are reduced to 10

estate and gift tax benefit with the income tax

percent, with the possibility of complete elimination

benefits associated with Section 831(b). In doing

if the taxpayers have not previously engaged in a

so, congress explicitly provided approval for the

reportable transaction and they relied upon advice

micro-captive insurance strategy, which the IRS

from an independent tax advisor. The benefit of

chooses to ignore.

accepting the settlement offer was that it allowed affected taxpayers to move past the time and

Importantly, the joint committee on taxation

effort associated with the examinations.

estimated that USD 80 million in tax revenues would be lost for the years 2016-2026 due to the

It provides certainty, particularly regarding the

changes to Section 831(b), compared to USD

potential income inclusion at the captive level, and

621 trillion for the entire PATH Act. The IRS has

it reduces or potentially eliminates penalties.

likely spent more than that on enforcement and litigation alone.

Taxpayers and advisors frequently ask whether we may see a moderation of the IRS’s activities

2019 IRS settlement offer

relative

micro-captives.

Based

upon

the

settlement offer and additional statements by the To begin dealing with the swell of micro-captive

IRS, that does not appear likely unless some or all

cases amid shrinking resources, the IRS issued

of the following occur:

a notice announcing the mailing of a limited time settlement offer for certain taxpayers

•

under examination for participating in “abusive micro-captive

insurance

transactions”

court’s decision in Reserve Mechanical •

September 2019. settlement

Taxpayers are more successful with the cases currently pending in tax court

• The

A successful appeal by the taxpayer of the tax

offer

was

only

made

Congress places limits on IRS spending

relative to pursuit of micro-captives given the

approximately 200 taxpayers. Under the terms of

negligible amount of revenue lost from the

the settlement, taxpayers concede 90 percent of

federal budget from the 831(b) election

the deductions for premiums paid to the captive, with the deductions for the remaining 10 percent

Future implications

being sustained. The IRS has stated that they are assembling 12 The captive will not be required to include any

new examination teams to further pursue “abusive”

of the premiums amounts into income (unlike the

captive insurance transactions.

taxpayer in the Syzygy case). As such, there are likely to be a significant To the extent that the settlement covers years where

number of new examinations in the next 12 to 18

lineal descendants were among the captive owners,

months. Given the vast breadth of the information

gift tax returns are required to be filed to reflect the

requests, the lack of captive insurance experts

transfers to the captive benefiting such descendants.

within the IRS (even within the new exam teams),

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Captive Insurance Times Domicile Guidebook

and the IRS’s steadfast refusal to look at these captives reasonably, the vast majority of the cases will then move to the appeals phase, followed by a large number of taxpayers moving to litigate in tax court. The IRS could begin looking at other types of captive insurance companies, particularly if the Reserve Mechanical appeal is unsuccessful. The issues the IRS is focusing on aren’t limited to micro-captives. Concerns over the logic utilised by the tax court, such as the requirement to have a prior loss before there is a valid business purpose for purchasing insurance, ‘cookie cutter’ insurance policies and what the court incorrectly referred to as ‘circular flow of funds’ (the mechanism by which all risksharing pools operate) could potentially be issues for group captives, as well as the largest captives owned by Fortune 500 companies. Takeaways It would be one thing if the IRS were focused on pursuing taxpayers who entered into the captive transactions strictly to generate tax deductions. Unfortunately, the IRS is unlikely to be that focused on their new examination efforts. The additional issue is that there will still be a shortage of subject matter experts that understand the insurance-specific nuances of these transactions, resulting in longer, inefficient exams

and

increased

professional

fees

for

taxpayers defending the exams. While captives are still a viable business strategy, it is important for current and prospective captive owners to understand the potential tax impact and the practices and formalities that must be followed to be in compliance. 24

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B ROW N S M I T H WA LL AC E .C O M

Captive Insurance Times Domicile Guidebook

Anne Marie Towle Senior vice president Global captive solutions Hylant

Employee Benefits

Employee benefits Medical stop-loss

does

stop-loss

the

interest

captives

medical

continue

loss captive is a huge benefit in addition to the short and long-term costs savings.

trend upward? Employer-sponsored insurance covers over half of the non-

Health insurance premiums and

elderly population; approximately 153

worker contributions

million people in total. The average annual premiums for employerThe ever-increasing costs and unpredictability

sponsored health insurance in 2019 are USD 7,188

in the fully insured market continue to cause

for single coverage and USD 20,576 for family

considerable strain for organisations, leading

coverage. The average single premium increased 4

many to consider alternative risk funding.

percent and the average family premium increased 5 percent over the past year. Workersâ&#x20AC;&#x2122; wages

The ability to customise a risk management/cost

increased 3.4 percent and inflation increased 2

containment strategy for this expensive liability

percent. The average premium for family coverage

is very attractive for many organisations. More

has increased 22 percent over the past five years

control over programme design for a medical stop-

and 54 percent over the last 10 years, significantly

A veteran of the captive insurance industry, Anne Marie Towle leads the Global Captive Solutions Team at Hylant. She has over 25 years of experience with diverse projects and has worked with captives and other alternative risk transfer vehicles in many key onshore and offshore domiciles. Prior to joining Hylant, Anne Marie was an executive vice president with JLT, and formerly a senior consultant with Willis Towers Watson for over seven years.

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Captive Insurance Times Domicile Guidebook

more than either workersâ&#x20AC;&#x2122; wages or inflation

as-you-go or pre-funding a fiduciary account,

(Figure A).

purchasing stop loss to allow for greater control over the plan and improved cash flow. Similar to

As demonstrated by Figure A, the increases are

self-insurance, captives are a flexible, beneficial

fairly significant over a 10-year time period. These

option for financing risk related to medical costs in

increases

an employer-sponsored plan.

are

causing

organisations

seek

alternative forms of designing and funding their medical plans. At times, it seems like the only

Captive programmes are designed to maximise

alternative may be to cut benefits or seek increases

financial leverage through pooled and shared

in employee contributions, neither a great option for

risk, particularly with medical costs. The risks

organisations or its employees. It is possible to utilise

within the captive itself can be diversified among

a customised risk retention method to improve the

various groups within an organisation. Multiple

financial aspects of an employer-sponsored plan.

organisations can even join together to pool their risks.

Customised risk strategy When an employer purchases stop loss from For

those

organisations

already

self-insured,

a captive insurer, it is essentially no different

you are already familiar with the benefits of pay-

than purchasing from a commercial insurance

Figure A: Average Annual Worker and Employer Premium Contributions and Total Premiums for Family Coverage, 2009, 2014, and 2019 Worker Contribution

Employer Contribution

$25,000

$20,000

26% Total Premium Increase

$15,000

22% Total Premium Increase $16,834

$13,375

$10,000 $9,860

37% Worker Contribution Increase

$20,576

$12,011

25% Worker Contribution Increase

$14,561

$5,000

$3,515

$4,823

$6,015

2014

2019

$0 2009

Employee Benefits

carrier and will not have an impact on the

between the employer and the captive and the

plan participants. The key difference is the

second between the captive and the stop-loss

programme will be designed with the captive

reinsurance carrier.

now retaining a corridor of risk below the stop loss layer. See Figure B for a demonstration of

A significant benefit to the employer is the ability to

various programmes. Now, instead of having one

purchase stop-loss from the reinsurance market,

contract between the employer and the stop-

which historically has better rates than the retail

loss carrier, there will be two contracts; one

insurance market.

Figure B

Stop Loss Fully Insured

Stop Loss

Captive

SelfInsured Retention

Floating $250,000

SelfInsured Retention

•

Orange line limit can vary by member, based upon size and risk appetite

•

Captive layer of USD 250,000 “floats” above each employer’s specific limit

•

Captive layer premium reflects chosen limit and number of participants

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Popular captives for medical stop-loss The value of a single-parent captive

One of the significant differences in a medical stop-loss captive arrangement is when a high dollar claim actually hits against the stop-loss policy

Single parent captive owners have complete control over their insurance programme and are not subject to the risk-sharing required with group captives. A single parent captive can: â&#x20AC;˘

Smooth stop-loss volatility

â&#x20AC;˘

Offer financial benefits from underwriting profits

â&#x20AC;˘

Combine multiple lines of coverage

1. Smooth stop loss volatility In most respects, a self-funded plan in a captive arrangement is the same as any other plan under a traditional self-funded contract. The self-funded employer pays claims up to a designated threshold and is covered for losses on any eligible claims that exceed the specific threshold. A captive arrangement is no different in this respect. One of the significant differences in a medical stoploss captive arrangement is when a high dollar claim actually hits against the stop-loss policy. The additional claims dollars that are absorbed by the captive significantly reduce the claims paid out by a medical stop-loss carrier. The minimising effect that the captive layer has upon actual stop loss claim payments greatly improves the year-over-year stop-loss renewal calculations.

Employee Benefits

2. Financial benefit from underwriting profits

period of time are paid back to members that have renewed in the programme.

As the captive layer performs well with limited losses, the employer benefits from the premiums

The pooled dollars that are used to pay claims

paid and captures underwriting profits.

within the captive layer function to temper the

3. Ability to include other coverage in captive With a single-parent captive, an employer has

impact of catastrophic claims against the stoploss policy. 2. Smooth stop-loss volatility

the ability to maximise the financial benefit by combining multiple lines of coverage in the captive.

In most respects, a self-funded plan in a captive

This flexibility allows employers to optimise the

arrangement is the same as any other plan under

use of the captive and combine both employee

a traditional self-funded contract. The self-funded

benefits and property and casualty into one risk

employer pays claims up to a designated threshold

financing company.

and is covered for losses on any eligible claims that exceed the specific threshold. A captive

The value of a group captive

arrangement is no different in this respect.

Insurance is meant to protect what you value, so

One of the significant differences in a medical stop-

you shouldn’t be punished by high premiums when

loss captive arrangement is when a high dollar claim

your organisation experiences high claims. Group

actually hits against the stop-loss policy. When

captives offer additional protection by allowing

a claim is paid out of the captive layer, this claim

members to:

payment does not count against the group as a stop-

Pool catastrophic claims

loss claim. As such, a group’s claims experience is

Smooth stop-loss volatility

protected significantly by the captive layer.

Experience improved claims performance and favourable renewals

Receive

financial

The additional claims dollars that are absorbed by benefit

from

shared

underwriting profits 1. Pool catastrophic claims

the captive significantly reduce the claims paid out by a medical stop-loss carrier. The minimising effect that the captive layer has upon actual stop loss claim payments greatly

Through a group captive, each member within the

improves the year-over-year stop-loss renewal

captive pool can purchase a specific stop-loss

calculations.

policy at a level they deem appropriate for their own risk tolerance. A portion of each group’s stop-

3. Positive performance and favourable renewables

loss premiums is used to fund the captive layer, which is then kept in a trust account for the sole

Medical stop-loss captives are structured such that

purpose of paying claims. Any pooled premiums

the employer pays claims up to the specific limit,

that are not used to pay claims over a given

then the captive layer pays the next USD 250,000

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Captive Insurance Times Domicile Guidebook

in claims per individual within a participating group. This arrangement serves to pay most of the claims that would typically end up being medical stop-loss claims. With this additional layer of claims protection in place, the claims paid by the reinsurance carrier are minimised. The reinsurance carrierâ&#x20AC;&#x2122;s risk exposure is greatly reduced because they only insure the claims risk above the captive layer. Stop-loss claims payments are inherently much less frequent under a captive programme. Stop-loss claims are much more infrequent under a captive arrangement. Significantly fewer claims result in significantly more favourable renewals. 4. Financial benefit from shared underwriting profits The captive layer is funded by like-minded employers which have had a portion of their stop-loss premiums transferred to the captive to collectively fund the payment of high dollar claims that are within the range of the captive layer. Since the captive is not a profit-taking entity, any funds that were not used to pay claims remaining within the captive after the contract and runout period are paid back to the groups participating in the captive. Payouts are proportional to the amount funded by each group. Any funds not used to pay high dollar claims in a given contract period are paid out to the groups that participated in that captive series. As the political landscape and healthcare laws continue to fluctuate, a captive provides a layer of security to employee benefits programmes, ensuring both employers and their employees are protected. 32

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Employee Benefits

HYLANT GLOBAL CAPTIVE SOLUTIONS

A UNIQUE INSURANCE PERSPECTIVE. YOURS. At Hylant, we know every business is unique. So your approach to risk management should be unique. With Hylant Global Captive Solutions as your partner, we will help you navigate the world of alternative risk solutions, helping you better define, finance and manage the risks in your business. We invest the time to understand your business and the nuances that make it unique. Hylant. Risk management solutions since 1935. Captive Advisory. Captive Consulting. Captive Management.

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Captive Insurance Times Domicile Guidebook

Paul Corver Group head of legacy M&A R&Q Legacy

Legacy and Run-off Solutions

he legacy and non-life run-off marketplace

of toxic exposures emanating from the US relating

has continued to grow in recent years due

to pollution, asbestos, and other mass torts. A

to shifts in corporate business objectives

number of insurers in the UK and US were forced

and

to stop underwriting, some forced into insolvency

informed of alternative risk solutions that

proceedings and Lloydâ&#x20AC;&#x2122;s of London had to undergo

intermediaries

becoming

better serve their clients.

reorganisation to ring-fence its pre-1993 liabilities.

Randall & Quilter Investment Holdings (R&Q) is

At that time, run-off was considered a dirty

uniquely placed to deliver during 2020/21 and

word. Companies feared for their reputation if

beyond with a proven track record over three

their name was used in the same sentence. R&Q

decades of acquiring discontinued books of non-

was formed in 1991 to take on these liabilities

life business and non-life (re)insurance companies

to enable companies to focus on their ongoing

and captives in run-off.

business.

Run-off

acquirers,

whose

primary

business strategy was run-off, provide a more The origins of effective run-off management and the

dedicated focus on the claims management

emergence of run-off acquirers go back to the days

without distractions of live underwriting.

Paul Corver is the group head of Legacy M&A at R&Q. His involvement in the captive sector has included acquisitions of captives in run-off as well as LPTâ&#x20AC;&#x2122;s, business transfers and novations from active captives and corporations. Transactions have been concluded in most captive domiciles and with companies such as Unilever, John Laing, Virgin Atlantic, Clariant, NN Group and Astra Zeneca. In 2019, R&Q won both the US and the UK/European Captive Services Awards for Run-Off specialist, highlighting R&Qâ&#x20AC;&#x2122;s continued global presence.

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

Typical captive acquisition timetable There is no such thing as a ‘textbook’ legacy transaction. Individual circumstances can vary significantly from case to case and transacting parties have different objectives and timelines to work to. However, in order to give owners of captives who are thinking of pursuing a legacy solution in 2020, the timeline below gives an outline. Transaction timelines vary depending on the type of deal and the jurisdiction. A typical acquisition timeline would be as little as two to three months or as long as 12 months depending on the complexity and requirement for regulatory approval. An indicative bid can be provided in two to three weeks on the back of highlevel preliminary data including, subject to availability, the following items: loss triangles, loss run, accounts, actuarial report and information memorandum.

Sign NDA

Origination

Transaction overview sent by sell-side adviser

Submit non-binding indicative bid

Desktop Analysis/Structuring

High level data received including some or all of • Information memorandum • Triangles • Loss run • Accounts • Actuarial report

Desktop due diligence, financial modelling & structuring

Legacy and Run-off Solutions

Once an insurance policy expires it is in run-off.

Zurich, Allianz, or AXA XL equally apply to the

The market, however, has different interpretations

captive sector.

depending on the age of the policies or whether the class of business has been discontinued. These

Applications for the captive market

legacy liabilities may be within a live writing (re) insurer, a captive, a self-insured fund or a standalone

Captives, cells, risk retention groups (RRGs) and

company that has stopped writing new business.

other forms of self-insurance vehicles can effectively be split into two buckets: those which are actively

A number of tools were developed and adapted to

underwriting and those deemed in run-off.

enhance the efficient handling of these liabilities, such

commutation

programmes,

business

actively

underwriting

captives,

there

will

transfers and schemes of arrangement. These

be run-off years, which require capital, and if

tools still exist, yet the whole attitude to run-off has

these can be exited through novation, transfer,

changed, as has the terminology.

commutation, or reinsurance, then surplus capital or collateral held to support those liabilities could

Legacy is often used, perhaps to disassociate

be recycled to support new underwriting or

these liabilities from the toxic problems of the past.

distributed to the parent.

Furthermore, portfolios of legacy liabilities are regularly disposed of by large commercial insurers.

There is an ever-increasing interest in captives

The drivers and benefits of legacy deals to AIG,

using the legacy market driven by the increase

Submit final bid

Due Diligence

• • • • •

E xclusivity D etailed due diligence Management meetings Onsite visit Q&A

www.captiveinsurancetimes.com

Sign legals

Contracts/Legal

• • •

Negotiate legal documentation O perations/ transition plan O btain signatures & final approvals

Regulatory approval granted

Completion

Regulatory approval (if required)

Captive Insurance Times Domicile Guidebook

â&#x20AC;&#x153;

Effective legacy

management enhances capital efficiency and could prolong the life and attractiveness of having a captive in frequency and deal size of transactions

new interdependencies and vulnerabilities to

coming to market. Efficient capital management

geopolitical relationships between nations.

is becoming embedded in standard practice at many insurance and reinsurance companies. This

Whether it be Brexit, or the US administration

will inevitably filter through to the captive sector.

revisiting

previously

established

free

trade

agreements, both create uncertainty for multinational Effective legacy management

mega-cap companies as well as the small private partnership operating in the US Midwest.

The macroeconomic landscape for businesses inside and outside the insurance industry is

This uncertainty requires businesses leaders

ever-changing.

in various industries to constantly recalibrate their tactics in order to achieve their long-term

As has been the case for several decades

strategic goals.

now, the pace of international commerce and general

the

The types of legacy transactions have expanded

globe has been accelerating, which has been a

in recent years from traditional loss portfolio

boon to global commerce but has also created

transfer

human

interconnectivity

across

(LPT)

reinsurance

agreements

and

Legacy and Run-off Solutions

Loss portfolio transfer: A reinsurance transaction whereby a new reinsurance contract is purchased by the captive to provide protection for their policy obligations. While this transfers the economic risk, the captive is still the contracted insurer with the policyholders.

Insurance business transfer: A mechanism that transfers all or part of the captiveâ&#x20AC;&#x2122;s business to a third party. This will be governed by prescribed regulatory processes depending on the domiciles of the transferor and transferee. In the UK, it is performed by the Part VII transfer mechanism and will also require court approval. Insurance business transfers (IBTs) will transfer the liabilities and obligations of the transferor but not generally any benefits such as reinsurance protections. However, a Part VII usually will transfer reinsurance protections. Unlike an LPT, an IBT gives finality as the policy obligations are transferred and not just the economic risk.

Policy novation: A legal agreement to replace one insurer with another insurer. The insured, the captive and the new insurer will all execute the novation. If the policy was fronted then the front company would need to agree the novation. All obligations under the policy transfer to the new insurer as if the new insurer were on risk from inception of the original policy. Novation can also be used to transfer reinsurance protections, perhaps in conjunction with an IBT.

Sale: A legal transfer of the shareholding of the captive from the corporate parent to a new owner. This provides full finality to the corporate parent.

Commutation: The captive undertakes policy buybacks with all parties to remove its obligations and liabilities. Front companies often undertake this but some are reluctant or price it to be unattractive. If the captive wrote direct policies then the insured would have to take liabilities back, which may not be attractive to the corporate parent.

Scheme of arrangement: This is a court process whereby policyholders effectively agree to a commutation plan with the insurer. If the plan is voted through, it is mandatory on all policyholders. A scheme provides finality for the insurer. There are only a few domiciles where this could be used, primarily Bermuda for captive jurisdictions. It is only really relevant where the captive has written third party business that would be too voluminous to exit by individual commutation, or where insured parties cannot be located.

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Captive Insurance Times Domicile Guidebook

Changes

regulatory

environments

and

organisations’ business lifecycles pave the way

Changes in regulatory environments and organisations’ business lifecycles pave the way for risk managers and executives to reconsider historical insurance programmes

for risk managers and executives to reconsider historical insurance programmes. Self-insurance

programmes

fitting

into

organisation’s business objectives at inception may over time become less beneficial or even an impediment to a company’s current and future goals. Unfortunately,

the

majority

organisations

do not consider future exit options as part of the self-insurance programme at the time of establishment. Thus, the evolution of an organisation’s business through changes in management, changes in strategic goals, changes in risk management, mergers and acquisitions, financial planning, cost reductions, or external forces, can leave organisations feeling trapped behind previously made insurance decisions.

acquisitions of run-off insurance companies to providing complex solutions/finality to corporates

Non-insurance industry merger and acquisition

and public entities within self-insurance insurance

(M&A) activity is one of the biggest catalysts for

programmes

run-off opportunities.

(large

deductible

programmes,

captives, risk retention groups, and self-insurers). Company mergers lead to duplicate insurance R&Q has built a platform to facilitate transactions

programmes, duplicate captive structures, or

in both the traditional run-off space as well as

different risk management philosophies.

unique transactions with corporate self-insurance programmes.

Executives and risk managers alike seek ways to capture synergies contemplated as part of the

This has allowed it to develop solutions for counter-

merger or acquisition process.

parties to exit legacy insurance liabilities enabling entities to free-up working capital trapped as

Consolidating insurance programmes, freeing

collateral held as part of its insurance programme,

up excess collateral, or eliminating existing self-

eliminate insurance tail risk, and diminish or remove

insurance structures (i.e. captives) can assist in

administrative and regulatory burdens.

achieving these synergies.

Legacy and Run-off Solutions

Awareness and management The implementation of Solvency II and other risk-based capital models around the world have caused insurance and reinsurance companies to assess what capital is required to support their business. This enables them to identify whether they are getting the best return on that capital. Captives may carry liabilities that are of little ongoing interest, they may relate to disposed business units or discontinued operations. What benefits does the captive achieve by continuing to carry those liabilities which are effectively trapping capital?

A further key area for the captive to understand is whether it is comfortable with the possibility for deterioration in the held reserves

Many captives will also have to post collateral to give the fronting company protection on its credit risk. These collateral obligations are often considerably in excess of the held reserves, again trapping capital. When R&Q assumes liabilities from a captive, R&Q

The management shortfall that R&Q often see is

take on the obligation to provide collateral. This can

that the captive owners have not fully assessed

realise a sizeable source of free cash for the captive.

their legacy exposures and the benefits that could be gained by disposal or economic certainty

A further key area for the captive to understand is

through a reinsurance structure.

whether it is comfortable with the possibility for deterioration in the held reserves.

R&Q – ‘Bringing innovation to the legacy sector’

Certain lines of business, such as employers’

The R&Q team is comprised of ‘out-of-the-box’

liability and workers’ compensation, have a long

thinkers who pursue innovative solutions to

tail of claim exposure which can cause nasty

meet all the varying needs of its counterparties.

surprises

especially

changing

regulatory

environments that may favour claimants.

This ability to work towards the most appropriate solution

meet

the

goals

transaction

What benefit is there for a captive to continue

counterparties coupled with a platform capable

holding these reserves and running the risk of

of providing a wide variety of solutions has

deterioration?

contributed to its growth and success.

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Captive Insurance Times Domicile Guidebook

R&Q has an excellent track record of successfully

Accredited Surety and Casualty Company (ASCC)

closing deals operating since the 1990s, with

is the R&Q Groupâ&#x20AC;&#x2122;s A- rated US carrier which is

over 84 transactions completed since 2012.

admitted in all 50 States with near full penetration

These transactions include captive acquisitions,

of licences.

traditional LPTs, novations, facultative reinsurance, and deductible reimbursement policies. Included

ASCC has taken on a range of liabilities from

in that number are successfully completed run-

medical

off transactions with large US and European

workersâ&#x20AC;&#x2122; compensation from group captives,

corporates as well as large insurance groups.

RRGs, on balance sheet deductibles and self-

malpractice

commercial

auto

insurance funds. R&Q works with captives and their managers to ensure that the transaction undertaken provides

Similarly in the EU, Accredited Insurance (Europe)

the best benefit to the captive and their needs

is also A- rated, domiciled in Malta and licenced

and motivations.

for all 18 non-life classes with freedom of service across much of Europe. It is used to assume

While reinsurance gives economic relief the

compulsory line liabilities from EU captives

contractual obligations remain with the captive,

looking to reduce Solvency II obligations.

a transfer or novation of the policies would move those obligations to the acquiring party. Sponsored by R&Q uses a wide array of solutions. For captives that are no longer underwriting, the cleanest exit is a share purchase where R&Q take over the company lock, stock and barrel. This clearly gives the seller complete finality. More recently, and particularly in the US, R&Q has seen the use of 100 percent reinsurance or assumption increase in popularity.

Legacy and Run-off Solutions

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07/01/2020 16:47:39

Captive Insurance Times Domicile Guidebook

Dr. Marcus Schmalbach Founder and CEO RYSKEX GmbH

Blockchain and AI

Parametric insurance of intangible assets benefits of blockchain and AI

conomists neatly divide activity into three

to intangible. This change is clearly visible at the

categories: primary industry which is the

corporate level, too. Examining the balance sheets

extraction of resources, secondary industry

of the S&P 500, some 83 percent of their value

which is manufacturing and tertiary industry

now stems from intangible assets, up from only 20

which is services. As economies develop,

percent or so 40 years ago.

they tend to move up this scale and become dominated by the service sector. They grow

These intangibles are a heterogeneous collection

less concerned with physical goods and more

of items such as service contracts, intellectual

concerned with knowledge; a segue from tangible

property, goodwill, software, trademarks, data,

Dr. Marcus Schmalbach is the founder and CEO of RYSKEX GmbH. He has a long-standing experience in risk and captive management in various industries. Before the founding of RYSKEX, he was head of a German MBA programme. He is still working as a visiting professor on Innovation and Risk Management matters as well as an academic head of BlockART institute with a research focus on GIG companies, parametric solutions, blockchain technology and the impact of AI on the captive value chain.

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Captive Insurance Times Domicile Guidebook

rights of use and other non-physical goods. Unlike

Parametric insurance is as simple as an if-then

property or machinery, they are hard to classify

statement: if this, then pay that. All that is needed

and even harder to value.

is a trigger and a pay-out mechanism.

Insurance is inadequate in several ways. One of

This can be carried out completely without

which is the growing coverage gap; the difference

traditional underwriting with the help of blockchain

between the damage inflicted by events and the

and artificial intelligence.

amount of insurance cover. The future of risk transfer is therefore digital, Tangible assets, like property, has ballooned in

process-optimised and parametric.

recent years and now stands at USD 136 billion. But if tangible asset insurance, with a 400-year

Parametric solutions

history, still falls short of the mark, try glancing across to the intangible side of the balance sheet.

Traditional insurance is based on the principle

These assets are hardly insured at all. We are still

of indemnification: a demonstrable loss against

at the starting line.

an asset.

Traditional insurance is based on the concept of

With

indemnity. There must be a demonstrable and

not linked to identified damage but instead to

calculable loss that can then be used to justify a

an index or set of parameters that gauge the

payment, in compensation for that amount.

severity of the event.

The challenge is that intangibles, financial values,

A loss adjuster will ask many questions in the

and indeed damage, is hard to pin down. This is

claims process such as what caused the damage

where parametric insurance comes in.

or when did it happen? Parametric insurance does

parametric

insurance,

the

pay-out

not require any questions like this. The beauty of parametric insurance is that it is free from the concept of demonstrable asset damage,

The simple fact that an index reached a specified

so you donâ&#x20AC;&#x2122;t need to figure out what a particular

level is enough to trigger the claims payment.

asset is worth.

A claim is the moment of consummation in an

Blockchain and AI

insurance relationship. After all, that is the real

and the like, whereas parametric insurance has

product that is being sold. Parametric insurance

no such limitations because it is not linked to

has the ability to improve this relationship by

underlying assets.

avoiding arguments about causality and valuation Contracts can also be shorter than one year, for

and delivering a speedy payment.

example, just covering the Christmas shopping Knowledge, trust and price are the three reasons

season or summer holiday periods.

why customers might not be buying traditional insurance.

Parametric

insurance

can

deliver

Knowledge:

Parametric insurance is based on inclusion rather than exclusion.

improvements in all three: more

A traditional insurance wording starts with a base

transparent as it is based on a single identified

premise and then carves parts out through detailed

numerical value.

exclusions, deductibles and limits.

Trust: No tricky â&#x20AC;&#x2DC;small printâ&#x20AC;&#x2122; or obfuscation around

The parametric approach remains at a high level.

exclusions, causes or damage. Pay-outs are

All that is required to be demonstrated is simply

streamlined and much faster.

that the event happened, not what caused it nor

Parametric

insurance

what harm resulted. Price: By eliminating underwriting and claims settlement costs, these savings can be passed on

Traditional

to customers in lower prices.

frequency, low severity events aimed at households

insurance

well

suited

high

and small business. In addition to these, there are other benefits to parametric insurance. There is a greater

A multitude of small-scale losses are easier to

time flexibility as the contracts can be tailored

model and manage due to the richness of historic

for specific scenarios and do not have to be

data and the fact that the law of large numbers will

renewed annually. The normal insurance annual

enable accurate macro-level predictions. Parametric

cycle requires exposures and asset values to be

insurance in the past has been focussed on low

changed every year based on accountants reports

frequency, high severity events.

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Captive Insurance Times Domicile Guidebook

What about the use of parametric insurance for

Large amounts of data coupled with a machine

intangibles? For large scale catastrophes, there is

learning algorithm offer an alternative to the

scarce capacity, as few underwriters would want

traditional modelling process. It solves the ‘Catch

to carry that level risk and so parametric insurance

22’ problem.

can step in. To launch any new insurance product, you need Coverage of intangibles is a gap in the market

claims data in order to model risk. Without data,

that begs to be filled. The beauty of parametric

you cannot offer insurance, but with no insurance

insurance is that it is free from the concept of

offered you cannot get data.

demonstrable asset damage, so you don’t need to figure out what a particular asset is worth.

The ‘AI and Big Data’ approach gets around this conundrum by using data scientists to create an

Parametric insurance is as simple as an if-then

index from non- traditional sources, thus obviating

statement: if this, then pay that. All that is needed

the need for historic claims datasets.

is a trigger and a pay-out mechanism. The trigger must be an objective parameter or index that is

Technology change 2: The platform

related to the insured’s exposure.

business model

It must be consistent, in other words, calculated

The

in the same way over time so as to be fair and

platform business model. The titans of the internet are

accurate. It must also be independently verifiable

all ‘platform’ businesses; Apple, Facebook, Google,

and so unable to be influenced by the risk taker or

eBay, Uber and Airbnb have all been remarkably

the insured.

successful in exploiting this type of business model.

Lastly, it needs to be regularly reported. If these

Platforms have oversight but they don’t have

three criteria are met and a pay-out mechanism

foresight – they don’t know what content will be

pre-agreed, then there is nothing stopping the

put on the platform, but they do define how it is

use of parametric insurance to cover any type

put there.

second

technological

development

the

of asset, tangible or intangible. In fact, several recent developments in technology have made this

Traditional insurance policies try to use foresight

process much easier and therefore open the door to

to anticipate possible future events and then

far more widespread use. It is to these technology

exclude them or draw causal chains in anticipation

changes that we turn our attention next.

of particular types of damage.

Technology change 1: AI and big data

But parametric insurance does not need to establish chains of causality. The only thing

The first important technological development

that is important is that the event happened not

to examine is the use of artificial intelligence

what caused it. So, there is no foresight needed.

(AI) algorithms to mine large data sets, known

That makes a platform-style business ideal for

as ‘big data’.

parametric insurance.

Blockchain and AI

How to get to critical mass? In order to attract

technology. The type of information that is stored

business to a new platform, there must be clear

in this blockchain ledger can be items, actions and

advantages over the traditional way of doing

permissions.

business. As an example, the items can be the clauses of A platform that allows risk holders to trade

a contract, the actions can then specify how a

insurance-linked securities (ILS) has two of these:

transfer of funds will take place and the permissions

it is cheaper due to the cost savings in the claims

will work as the trigger for that transfer to occur.

process, and it is easier because of the third

So, a smart contract can be set up to automatically

technological revolution.

make a pay-out if a certain event occurs.

Technology change 3: Blockchain ledgers

No muss, no fuss. There is no need for verification by a human third party. This makes it the perfect

The third important development in technology

underlying technology for parametric insurance.

is blockchain style distributed ledgers â&#x20AC;&#x201C; which is

Since the pay-out terms and criteria are baked into

the enabling technology behind smart contracts.

the code you have a fast, secure and transparent

Traditionally,

system which should both help rebuild trust and

trusted third party to facilitate the exchange of

also be much cheaper as processing costs are

payments and securities.

dramatically reduced.

This

financial

transactions

clearinghouse

acts

require

central

The future outlook

counterparty between the buyers and sellers, acting as a guarantor for the transaction. The

Looking at parametric products from the point of

counterparty risk is transferred from either of

view of an investor, what type of returns might

the participants to a trusted and highly regulated

be expected from these products? Yields on cat

central authority.

bonds range from 2 percent to 20 percent.

Often the actual assets in question, like stocks

We know that intangible assets have been growing

and shares, are held in a central securities

rapidly on corporate balance sheets. We can also

depository. Trading shares then just becomes a

anticipate potential growth in the ILS market which

book-entry change rather than a physical transfer

is currently tiny in relation to bond and equity

of certificates. Identity and ownership are verified

markets and offers attractive returns.

by a centralised database owned and controlled by this trusted middleman.

So, both the numerator and the denominator are growing but which is growing faster? If ILS capital

A smart contract does away with the central

grows faster than the intangible asset base then

database and uses a distributed database on

this ratio will get smaller. Intangibles to assets:

a decentralised peer-to-peer network instead.

This has been growing fast but since they are

This transfers the trust element from a central

already dominant they may not have much room

counterparty to the cryptography behind the

to grow further.

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Captive Insurance Times Domicile Guidebook

The point of the Dupont model is to examine the factors on the right-hand side of the model in order to help answer this question. On the right-hand side, we have:

Assets to premiums: This is inverse of the insurance

Capital backing to ILS: The inverse of the ratio of

penetration rate and stands at around 33 times. This

alternative capital to traditional capital. More ILS

reflects the amount of money the corporate sector

funds coming into the market will make this ratio

wants to spend on insuring their assets.

smaller.

Any insurance growth forecasts need to be

To conclude, we have two factors getting bigger,

tempered by the fact that customers only have

one getting smaller and two probably static. But

limited budgets and many spending requirements.

this a multiplication so the actual values matter a

Insurance is not often top of that list.

lot. So, we can’t conclude that the fog is stronger than the heartbeat or vice versa without doing

The insurance penetration rate has remained fairly

the numbers properly. For now, this model is just

steady at around 3 percent for decades.

a signpost to further research which may prove fruitful in the future.

Premiums to cover: Also known in insurance circles as ‘rate online’. This is very cyclical as the insurance market hardens and softens. It is currently hardening – the ratio is getting bigger. Cover to capital backing: The amount of capital required to support the cover offered. This is set by industry regulators. Let’s assume it is static for now. 50

Sponsored by

R SKEX

Blockchain and AI

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Association Profiles

A s s o c i a t i o n P ro f i l e s

Insight from the Captive Insurance Companies Association, the European Captive Insurance and Reinsurance Owners Association, and the Pan-Asia Risk and Insurance Management Association

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Captive Insurance Times Domicile Guidebook

or nearly 50 years the Captive Insurance

many companies that will want to form captives to

Companies

help them better manage their risks.

Association

(CICA)

has

provided the best source of unbiased information, knowledge, and leadership

This change will elevate the status of captives

for captive insurance decision makers.

across board rooms and with CFOs and risk

CICA brings together approximately 400 members

managers. Thatâ&#x20AC;&#x2122;s a positive for the industry when

from all sectors of the captive industry to share

they become more aware of the value a captive

best practices, explore new uses of captives and

insurance company brings to their bottom line.

identify ways to engage the new talent needed to

Public entities will also find that captive solutions

continue advancing the industry.

give them important options in covering their risk management needs.

CICAâ&#x20AC;&#x2122;s

domicile-neutral

focus

and

growing

international partnerships make us a strong

The focus on the formation of quality captive

voice in defending the captive insurance industry

insurance companies, along with the firming of the

around the world. For many years, CICA has

market, are good signs for the captive industry.

partnered with the European Captive Insurance

One challenge we all face around the world is

Owners and Reinsurance Ownersâ&#x20AC;&#x2122; Association.

the need to make the industry a desired career

Together we host an event every two years

choice for young professionals. CICA is leading

for

the development of programmes for our members

Luxembourg. We are exploring opportunities

that provide career support and development

to work together with the Pan-Asia Risk and

opportunities

Insurance Management Association (PARIMA).

programmes have been positively received and

European

captive

insurance

owners

for

young

professionals.

These

participation in the programmes is increasing. We continue to hear about the market hardening. As companies feel the economic effects of

Attracting a robust talent pool and providing

the hardening market, they will quickly look to

career development resources to help young

form captives. Companies with existing captive

professionals grow their captive careers continues

structures will be expanding the use of their

to be a vital issue. CICA actively promotes the

captives. The industry has been waiting for this

dynamic nature of the captive industry and the

time for quite a while and will be ready to assist the

challenging and interesting careers it offers. We

CICA

are offering more ways for young professionals

CICA’s mentorship programme provides young

and students to get involved and providing more

and mid-career professionals with the opportunity

career development resources to help them grow

to receive counsel, advice and support from

their captive careers.

seasoned industry veterans from a wide range of skill sets. It also showcases why the captive

We are proud of the new programmes and

industry is a great place to work. The people

initiatives we have put forward. We have received

you meet, including a future mentor, can provide

overwhelming support from our members and

advice and introduce paths you might have never

are excited to report increasing participation and

known you wanted to pursue.

new opportunities. This is reassuring and we are grateful to the many member volunteers that are

The synergy of CICA’s efforts and the momentum

vital to these programmes’ successes.

created by industry colleagues and associations creating additional programmes will help to

Our

second

college

student

essay

contest

position the captive insurance industry as

received more entries from more schools. It

an attractive industry with meaningful work

is great to see the increased participation.

and opportunities to advance quickly in one’s

The emphasis on emerging industries helps

career. I encourage everyone to get involved in

showcase the growing opportunities for captive

these efforts.

insurance solutions. Our NEXTGen Task Force has been focused on raising awareness of the captive industry with future young professionals and providing networking and career-building opportunities for today’s young professionals. Our Amplify Women Task Force is connecting women

through

ongoing

communication

and

networking and creating visibility for today’s women captive leaders and role models. By creating awareness of the diversity of skills and experiences the captive industry needs we hope to engage a robust pool of talent interested in the opportunities, benefits and mobility the captive insurance industry provides. We also hope that

Dan Towle President CICA

this group will become our best advocates when it comes to spreading the word about exciting professional opportunities.

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Captive Insurance Times Domicile Guidebook

ECIROA

n last year’s edition, the European Captive

on financial transactions – inclusive framework

Insurance

on BEPS: Actions 4, 8-10).

and

Reinsurance

Owners

Association (ECIROA) informed the industry about the organisation’s objectives and

At first sight, this paper still gives the impression

explained how the particular structure and

that captives are “usually” only established to

performance of captives can be protected.

shift profits in the interest of the parent company. We fundamentally acknowledge the objectives

More recently, we learned about a new paper from

of the OECD base erosion and profit shifting

the Organisation for Economic Co-operation and

(BEPS) initiative and support the achievement of

Development (OECD) (transfer pricing guidance

these objectives.

ECIROA

However, we see a clear contradiction between

an appropriate and proper worldwide premium

the OECD papers and the already existing,

allocation with regard to their IIP. The wording

generally accepted rules and regulations for

of ECIROA’s proposal is available on its website:

captives.For some years now, the entire economy

www.eciroa.org

has been confronted with constantly increasing requirements

the

areas

regulation,

governance and compliance.

In ECIROA’s view, the OECD creates excessive and “inflated” wordings in its BEPS papers regarding the insurance sector, especially for

These

“improvements”

have

also

been

captives. Furthermore, the terms used by the

incorporated into a number of legal regulations

OECD are often not those commonly used in the

for the insurance business, such as Solvency II.

areas of risk and insurance management and have long been generally accepted.

All multinational enterprises (MNEs) and their captives have a vested interest in conducting

For captives, in particular, IAIS has provided

their business in accordance with national and

comprehensive definitions with the publication

international accounting and tax regulations,

of its Application Paper On The Regulation And

such as the transfer pricing principle.

Supervision Of Captive Insurers in November 2015. This paper is available on the website of

ECIROA has informed about these requirements

IAIS: www.iaisweb.org

in various working group meetings within the framework of the European Captive Forum (ECF),

What’s more, it doesn´t make sense to introduce

which are held every two years in Luxembourg.

a new definition of captives (and insurers in

This year’s ECF is scheduled to take place on 5

general) because the Solvency II Directive is

to 6 November.

precisely defining in its framework what has to be implemented in the European countries and which

In addition, ECIROA has made a proposal to

is – at least to a certain extent – a benchmark for

the

the introduction of legal frameworks in the area of

International

Association

Insurance

Supervisors (IAIS) for their publication of a

insurance worldwide today.

new Insurance Core Principle on International Insurance Programs (IIP).

need

the

long

and

sometimes

not

acceptable explanations of the OECD in its At present, the so-called non-admitted problem

´PART

often prevents MNEs from distributing insurance

APPLYING THE AUTHORISED OECD APPROACH

premiums among the subsidiaries co-insured in

the IIP worldwide in a way that complies with all

INSURANCE COMPANIES` to understand what

the regulations.

should be achieved? The answer can only be: no.

The wording proposed by ECIROA would help to

We support the targets of the BEPS papers but we

solve this problem and allow MNEs to carry out

are absolutely convinced that some simplifications

www.captiveinsurancetimes.com

IV:

SPECIAL

PERMANENT

CONSIDERATIONS

ESTABLISHMENTS

Captive Insurance Times Domicile Guidebook

FOR

(PE)

ECIROA

to achieve these targets are necessary – without preparing a new set of requirements.

Definitions: •

The Transfer Pricing Principle, the proof of arm’s

‘Captive insurance undertaking’

length premiums and the avoidance of misuse of

means an insurance undertaking,

insurance contracts as a ´financial transaction`

owned either by a financial

tool have to be observed by all MNEs, and

undertaking other than an

checked, audited and certified by all the relevant

insurance or reinsurance

stakeholders, but without the rampant amount

undertaking or a group of

of paperwork that gives the normal insurance

insurance or reinsurance

business a supposed importance through a

undertakings within the meaning

drastic increase in workload. In our opinion,

of Article 212(1)(c) or by a non-

the insurance business is, in any case, one of

financial undertaking, the purpose

the best regulated and monitored economic

of which is to provide insurance

activities in the world.

cover exclusively for the risks of the undertaking or undertakings to which it belongs or of an undertaking or undertakings of the group of which it is a member. •

‘Captive reinsurance undertaking’ means a reinsurance undertaking, owned either by a financial undertaking other than an insurance or reinsurance undertaking or a group of insurance or reinsurance undertakings within the meaning of Article 212(1)(c) or by a nonfinancial undertaking, the purpose of which is to provide reinsurance cover exclusively for the risks of the undertaking or undertakings to which it belongs or of an undertaking or undertakings of the group of which it is a member.

Guenter Droese Chairman ECIROA

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Captive Insurance Times Domicile Guidebook

new year brings some familiar stories

pressure. The criticality (and difficulty) of obtaining

when it comes to the captive scene out

the right coverage is also further highlighted as

here in the Asia Pacific.

it is common nowadays in many industries that business cannot operate without the appropriate

Recent and ongoing changes in the

regulatory

and

market

anything,

reinforced

environment the

â&#x20AC;&#x153;common

have,

coverage in place.

senseâ&#x20AC;?

approaches when it comes to utilising a captive.

Thus, while the insurance market in Asia Pacific has been lagging behind US and Europe in the hardening cycle race (with perhaps the exception

Companies seek out captive arrangements in

of Australia, where the hardening cycle has

order to gain long-term control and efficiency over

certainly been felt in some specialty classes like

their risk financing strategies.

directors and officers liability), and risk managers should be taking heed of these lessons.

Often, the primary objective is not to replace traditional insurance market capital, even in

It is likely a matter of when, and not if, the

a market where insurance premium rates are

insurance market in Asia Pacific catches up with

increasing/hardening.

the hardening cycle in the rest of the world.

However, the value of a captive and the control

The region had benefitted from the influx

and efficiency it offers comes to the fore when the

of global capital into the insurance markets

insurance market is hard and coverage is difficult

seeking higher returns, which translated into a

to find and/or expensive.

decade (plus) of soft insurance rates, and the effects of the withdrawal of global capital in the

Insurers either increase rates significantly and/or

aftermath of catastrophic losses will similarly

seek to reduce coverage.

filter across eventually.

This is when insurance as a topic gets escalated

Layered upon that is the fact that the majority of

higher up the board agenda and management

the professionals in the insurance industry have

wants to see the evidence of a strategic approach

not experienced a hard market. In fact, there

and not just knee-jerk reactions to market-driven

are many (risk managers, brokers and insurers

PARIMA

alike) who have built a career upon a soft market

assurance to attract overseas companies. Hong

which prioritises different negotiating skills and

Kong has still only attracted mainland Chinese

behaviours.

state-owned enterprises (SOE) owned captives which have a size and operating structure more

So in short, markets are hardening, coverage is

akin to commercial insurers than captives.

shrinking, professionals are inexperienced dealing with both, and captives can help - and we havenâ&#x20AC;&#x2122;t

Meanwhile

Australia,

New

Zealand

and

even mentioned the global uncertainty amidst the

Micronesia remain niche domiciles catering to

trade war and coronavirus. If risk managers are

largely domestic markets.

paying attention, then the interest in captives in the year ahead should be strong.

Regardless, I expect captives to be a recurring topic

the

year

ahead,

judging

from

the

After all, it is easier to leverage a captive in a

feedback from members on topics of interest

difficult market when you already have a captive

at our upcoming Pan-Asia Risk and Insurance

â&#x20AC;&#x201C; these things take time to convince stakeholders

Management Association (PARIMA) events.

and set up. PARIMA will endeavour to support my fellow risk As for captive domiciles, the best is still that

managers as they embark on a captive discovery

which

journey, one that seems more timely than ever.

facilitates

success

for

your

specific

captive objectives. Given the regulatory climate, risk managers would favour domiciles which have appropriate legislative requirements which includes capital, and regulators applying a light but firm, consistent and consultative approach to facilitate efficient operation without excessive requirements

substance.

Domiciles

with

a strong track-record of successful captives, preferably from your country and/or industry, will provide further comfort. In Asia Pacific, the factors mentioned above all

favours

Singapore,

which

continues

attract captives from a wide range of industries and

countries

â&#x20AC;&#x201C;

including

some

European

ones alongside the traditional sweet spot of Australia and Asia. Labuan is closing the gap on Singapore, but, for the time being, remains mainly attractive to Malaysian owners and the regulatory environment needs to offer greater

www.captiveinsurancetimes.com

Kelvin Wu Treasurer and member of EXCO PARIMA

Captive Insurance Times Domicile Guidebook

Domicile Profiles Up-to-date information about every major captive insurance domicile, including capital requirements and regulatory guidance

D o m i c i l e P ro f i l e s

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

Abu Dhabi

bu an

Dhabi

Global

innovative

Market

and

(ADGM)

•

Class 4 – any other proposals that do not

forward-looking

fall under class 1, 2 or 3 (e.g. beyond 20

International Financial Centre located in

percent third-party business), base capital

Abu Dhabi, the capital of the United Arab

requirement of USD 1 million

Emirates (UAE). ADGM offers a wide range of corporate vehicles

ADGM is an independent jurisdiction which uses

for the benefit of captive insurers, from standard

the direct application of English common law and

structures such as limited companies to protected

is comprised of three authorities: the Financial

cell companies and incorporated cell companies,

Services Regulatory Authority, the Registration

Authority and the ADGM Courts, providing a holistic

supports

environment which enables companies to conduct

(ISPVs) and SPVs.

provide

maximum

insurance

flexibility. ADGM

special

purpose

also

vehicles

and operate their businesses with confidence. Other key benefits of ADGM’s captive insurance Operating on recognised international standards,

regime include:

ADGM caters to a broad range of financial services,

•

100 percent foreign ownership permitted

including the growing captive insurance sector.

•

Flexibility to relocate existing captives from

ADGM’s risk-based and proportionate approach

•

other jurisdictions offers an attractive, flexible, responsive captive insurance framework that is business-focused.

requirements, above the base level required •

No restriction on repatriation of profits

•

0 percent tax environment until 2065, (5

The captive insurance regime benefits from a dedicated rulebook and streamlined application

percent VAT may apply) •

process, which is not only quick and efficient

application and annually •

range of structures, offering four classes of captive

•

Competitive registration fees of USD 1,000 per initial registration and USD 1,200 per

insurers to address a wide variety of business needs:

Competitive regulatory fees of USD 5,000 per captive and USD 1,000 per ICC/PCC at

but also robust and credible. ADGM’s captive insurance regime allows for a comprehensive

A risk-based, responsive approach to capital

annual renewal •

Ability

outsource

all

functions

managerial

Class 1 - ‘pure captive’, single parent, no third

administrative

party business, base capital requirement of

authorised captive insurance manager

and

ADGM

USD 150,000 •

•

Class 2 – single parent, up to 20 percent

For further information, or if you are interested in

gross written premium from third-parties,

discussing setting up a captive insurer or captive

base capital requirement of USD 250,000

insurance manager, please contact: +971 2 333

Class 3 – group, industry or association

8888, fsra@adgm.com, https://www.adgm.com/

captive, base capital requirement of USD 500,000

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

Alabama Sponsored by

Alabama

he State of Alabama has been consistently

2016 update, several of the features contained

recognised

in that revision to the Alabama Captive Act had

for

its

innovations

and

advancements in the captive industry,

heavy utilisation:

including placing top five nationally three years in a row in net captive formations and

•

approving the first rider-share captive in the nation.

utilised by 15 captives and protected cells •

The captive industry in the State of Alabama

The

modernisination

the

Alabama

protected cell captive statute allowed for the

began in 2006 when legislation was enacted allowing for captive insurance companies. In

The 60-day provisional captive license was

creation of one new protected cell captive •

2008, the law was amended to allow captives

One risk retention group was formed using the new Alabama RRG statute

to write homeowners insurance in gulf front, beach, and seacoast areas. The law also allowed

Other changes made in the 2016 Captive Act

captives to write all lines of insurance except

update included:

personal auto, homeowners insurance (allowed in

•

gulf front, beach, and seacoast areas only), and

Captives may form as any entity allowed under law, including Series LLCs and mutuals

reinsure workers compensation.

•

In 2016, Alabama signed into law HB 270

•

Initial capital requirements are updated for some captives Clarification and codification of premium tax

sponsored by the Alabama Captive Association to

requirements:

update and modernise the Alabama Captive Act.

The new law was an effort to make Alabama

No premium tax on dormant captives

more competitive in the formation of captive

Premium tax prorated in first year of

New cap on premium taxes of USD 100,000

insurance companies. In the first year after the

www.captiveinsurancetimes.com

operation

Captive Insurance Times Domicile Guidebook

To date, the 2016 updates to the Alabama

The capital requirements for the State of Alabama

Captive Act continue to have a positive impact

are:

and heavy utilisation in the captive industry in

•

Pure and protected cell: USD 250,000

the State of Alabama.

•

Risk retention groups and industrial insured:

With the updates to legislation, the captive

•

USD 500,000 Reciprocals: USD 1 million

market is continuing to see positive growth in the State of Alabama.

Benefits of domiciling in Alabama include the ability to obtain a 60-day provisional license.

In 2019, nine new captives were formed, bringing

There is a cap on premium taxes of USD 100,000,

the total number of licenses in the state to 72.

and no premium tax on dormant captives.

Alabama

Premium tax is also prorated in the first year of

promote the collective voice of its members with

the captiveâ&#x20AC;&#x2122;s operation and credits for exam fees

state and federal regulators, legislators, and the

are allowed to offset premium tax.

National Association of Insurance Commissioners. In 2020, the Alabama Captive Association will

The State of Alabama supports its own trade

continue promoting innovation and flexibility in

association, the Alabama Captive Association,

the captive industry by supporting an amendment

which is led by president Norman Chandler. The

to the Alabama Captive Act.

Alabama Captive Association (ACA) works to provide networking and educational opportunities

More information on captive insurance in Alabama

for

can

captive

owners

and

captive

insurance

professionals. The association also works to

www.captiveinsurancetimes.com

found

www.aldoi.gov/companies/

captives.aspx and www.alcaptives.org.

Captive Insurance Times Domicile Guidebook

Your Company. Your Risk. Your Way.

Arsenal, a leader in the captive industry, provides unique insurance

and business solutions in the alternative risk sector not available through traditional risk management mechanisms. With broad experience in P&C and L&H risks within regulatory and industry frameworks, the Arsenal team manages the full process for our clients from design and implementation to management and consulting. With physical locations in Alabama, Florida, Tennessee, New York, Texas, Vermont, and a strategic partnership in the Cayman Islands, Arsenal is one of the few independent captive managers that provides services in the top captive domiciles.

(855) 250-5550 5151 Hampstead High Street, Suite 200 Montgomery, Al 36116 www.ArsenalRMI.com

Anguilla

nguilla’s Insurance Act covers the

•

Group licences permit a foreign insurer to carry

licensing and regulation of companies

on any foreign insurance business, including

undertaking

insurance,

long-term foreign insurance business, with a

offshore and captive insurance, and of

single owner of that insurer and its affiliates,

domestic

insurance intermediaries.

and employees of the owner or its affiliates •

Single licences permit a foreign insurer or

In order to underwrite domestic insurance risks

a trust to carry on any foreign insurance

in Anguilla, a company needs to apply for a Class

business,

A insurer’s licence, which allows the licensee to

insurance business, with the sole owner of the

carry on any type of insurance approved by the

insurer, if a company, or with the beneficial

Anguilla Financial Services Commission. Foreign companies

wishing

undertake

domestic

including

long-term

foreign

owners of the insurer, if a trust •

Anguilla’s Insurance Act sets out the licensing

insurance need to register as a foreign company

regime, which calls for a detailed application

under

and business plan

the

appropriate

section

Anguilla’s

Companies Act and they must either set up a local office or appoint a licensed insurance agent

The act also details minimum capital requirements

or broker.

and general requirements as well as annual returns to be submitted by licensed insurers.

Offshore and captive insurance fall under Class B. These licences are divided as follows:

Every insurer, other than an approved external insurer undertaking domestic business or an

•

Unrestricted

licences

foreign

insurer, which maintains permanently in Anguilla

insurer to carry on any foreign insurance

its principal office and staff, is required to appoint

business,

an insurance manager.

including

permit

long-term

foreign

insurance business •

•

General licences permit a foreign insurer to

In 2018, Anguilla passed legislation allowing

carry on general foreign business, but not

the licensing of producer affiliated reinsurance

long-term foreign insurance business

companies,

Association

licences

permit

whose

reinsurance

business

foreign

managed by a primary insurer of the business

insurer to carry on general foreign insurance

acceptable to the Commission; and the ultimate

business and long-term foreign insurance

beneficial owners of which are the same as

business, with two or more owners of the

those of, or affiliated with, the producer of the

insurer, and their affiliates, and to carry on no

business reinsured.

more than 50 percent of its foreign insurance business (based on net premiums written)

More information on captive insurance in Anguilla

with persons who are not owners of the

can be found at www.fsc.org.ai.

insurer or their affiliates Domicile did not respond to request for data. Information correct as of 31 December 2018.

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

Arizona Sponsored by

Arizona

stablished in 2002, the Arizona captive

•

premium volume

a well-established group of local captive managers, attorneys, and other service

Each licensed captive insurer pays a flat annual license renewal fee, regardless of

domicile is vibrant, mature, and proven with •

Protected cell captive insurers pay a flat fee for each cell

providers, and is actively supported by the

Arizona Captive Insurance Association.

•

Arizona captives wrote more than USD 9.1 billion

•

Small captives may qualify as exempt from annual actuarial and audit reports Captive

insurers

(except

in gross premiums in 2018, and there are now

groups)

are

routinely

more than 125 licensed captives and captive risk

periodic regulatory examinations unless the

retention groups in the state.

director deems it prudent

not

risk

retention

subjected

The Department of Insurance has a stable team of

Arizona licenses the following types of captives

professionals who are knowledgeable, accessible

with the applicable minimum statutory capital

and

requirements:

responsive

and

have

the

necessary

experience to foster a sound and competitive •

Pure captive: USD 250,000

•

Association or industry group: USD 500,000

Arizona provides a cost-effective application

•

Risk retention group: USD 500,000

process, a supportive regulatory environment, and

•

Pure reinsurers: 50 percent of the amounts

captive programme.

above

the ease of an electronic filing portal making the state a national leader among captive domiciles. •

•

Agency captive: USD 500,000

•

Protected cell captive: USD 500,000

The state levies no insurance premium taxes or state and local income taxes on most

The director may prescribe additional capital and

licensed captives or protected cells

surplus requirements based on the type, volume,

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

and nature of the insurance. The state may also

traditional insurance which is not always available

license branch captives of alien captive insurers.

or affordable.

Pure captives may take several forms, including for-profit and not-for-profit corporations or LLCs.

mature

Reciprocal group captive insurers organised by

the

subscribers may also be an option.

organisations to meet many of their needs and

Arizona

and

experienced

captive

programme

domicile, enables

challenges in a manner more responsive to their We

understand

that

businesses

and

other

organisationâ&#x20AC;&#x2122;s objectives.

organisations take risks in order to compete and thrive. Captive insurance is an important risk

There are many factors to consider when selecting

management and financing option that can serve

as an attractive complement or alternative to

regulatory environment. The State of Arizona,

captive

domicile,

besides

attractive

Arizona

with its favourable year-round climate, is a

explore ways in which the Arizona captive

haven for business people and pleasure seekers.

programme can help businesses and other

Known as the Grand Canyon State, Arizona

organisations

attracts international tourists and professionals

manage and finance risk.

efficiently

and

effectively

alike for the fresh air and sunshine, world-class convention centres, and all the activities one

More information about the Arizona captive

would like to enjoy.

programme can be found on our website at: https://insurance.az.gov/captives, including links

All in all, Arizona offers clear advantages that

to captive programme facts and stats, separate

make it an attractive domicile and we are proud

reference guides for RRGs and other captive

so many captives have selected the Grand

types, state statutes and administrative code, and

Canyon State. We stand ready to discuss and

the captive license application and other forms.

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

Arizona

Vibrant, Mature, Proven

To learn more about the Arizona captive program, visit our website at https://insurance.az.gov/captives or contact Vincent Gosz at vgosz@azinsurance.gov or 602.364.2008.

Arkansas

T The

pure,

State

Arkansas

continues

its

aggressive recruiting captive insurers to

Some of their minimum capital and surplus requirements are:

the state by continuing to refine its captive •

laws after significant changes in 2017.

Producer

reinsurance:

USD

100,000

capital and USD 100,000 of surplus

Natural

State

association,

has

opportunities

Sponsored captive insurance company

and reinsurance transactions.

•

Special purpose financial captive insurance

Its

captive

traditional

insurers and

underwrite

non-traditional

a risks

variety

company Connecticut welcomes all companies that seek

•

a domicile that offers regulation that is thorough but at every step of the way business-friendly and

purpose financial captive •

particularly invite firms looking for regulators with real-world experience in alternative and unique

Sponsored captive licensed as a special Risk

retention

group

captive

insurance

company •

Agency captives

risks to consider domiciling in the domicile. Connecticut has set its sight on second movers

to the captive market including middle-market

Connecticut can be found at https://portal.

manufacturers and health care centres, key sectors

ct.gov/cid

www.captiveinsurancetimes.com

information

captive

Captive Insurance Times Domicile Guidebook

insurance

103

Cook Islands

he Cook Islands financial services industry

Only assets prescribed in the Captive Insurance

has been in existence for more than 30

Regulations of 2013 will be admissible when

years. It has been driven by reputable

determining the value of an LCIC’s assets and

professional

its surplus.

service

providers

with

wealth of knowledge and experience and

expertise in the laws of the Cook Islands, and the

The LCIC’s annual accounts must be audited and

administration of entities and products created

filed with the Financial Supervisory Commission. An

pursuant to those laws.

LCIC must establish and maintain a clearly defined risk management strategy commensurate with the

The Cook Islands has always shown itself to be

size, nature and complexity of the LCIC’s business.

flexible, innovative and understanding in meeting the needs of international businesses.

An LCIC is an international company that came into existence on 18 December 2019 will, as

The enactment of the Captive Insurance Act

from 1 January 2022, be subject to Cook Islands

in 2013 is an example of that. The Captive

company tax of 20 percent on its worldwide

Insurance Act of 2013 provides for the licensing,

income. An LCIC that is an international company

regulation and supervision of captive insurance

incorporated on or after 18 December 2019 will

business conducted outside of the Cook Islands

be subject to Cook Islands company tax from

by international companies incorporated under

incorporation. This change is a result of the Cook

the International Companies Act of 1981/82

Islands amending the International Companies

(International Companies), and certain captive

Act 1981-82 by removing exemptions from Cook

insurance business conducted within the Cook

Islands tax to comply with the requirements of the

Islands by companies incorporated under the

EU and avoid being listed as a non-cooperative tax

Companies Act 1970/71.

jurisdiction. Cook Islands domestic companies are subject to tax on worldwide income.

Captive insurance business in the Cook Islands means the business of a company insuring interests

The LCIC is required to pay a government fee of

in its holding company or in companies that it is

NZD 1,100 (USD 790) upon making its application

affiliated or associated with, or is organised within

for a captive insurance licence, with an annual fee

a group or agency relationship.

of NZD 3,100 (USD 2,217) also being payable.

The prescribed minimum share capital and surplus

More information on captive insurance in the Cook

requirement for a licensed captive insurance

Islands can be found at www.cookislandsfinance.

company (LCIC) is NZD 100,000 (USD 71,500).

com

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

105

Delaware

ne of Delaware’s most important attributes is its regulator’s highly experienced and

•

Series captive insurers: An amount specified by the insurance commissioner

qualified staff. The captive bureau’s level of staff experience and expertise ranks

The captive insurance premium tax for direct

as one of the highest among global

premium is 0.001 percent to a maximum of USD

captive regulators. Delaware’s captive bureau

200,000 and for assumed premium, the rate is

employees financial analysts who hold an array of

0.004 percent to a maximum tax of USD 110,000.

qualifications, including the ACI, AFE, CFE, APIR, ACO, CPA and MCM designations, as well as

Except for series captive insurers that pay a

masters in accounting and financial management

minimum annual premium tax of USD 3,500, all

and in business administration.

other captive insurers pay a minimum annual premium tax of USD 5,000.

Delaware law allows the licensing of agency, association, branch, industrial insured, mutual,

Conditional licensing legislation was passed in

pure, reciprocal, series, special purpose, special

October of 2018 and allows selected captives to

purpose financial, sponsored, and cell captives, as

receive a conditional license on the same day they

well as risk retention groups.

submit an application. Delaware is the first US state to offer such a license, which allows captives

The minimum capital requirements for these

to conduct business while their application is

captives are:

reviewed and a permanent license is established.

•

Agency, branch, pure, and special purpose

According

captive insurers: USD 250,000

Insurance, Delaware ranks third in the US and fifth

the

Delaware

Department

in the world in terms of captive domiciles and is Industrial insured and sponsored captives:

one of just four domiciles that are International

USD 500,000

Center for Captive Insurance Education trained.

•

Association captives: USD 750,000

More information on captive insurance in Delaware

•

Risk retention groups: USD 1 million

•

can be found at captive.delaware.gov.

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

107

District of Columbia

he District of Columbia has a progressive

The legal requirements in the District of Columbia

captive insurance and corporations code

are

that meets the needs of captive owners.

The district also has a very knowledgeable

providers. The district does not require a local

straightforward. manager,

lawyer

All and

captives

must

experienced

have

service

dedicated staff of financial examiners and

director, but the captiveâ&#x20AC;&#x2122;s board must meet in

analysts who are well-versed in the regulation of

the District of Columbia at least once per year,

captives, including risk retention groups.

although the annual meeting requirement may be met if at least one representative is present in the

Additionally, the cost of doing business, especially

District of Columbia.

financial examinations, compares favourably with other captive domiciles.

Instead, a representative of the captive present in the District of Columbia can facilitate the meeting

The district caters to all types of captives, including

via phone or web conference. Captives in the

agency, association, branch, cell, pure, rental and

District of Columbia are examined on a five-year

risk retention groups.

cycle, which can be extended or waived upon request after the first examination.

The minimum capital and surplus for pure captives has been set at USD 250,000, while the minimum

More information on captive insurance in the

capital and surplus for most other captives is

District of Columbia can be found at www.disb.

USD 400,000. There is no minimum capital for

dc.gov.

cell captives. Cell minimums are established by the insurance commissioner based on the cellâ&#x20AC;&#x2122;s business plan.

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

109

Dubai

ubai is a global centre of business,

Class three captives insure risks of members of

connected to both regional and worldwide

the same industry and are subject to a stricter

markets, and offering an experienced

regulatory regime reflecting the standards of a

reinsurance set-up, access to brokers

traditional insurer.

from across the Middle East, Africa, and

South Asia markets, and a highly-skilled workforce.

The minimum regulatory capital requirements for Dubai are as follows:

The domicile’s unique selling point is its legislative and regulatory framework that complies with

•

Class one: USD 150,000

global standards in a favourable tax environment.

•

Class two: USD 250,000

•

Class three: USD 1 million

Captives are licensed by the financial services regulator, the Dubai Financial Services Authority

Dubai also authorises the formation of protected

(DFSA).

cell companies (PCCs), which offer lower formation costs and capital requirements.

The DFSA rulebook authorises three classes of captive.

PCCs must operate and be authorised as class one, two or three captives, and have minimum

Class one captives insure only the operations of

cellular assets of USD 50,000 and minimum non-

the business or the group and are subject to a

cellular assets of USD 50,000.

lighter regulatory regime than traditional insurers. Captives and PCCs in the domicile are subject Class two captives have at least 80 percent of

to risk based solvency and capital requirements.

gross written premium from the same group and

There is no company tax, but a 5 percent VAT

are subject to a slightly stricter regulatory regime.

applies on non-life premiums for UAE risks.

www.captiveinsurancetimes.com

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Federated States of Micronesia

F e d e ra t e d S t a t e s o f M i c ro n e s i a

Micronesiaâ&#x20AC;&#x2122;s

investments, subject to the condition that the

captive law was enacted in 2006. It was

insurance commissioner may limit or prohibit any

intended to provide Japanese corporations

investment that threatens the solvency of the

with an optimal means of implementing

captive.

Federated

captive

States

insurance

company

conveniently located domicile with a prudent and

As of 31 December 2019, there were 25 actively

responsive regulatory and legislative environment.

licensed captives. There were no new captives licensed, compared to the three in 2018. However,

Micronesia is an independent republic that covers

2019 was a stable year, in the face of evolving

about one million square miles in the Western

Japanese regulations. All captives are required

Pacific Ocean. It is located about 3,000 miles

to file annual audited financial statements, which

southwest of Hawaii and 2,000 miles southeast

may be prepared based on US generally accepted

of Japan. The country has full diplomatic relations

accounting principles (GAAP), Japanese GAAP,

with nearly 60 countries, including the US,

international financial reporting standards, or

Japan and China. It is also a member of several

another comprehensive basis of accounting.

international

organisations

including

the

UN,

Asian Economic Development Bank, International

Annual actuarial certifications are also required

Monetary Fund, and World Bank.

to be prepared by members of the American Academy of Actuaries, the Institute of Actuaries of

Captives are regulated by the Federated States

Japan, or other loss reserve specialists as may be

of Micronesia insurance board and the insurance

approved by the insurance commissioner and the

commissioner, which are supported by a staff of

insurance board.

in-house examiners and financial analysts. Annual operating costs include a premium tax The licensing authority currently allows for single

of 0.05 percent on gross premiums that were

parent and group captive structures with minimum

not previously subject to tax, less any return or

required capital and surplus of USD 100,000,

assumed reinsurance premiums. Annual captive

subject to additional amounts as may be prescribed

licensing and business registration fees are about

by the insurance commissioner depending on

USD 550. All captives are also required to file a

nature and volume of risk retained by the captive.

relatively simple annual income tax return that is computed at 21 percent of net income as reported

Minimum capital and surplus may be in the form

in their annual audited financial statements.

of cash, irrevocable letter of credit or other security deemed appropriate by the insurance

Micronesiaâ&#x20AC;&#x2122;s captive insurance industry is also

commissioner.

supported by the Federated States of Micronesia Captive Insurance Council (FSM-CIC), the private

Investments are generally required to be made

sector trade association comprised of service

in secure and highly rated securities and other

providers and captive owners formed in 2009.

www.captiveinsurancetimes.com

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Florida

ew legislation was signed into law in April

insurance company and may insure only the

2012 that augmented Florida’s provisions for captive insurers by further specifying

risk of its parent •

Reinsurance captive: A reinsurance company

criteria for the formation, incorporation,

that must be a stock corporation that is wholly

coverage, capital and surplus, reporting,

owned by a qualifying reinsurance parent

licensure and reinsurance. Florida has a unique

company and may not directly insure risks

selling point in that its capital requirements are

relatively low.

Florida’s general requirements are based on the type of captive insurance or reinsurance company.

There are four main types of captive companies available in Florida:

The variations in requirements range across incorporation,

•

Pure: A company that insures the risks of

unimpaired

capital

and

unimpaired surplus.

its parent, affiliated companies, controlled

•

unaffiliated businesses, or a combination

Interested parties should review Chapter 628 of

thereof

Part V the Florida statutes to see what is required

Industrial

insured:

captive

insurance

for each type of captive insurer.

company that provides insurance only to the

•

industrial insureds that are its stockholders

In addition to the specific requirements of each

or members, or to the stockholders, and

type of captive insurer, all captive insurers must be

affiliates thereof, of its parent corporation

approved through an application process and must

Special purpose: A captive that does not meet

comply with the annual reporting requirements.

the definition of any other type of captive

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

115

Georgia

Department

on each dollar thereafter on its direct premiums

continues to make strides in maintaining a

Georgia

Insurance

collected, after deducting return premiums or

healthy regulatory environment for captive

dividends to policyholders.

companies that want to call Georgia home. The state also collects on assumed reinsurance

New legislation was introduced in 2018, which

premium at a rate of 0.225 percent on the first

offers businesses and captive managers a more

USD 20 million, 0.15 percent on the next USD 20

efficient method of forming and domiciling a

million, 0.05 percent on the next USD 20 million,

captive in Georgia.

and 0.025 percent of each dollar thereafter.

The department’s captive division continues to make

No reinsurance tax applies to premiums for risks

it a priority to strengthen relationships within the

or portions of risks subject to taxation on a direct

industry and to provide a superior level of customer

basis under Title 33.

service to captives in order to help them succeed. The types of captive structures available in Georgia

Captives pay a maximum tax of USD 100,000 per

and their minimum capital requirements are:

year and two or more captives under common ownership and control, other than sponsored

•

Pure and agency: USD 250,000

•

Association

and

industrial

insured:

captive insurance companies, are taxed as though USD

they are a single captive.

500,000 •

Risk retention group: USD 500,000

More information on captive insurance in Georgia can

Georgia’s premium tax has been set at a rate of 0.4

found

www.oci.ga.gov/insurers/

captives.aspx

percent on the first USD 20 million and 0.3 percent

www.captiveinsurancetimes.com

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117

Germany

ermany is not a typical captive domicile.

amount of eligible basic own funds within a short

There

companies

period of time. The calculation used to determine

that have located their captive here due

the minimum capital requirement is set out in the

Delegated Regulation 2015/35/EU.

are

some

compliance

German

requirements

and

the

opportunity to share staff with the in-

house broker and the parent company. In Germany,

Minimum absolute capital requirements:

there are insurance captives as well as reinsurance captives, which are writing property/casualty and

•

EUR 2.5 million for non-life insurers, including captive insurers (except for insurers covering third-

life business.

party liability, credit and deposit risks, in which case the minimum capital is EUR 3.7 million)

There are extensive requirements, mainly due to Solvency II. Section 122 VAG provides that the

•

amount of eligible basic own funds below which

EUR 3.7 million for life insurers, including captive insurers

minimum capital requirement corresponds to an •

EUR 3.6 million for reinsurers excluding captive reinsurers

policyholders and beneficiaries would be exposed to an unacceptable level of risk if the insurer was

•

EUR 1.2 million for captive reinsurers

allowed to continue its operations. Accordingly,

•

EUR 6.2 million for insurers conducting life

the financial regulatory authority for Germany

and non-life insurance business covered by

(BaFin) will withdraw an insurer’s authorisation

the EU Solvency II Directive

when the insurer’s amount of eligible basic own funds falls below the minimum capital requirement

For more details, visit: https://www.clydeco.com/

and the insurer is unable to re-establish the

insight/article/insurance-reinsurance-in-germany

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

119

Gibraltar

G i b ra l t a r

aving been a financial services centre

licences and without having to apply for a

for more than 30 years, Gibraltar has

separate licence in other territories.

highly developed legal and accounting professions, and an established and

Gibraltar also has a flexible tax regime, with

successful insurance sector.

a low tax rate of 10 percent across the board, which came into effect in July 2010. As a British

Gibraltar licenses captive insurers, protected

overseas territory, Gibraltar is caught up in the

cell companies, reinsurers, insurance managers,

UKâ&#x20AC;&#x2122;s exit from the EU. As part of the UKâ&#x20AC;&#x2122;s exit,

intermediaries, managing general agents, life

Gibraltar will lose its EU membership (at the

insurers,

time of writing).

general

insurers,

liability

insurers,

casualty insurers and motor insurers. The

Gover nment

currently

about

future

having

ongoing

based in Gibraltar can provide insurance in

relationships and is set to do so until 31

other EU member states using their Gibraltar

December 2020.

www.captiveinsurancetimes.com

discussions

Under EU laws, insurers and intermediaries

Captive Insurance Times Domicile Guidebook

trading

121

Guam

n 1996, the governor of Guam signed a

The capital and surplus requirements for Guam

bill into law, which authorised 100 percent

captives are as follows:

abatement and rebates of corporate and

•

gross

receipts

taxes,

respectively,

qualified insurance underwriters and captive

USD 100,000 of surplus •

insurance companies incorporated in Guam. Benefits of domiciling in Guam include its percent tax rebates for commercial, captive and

Group captives: USD 150,000 of capital and USD 150,000 of surplus

• geographic location in relation to the US, 100

Pure captives: USD 50,000 of capital and

Industrial insured captive: USD 150,000 of capital and USD 200,000 of surplus

•

Protected cell companies: USD 150,000 of capital and USD 200,000

reinsurance companies, its established financial services community and reinsurance business.

More information on captive insurance in Guam can be found at www.investguam.com

Guam welcomes pure captives, group captives, incorporated industrial captives and protected cell captives.

Domicile did not respond to request for data. Information correct as of 31 December 2018.

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

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Guernsey Sponsored by

Guernsey

uernsey is well known for innovation in

Guernsey’s close proximity to the UK and mainland

offshore insurance. The sector’s origins

Europe, being in the same time zone as the UK, and

date back to the 18th century and the

not being a member of the EU, place the domicile

first captive insurer was incorporated

at an advantage. Being outside the EU means

in the island in 1922. Today it is the

Guernsey has maintained a solvency regime that is

largest captive domicile in Europe and in the top

fully compliant with the International Association of

five jurisdictions worldwide, with an experienced

Insurance Supervisors, but is not subject to Solvency

insurance community of nearly 1,000 professionals,

II. This provides a highly effective regulatory

and offices of all the major global captive managers

environment

and a number of significant independents. The

companies in the use of their captives to meet

island pioneered the cell company concept by

their risk financing needs efficiently and effectively.

introducing the protected cell company and, more

Captives may be structured as companies, protected

recently introduced insurance-linked securities

cell companies or incorporated cell companies and

and pension longevity structures.

their respective cells.

The

island’s

captive

insurance

expertise

Licensing

that

and

encourages

regulatory

and

facilitates

requirements

are

well regarded worldwide, with memoranda of

set under the Insurance Business (Bailiwick

understanding signed with Chinese authorities and

captive business starting to flow from the country.

Financial Services Commission assesses licence

Guernsey)

applications

Law and

2002.

business

The

plans

Guernsey based

More than 20 percent of the UK FTSE 100 have

applicant’s ability to meet minimum statutory

captives domiciled in Guernsey–and a number of

licensing criteria, including fitness and propriety

firms join them from continental Europe, US, the

of applicant, integrity and governance.

Middle East, Asia, South Africa, Australia, and the Caribbean.

Captives are designated as a Category five insurer under the Insurance Business (Solvency)

In 2018, the island licensed more than 40 percent

Rules of 2015 and are subject to a standardised

of new captives launched in Europe, and its

risk-based solvency requirement calibrated such

share of the European captive market still stands

that there is a 90 percent confidence level that

at nearly 40 percent. Although new licences are

there is sufficient capital to meet obligations over

nowadays being overtaken by closures, in line with

the next 12 months.

market trends, captives are still valued and market changes led to a significant increase in inquiries in

More information on captive insurance in Guernsey

the second half of last year.

can be found at www.weareguernsey.com

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

125

WE ARE innovatio innovation WE ARE innovation ARE innovation EWE ARE innovation During the years he lived and worked in Guernsey,

Victor Hugo was inspired by the island, completing edthe and worked in Guernsey, During the years he lived lived and worked in Guernsey, Guernsey, the years he lived andand worked in Guernsey, gDuring years he lived worked inworked Guernsey, During the yearsand he in ‘Les Miserables’ as well as decorating his house ed by the island, completing Victor Hugo was inspired by the island, completing Victor Hugo was inspired by the island, completing Hugo was inspired by the island, completing Victor Hugo was inspired by the island, completing with his a plethora of unique mterials. lLes as‘Les decorating house Miserables’ as well as decorating decorating his house house Miserables’ asas well as decorating his his house Miserables’ as well decorating his house ‘Les Miserables’ as well as

ue mterials. with aof plethora unique mterials. with a plethora of unique mterials. plethora unique mterials. of unique mterials. Guernsey is still inspiring innovation today

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INSURANCE

INVESTMENT FUNDS

INVESTMENT FUNDS TRUST & COMPANY PENSIONS INVES INSURANCE INVESTMENT FUNDS TRUST &&CO E: info@weareguernsey.com INSURANCE INVESTMENT FUNDS TRUST C TRUST & COMPA INSURANCE INVESTMENT FUNDS SURANCE INVESTMENT FUNDS TRUST & COMPANY PEN

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E: info@weareguernsey.com info@weareguernsey.com E: E: info@weareguernsey.com o@weareguernsey.com T: (0)1481 +44 (0)1481 (0)1481 720071 T: +44 720071 +44 720071 4T:(0)1481 720071

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BANKING BANKING BANKINGBANKING

Hawaii

xperience, reliability and accessibility best

•

Class 5: Reinsurance or excess insurance

describe why Hawaii is one of the world’s

only, to be determined by the insurance

premier domiciles for captive insurance and

commissioner

alternative risk financing. With over 30 years of experience, Hawaii is a key domicile of

In Hawaii, tax is levied only on the captive’s

the Pacific region and highly respected worldwide.

premiums. There is no minimum premium tax but it is limited to USD 200,000. There is no

Its partnership approach with captive owners

taxation of captive premiums if premiums were

and the industry offers a stable and prudent

previously subjected to tax in a jurisdiction where

environment for captive organisers, ensuring the

the underlying risk is located, or on reinsurance

continued success of Hawaii captive programmes

premiums assumed by a captive.

in this rapidly changing area. The premium tax rate has been set at 0.25 percent Hawaii offers multiple captive structures, including

for the first USD 25 million, 0.15 percent for the

pure, group, association, sponsored and risk

next USD 25 million, and 0.05 percent for between

retention groups.

USD 50 million and USD 250 million. No tax is levied on more than USD 250 million.

The minimum required capital and surplus is determined by the insurance commissioner based

Captives in Hawaii are also subject to the

on each captive programme. As a guide, the

following fees:

minimum statutory capitalisation requirements by

•

Initial incorporation: USD 50

class of captive licence are:

•

Application: USD 1,000

•

Annual business registration: USD 50

•

Annual captive licence: Class 1 and 2, USD

• •

Class 1: Single-owner; reinsurance only, USD 100,000

300; Class 3, USD 500; and Class 4 and 5,

Class 2: Single-owner; direct and reinsurance,

USD 1,000

USD 250,000 • •

Class 3: Multi-owner; association or risk

More information on captive insurance in Hawaii

retention captive, USD 500,000

can be found at www.cca.hawaii.gov/ins/captive

Class 4: Sponsored captive, USD 500,000

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

129

Hong Kong

ong Kong first enacted legislation for

It boasts a simple tax regime with a corporate tax

captive insurance in 1997, with its first

rate as low as 16.5 percent, while the maximum

captive licensed in 1999. Hong Kong is

rate of personal income tax is only 15 percent.

known for its commitment to encouraging the establishment of captive insurers in

Commencing from the year of assessment 2013/14

the territory with a view to promoting Hong Kong

onwards, there has been a 50 percent reduction in

as a captive centre within the Asian region.

the corporate tax rate for the offshore insurance business of captives. This has been further

It also holds a reputation for being the financial,

extended to the insurance business of onshore

trading and business centre in Asia, providing

risks commencing from the year of assessment

a sound, and internationally respected, legal

2018/19.

system and a resilient, resourceful and efficient workforce, as well as a sophisticated and friendly

The minimum paid-up capital requirement for

business environment.

captives licensed in Hong Kong is HKD 2 million (USD 260,000), while the solvency requirements

Hong Kong keeps its regulatory legislation under

stand at 5 percent of the net premium income,

regular review to ensure it is up to date with

5 percent of the net claims outstanding, HKD 2

international standards.

million, or whichever is greater.

The domicile is home to traditional types of

More information on captive insurance in Hong

captives insurance companies that carry general

Kong can be found at:

insurance business and sways away from more sophisticated types of captives such as rent-a-

https://www.ia.org.hk/en/supervision/reg_insurers_

captives and protected cell captives.

lloyd/requirements_captive_insurers.html

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

131

Illinois

he Illinois Department of Insurance has

Other notable changes include:

amended the captive insurance article of the Illinois Insurance Code.

•

Lowering the filing fee from USD 7,000 to USD 2,000

Effective

amendment

allows

November captive

2018,

insurers

the be

•

Financial reporting requirements

•

Allowing captives to make loans to affiliates

formed in Illinois with lower minimum capital and surplus requirements.

with prior approval of the Director The minimum capital and surplus requirements of the three types of captives that can be formed in

•

Captive reinsurance pools

•

Captive managers

•

Dividends

Illinois are: •

Pure USD 250,000

•

Industrial insured USD 500,000

•

Association USD 750,000

More detailed information on captive insurance in

www.captiveinsurancetimes.com

Illinois can be found at www.insurance.illinois.gov

Captive Insurance Times Domicile Guidebook

133

Ireland

ccording to the Central Bank of Ireland

The foreign direct investment agency, IDA Ireland,

(CBI) there are 69 captive re/insurance

promotes the Irish international financial services

companies in Ireland with total assets of

sector and offers a myriad of supports to foreign

EUR 6.2 billion as of 31 December 2018.

companies establishing in Ireland. Ireland also

Gross written premiums were EUR 1.361

has a unique relationship with the UK, a common

billion with EUR 782 million retained within the

mother

captives. Gross technical provisions were EUR 2.6

common law legal framework.

tongue,

pro-business

culture

and

billion with EUR 1.5 billion retained. Setting up in Ireland Insurance Ireland is the representative body for the Irish domestic and international insurance

The process for setting up in Ireland and interaction

industry,

management

with the CBI, Ireland’s sole regulatory authority for

sector. Insurance Ireland is heavily involved with

financial services, initiates a strong relationship

our members in relation to the market’s priorities

with the applicant from the outset.

including

the

captive

and its future development. Insurance Ireland is also a contact point for Advantages of Ireland as a captive domicile

any captive management companies looking to establish in Ireland and keen to get a sense of the

With

30-year

world-leading

track

record

financial

services

building

ecosystem,

market and the opportunities Ireland presents to captive managers.

Ireland provides a stable and secure operating environment, skilled staff, connectivity, urban

Ireland’s sophisticated financial services sector

amenities and high quality, competitively priced

is regulated by the CBI, which covers life and

business infrastructure.

general insurance, credit institutions, investment intermediaries, stockbrokers, financial exchanges,

This is in addition to a transparent tax regime and

collective investment schemes, funds, investor

a business-friendly environment. The freedom of

compensation and related consumer issues.

services (FOS) and freedom of establishment (FOE) offering to all types of international re/insurers

The insurance regulatory environment overseen

and captives is central to Ireland’s international

by the CBI is of a high quality and adheres to

financial services activities.

Solvency II.

The strong ecosystem underpinning this model

The

includes

legal

and

associated

CBI

has

recognised

the

principle

professional

proportionality within its risk-based framework

services with extensive experience in supporting

for supervision via its Probability Risk and Impact

companies in accessing all EEA countries on a

System

direct writing basis.

ranked as ‘low’ or ‘medium-low’ such as captives

www.captiveinsurancetimes.com

(PRISM).

Under

PRISM,

Captive Insurance Times Domicile Guidebook

re/insurers

135

are subject to less onerous requirements, for

•

Employers’ liability

example, the CBI’s governance code allows for

•

General liability

fewer directors and less frequent board meetings.

•

Captive insurers and reinsurers also cover non-traditional risks such as:

The main types of captive structures in Ireland

•

Employee

benefits,

including

employee

benefits

through

domiciled branches of Irish captives

The captives domiciled in Ireland are direct insurance companies as well as reinsurance

•

Product liability

companies.

avail

•

Miscellaneous financial loss

of FOS Ireland and FOE to write cross-border

•

Workers’ compensation retentions

business in the EU from an Irish base.

•

Catastrophe

Regulated

companies

can

US US-

The types of risks traditionally underwritten by

The CBI has prepared a set of templates available

captives in Ireland includes:

for captives that wish to apply for a direct or

•

Accident

reinsurance license. These are available on the

•

Sickness

CBI website www.centralbank.ie

•

Aircraft

•

Property damage

•

Business interruption

•

Goods in transit

While we know Brexit creates uncertainty for

•

Motor vehicle liability

all insurers, it is difficult to assess what the

•

Credit

company-specific impacts are in the captive

136

Looking ahead

Ireland

market. The main issue is the lack of certainty

allowing Irish operations of international groups

on future regulatory frameworks between the

to expand their roles, as well as improving

UK and the EU and Insurance Ireland’s priority

Ireland’s

is on engaging with regulators and officials to

critical mass of expertise for specialist activities.

convey the industry’s views on the need for early

The priority areas for all aspects of insurance,

confirmation of a transitional arrangement and

including captives, are:

attractiveness

building

clarity on the considerations regarding the future •

Regulatory interaction

•

Promotion

The Irish Government’s strategy to develop and

•

Brexit

promote the financial services sector up until

•

Insurtech

2020 is called IFS2020. The strategy for the

•

Skills

period up to 2025, which will be called IFS2025,

•

Sustainable finance

is currently being drafted.

•

Competitiveness

•

Culture, diversity and inclusion

trading and regulatory relationship.

Insurance Ireland believes the central aim should be to move insurance and financial services further up the value chain as we see this as being critically important for existing insurers in the market and for potential new entrants. In addition, a continued focus on value chain will help cement existing jobs in the sector by

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

137

the

Isle of Man

he Isle Man has a strong economy, backed

prescribed minimum limits of solvency:

by a Moody’s rating of Aa2. Its pragmatic and effective regulation offers a choice of

•

General insurer: GBP 150,000

•

Reinsurance company: GBP 100,000

•

Captive insurer: GBP 50,000

structures, including incorporated cell and protected cell companies.

It also boasts bespoke insurance-linked securities, special purpose vehicle and catastrophe bond legislation. Redomestications are allowed.

Fees include an application charge of GBP 2,602 and annual charges of GBP 5,578.

Located in the heart of the British Isles, but not part of the EU or the European economic area,

The Isle of Man, in line with most other major

the Isle of Man has a skilled and cost-effective

domiciles, is introducing a revised risk-based

workforce, along with extensive infrastructure and

methodology for the calculation of capital and

supporting professional services.

solvency requirements based on internationally recognised standards developed by the IAIS

Its proportional capital and solvency requirements

Insurance Core Principles.

are coupled with the ability to provide a loan back to the parent company.

The process is well underway and the IOMFSA is engaging with the industry during this process.

The

domicile

offers

host

structures,

including limited liability companies protected

The new framework is anticipated to be in place

cell companies, incorporated cell companies,

for the captive insurance market (which includes

insurance special purpose vehicles, and limited

captives) in 2020.

liability partnerships. More information on captive insurance in the Isle At the formation stage, an appropriate risk-based

of Man can be found at www.iomfsa.im.

level of capital is agreed with the regulator, the Isle of Man Financial Services Authority (IOMFSA).

Additional information, including details of all companies offering captive management services

Thereafter, the company is required to maintain

in the Isle of Man, can be found on the Isle of

adequate capital and resources to meet its

Man Captive Association’s website at www.

liabilities. The current regulatory framework has

iomcaptive.com

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

139

Jersey

ersey has a growing reputation as an

standards set by the International Association of

alternative location to establish a captive

Insurance Supervisors. Jersey has capability for

and

both long and short-term risks, global and domestic

established jurisdictions can offer. The

programmes and can write on reinsurance or

Jersey market has grown in excess of 30

insurance basis.

can

offer

everything

the

percent over the past two years thanks to an â&#x20AC;&#x2DC;open for businessâ&#x20AC;&#x2122; approach from local managers.

More information on captive insurance in Jersey can be found at www.jerseyiia.org/about

Jersey has opted to be non-equivalent towards Solvency II and instead follows the international

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

141

Kansas

aptive insurance law in the State of

operations in the state, unless otherwise permitted

Kansas provides for pure, association,

by the commissioner.

branch and special purpose captives. Prior to 1 March of each year, every captive Capital requirements in the domicile are

as follows:

insurance company must submit a report of its financial condition, verified by oath of two of its executive officers, to the commissioner.

• •

Pure captives: no less than USD 250,000 in capital

Kansas-domiciled captives are required to pay a

Association captives: USD 500,000 in capital,

tax on all premiums received on risks located in

which can come in the form of cash or a letter

the state.

of credit issued by a bank chartered by the

•

state of Kansas or the US comptroller of

Interested parties should contact the financial

currency, domiciled in Kansas, and approved

surveillance division for more information and

by the commissioner

visit the National Association of Insurance

Special purpose captives: unimpaired paid

Commissioners

in capital and surplus of no less than USD

Authority Application website, via www.naic.

5 million

org, for applicable admission documents.

Uniform

Certificates

For the purposes the state’s captive insurance

More information on captive insurance in Kansas

law, a branch captive insurance company is a

can be found at www.ksinsurance.org

pure captive insurance company with respect to

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

143

Kazakhstan

he Astana Financial Services Authority

As part of investment reforms in Kazakhstan, the

(AFSA), is the independent regulator of

AIFC is aimed at accelerating economic growth

the Astana International Financial Centre

of the country. It has implemented a regulatory

(AIFC), a legal entity and statutory body of

regime that allows attracting capital to the country,

the Republic of Kazakhstan.

including repatriation of assets.

The AIFC is a unique hub on the map of the financial

Minimum capital requirement for a captive insurer.

world that brings together the best practices and

For the purposes of Schedule 4 of Insurance and

opportunities offered by similar institutions around

Reinsurance Prudential Rules (PINS), the capital

the globe â&#x20AC;&#x201C; from New York City and London to

floor for a captive insurer is:

Dubai, Hong Kong and Singapore.

(a) USD 150,000 for a captive insurer carrying on general captive insurance business;

The AIFC welcomes companies and individuals,

(b) USD 150,000 for a captive insurer carrying on

and are prepared to offer additional opportunities

long-term captive insurance business; or

for

development

and

growth

both

large

financial, industrial and trade corporations, as well as newcomers in the market.

Minimum capital requirement for a protected cell company:

Its friendly tax regime and operational incentives

(1) Subject to (2), each cell of a protected

help reduce expenses and make the cost of doing

cell

business in the AIFC attractive to clients as well as

capital requirement in accordance with PINS

increasing competitiveness.

5.2.2 (obligation to calculate minimum capital

company

must

calculate

its

minimum

requirement ) as if it were a stand-alone insurer Under AIFC acts, captive insurance business is the

(2) For a captive insurer that is a protected cell

business of effecting or carrying out contracts of

company, the capital floor only applies to the

insurance only for the business or operations of

overall protected cell company and there is no

the group to which the captive insurer belongs.

capital floor for each cell or the core

In January 2020, the AFSA revealed it had issued

Prescribed capital requirement for a protected cell

a license to the Kazakhstan Energy Reinsurance

company:

Company to continue the regulated activities of

Each cell of a protected cell company must

effecting contracts of insurance and contracts of

calculate its prescribed capital requirement in

insurance as a captive insurer, after relocating

accordance

from Bermuda.

calculate prescribed capital requirement) as if it

with

PINS

5.2.3

(Obligation

were a stand-alone Insurer. The transfer of incorporation of the captive insurance firm marked a positive process of

For more information, visit: https://aifc.kz/

relocation of Kazakhstani capital and assets from foreign jurisdictions, according to the AIFC.

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

145

Kentucky

entucky

established

mature

midwestern captive domicile focused on

Kentucky has four risk retention groups, with three writing medical malpractice.

insurance and risk management. It also has a captive owned by an international For many years, Kentucky has been a

nonprofit and a large employee stock ownership

successful captive domicile.

plan controlled captive.

It has grown to more than 80 licensed captives,

The minimum capital and surplus requirements in

with experienced captive managers and service

Kentucky begin at USD 250,000 for pure captives

professionals.

and special purpose captives, and USD 500,000 for most other captives.

The

Kentucky

Department

Insurance

has

experienced staff dedicated specifically to captives.

The premium tax starts at 0.4 percent for the first USD 20 million and has lower graduated rates as

Kentucky has not specialised in a particular type

premiums rise.

of captive or industry. The premium tax is generally in line with other Kentucky captive owners come from a number of

states that impose a premium tax. A minimum of

industries, including automobile, healthcare and

USD 5,000 per year is charged if the premium tax

elder services, manufacturing, computer services,

would not otherwise exceed that amount.

real estate and construction, banking and financial services, and shipping/ transport and logistics.

information

can

found

captive.

insurance.ky.gov and www.kycaptive.com Total annual premiums are approximately USD 100 million.

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

147

Labuan Sponsored by

Labuan

abuan boasts a robust and internationally

captive in Labuan, an applicant must be a Labuan

recognised

with

company (including protected cell companies)

a strong focus on insurance and risk

incorporated or registered under the Labuan

management. Businesses are governed by

Companies Act of 1990, or a special purpose

eight modern acts, including the Labuan

vehicle. They must also be a member of the Labuan

regulatory

framework,

Islamic Financial Services and Securities Act of

International Insurance Association.

2010, which is the world’s first omnibus legislation governing all shariah-compliant financial services

Every

Labuan

captive

insurer

must

have

in an international business and financial centre.

operational management office in Labuan, managed

This Islamic act has also led to the introduction

by a team that has adequate knowledge and

of Labuan’s Islamic captives, or as they are more

expertise in the insurance business, including the

commonly known, takaful captives.

captive insurance business. Otherwise, they need to appoint a licensed Labuan underwriting manager.

The domicile also has a broad range of entities and business and investment structures to cater for

Person in control, directors and principal officers

cross-border transactions, business dealings and

need to be approved by Labuan Financial Services

wealth management needs. In the risk management

Authority,

sector, the Labuan landscape is dotted with

International

various licensed entities, from insurers, reinsurers

Malaysia, set up via the enactment of the Labuan

and underwriters to managers.

Financial Services Authority Act 1996, reporting

the

statutory

Business

regulator and

Labuan

Financial

Centre,

directly to the Minister of Finance, Malaysia. Labuan offers global investors and financial services providers a competitive tax structure

A Labuan captive insurer needs to maintain

and various tax exemptions, as well as access to

a minimum paid-up capital or working funds

the majority of Malaysia’s extensive network of

amounting to a specified sum with a bank in

more than 80 double taxation treaties. In addition,

Labuan. In addition, the captive insurer needs

Labuan is a cost-efficient, substance-enabling

to monitor the level of its solvency regularly.

jurisdiction with an English speaking and well-

Higher capital requirements may be imposed

educated workforce.

commensurating with the Labuan captive insurer’ business activities and risk exposures.

The domicile offers multiple forms of captive structures, including pure/single owner captive,

More information about Labuan captives, including

group, association, master and subsidiary rent-a-

the capital requirements for each type of structure,

captive, cell and multi-owner captive. To set up a

is available at www.labuanibfc.com.

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

149

A VIBRANT

RISK MANAGEMENT CENTRE

The Labuan International Business and Financial Centre (Labuan IBFC) offers a comprehensive midshore solution providing fiscal neutrality and certainty, in addition to being an ideal location for substance creation. Labuan IBFC is home to more than 200 licensed insurance related entities and has a substantial retrocession market. Aside from reinsurance and retakaful licenses, Labuan IBFC also offers a wide range of risk management structures, such as captives, protected cell companies and limited liability partnerships.

Labuan IBFC Inc. Sdn. Bhd. (817593-D) Suite 3A-2, Plaza Sentral, Jalan Stesen Sentral, KL Sentral, 50470 Kuala Lumpur, Malaysia Tel: +603 2773 8977 Fax: +603 2780 2077 Email: info@LIBFC.com

Well-supported by a robust, modern and internationally recognised legal framework, Labuan IBFC provides clear legal provisions and industry guidelines enforced by its one-stop regulator, Labuan Financial Services Authority. Labuan IBFC possesses Asiaâ&#x20AC;&#x2122;s widest range of business and investment structures for cross border transactions, business dealings and wealth management needs. These unique qualities offer sound options for regional businesses going global or global businesses looking at penetrating Asiaâ&#x20AC;&#x2122;s burgeoning markets.

www.LABUANIBFC.com

Liechtenstein

iechtenstein is an international centre of

The

minimum

insurance, that is ideally located in central

accordance with Solvency II, EUR 1.2 million

Europe, and offers an adept workforce

for reinsurance, and for direct writing insurers

and unique access to both the EU and

(non-life)

Switzerland markets.

10 to 15 (where classes 10, 11, 12 and 13 are

EUR

capital

2.5

requirements

million,

without

are,

classes

liability insurance, and classes 14 and 15 credit

Captives Market

are

regulated

Authority

the

Liechtenstein,

Financial and

are

subject to the Insurance Supervision Act, the Insurance

Supervision

Ordinance,

and

are suretyship insurance), and EUR 3.7 million, including classes 10 to 15. The licensing fee for captives is CHF 30,000.

the

Solvency II directive.

Liechtenstein does not have a tax on capital, but does have a flat tax rate of 12.5 percent on

The structures authorised in the domicile are

taxable income.

single parent captive reinsurers and direct-writing insurance captives (both life and non-life).

information

captive

insurance

Liechtenstein can be found on https://www.fmaFrom

Liechtenstein,

captives

can

insure

the

li.li/

subsidiaries and branches of their parent companies in Switzerland, the EEA and third countries.

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

153

Luxembourg

uxembourg is internationally known for

sector. Any reinsurance company must be licensed

reinsurance and as a captive reinsurance

by the minister before commencing its activities.

domicile. It has a fully diversified financial centre and is the largest captive reinsurance

The issuance of the licence is subject to the

domicile in the EU.

following main requirements:

Companies from around the globe have domiciled

•

Corporate purpose limited to the acceptance

199 reinsurance vehicles in Luxembourg, 80

of risks ceded by insurance or reinsurance

percent of which are captives, choosing it for a

companies to the exclusion of direct insurance

variety of reasons.

business •

They include its stable democracy and strong economy situated in the heart of Europe, its

Luxembourg •

economic, social and political stability, which

infrastructure,

flexible

and

million for captive reinsurance companies •

open-minded

authorities, and a modern legal and regulatory

Minimum capital requirement EUR 3.6 million for reinsurance companies and EUR 1.2

ensure a secure legal and tax framework, as well as a skilled multilingual workforce, excellent

Central administration must be established in

Transparency

the

direct

and

indirect

shareholding structure •

framework for captive reinsurance companies.

Quality

the

shareholders

deemed

satisfactory in view of the need the ensure the sound and prudent management of the

Luxembourg legislation requires that reinsurance companies

collect

adequate

technical

and

company •

balancing reserves, so allowing captives with less favourable risk diversification to build large

Appoint a local manager who must be authorised by the minister

•

Implement

among

others

reliable

technical reserves to cover their ‘high risk-low

administrative and accounting procedures

frequency’ exposures.

and adequate internal control mechanisms

It has implemented the Solvency II regime via the

modified law of 7 December 2015 on the insurance

Luxembourg can be found at at www.caa.lu.

www.captiveinsurancetimes.com

information

captive

reinsurance

Captive Insurance Times Domicile Guidebook

155

Malta Sponsored by

Malta

alta

has

very

strong

economy.

efficient

migration

insurance

companies

Growth in 2020 and 2021 is expected

without requiring dissolution and re-incorporation,

to be the highest in the EU, according

ensuring continuity and minimum inconvenience

Commissionâ&#x20AC;&#x2122;s

to policyholders. In 2006 Malta enabled the first

autumn 2019 economic forecast with

conversion of a traditional insurance company to

the

European

sustained surplus, reducing debt to GDP ratio

a PCC.

and low unemployment of below 4 percent. Fitch in January 2020 confirmed its A+ rating of the

Whilst taking strength from its EU-based regulatory

Maltese economy.

regime, PCCs in Malta offer unique benefits under Solvency II with reduced costs thanks to shared

Since joining the EU in 2004, Maltaâ&#x20AC;&#x2122;s insurance

governance and reporting besides also potentially

sector has grown in size and sophistication

reduced own funds capital requirements.

attracting

established

major

international

insurance and reinsurance groups and distributors,

Well-resourced PCCs can provide cells with the

together with the newer insurtechs and businesses

regulatory expertise, infrastructure and economies

wishing to bolt-on consumer insurance to their

of scale only usually found in well-developed

product and service offerings. In 2019 Malta saw a

incumbent

3 percent net increase in non-domestic insurance

including actuarial, risk management, compliance

undertakings to 62 and a significant 64 percent net

and internal audit apply across the PCC. For

increase in licensed insurance cells to 59.

Solvency II, such can produce a single Own Risk

insurers.

Common

key

functions

Solvency Assessment (ORSA) for the entire PCC. Malta is the only full EU member state with

The same applies to reporting and disclosure

protected cell legislation, which came into force

requirements, with one Regulatory Supervisory

in 2004. This is used for captives, direct insurance

Report (RSR) and Solvency Financial Condition

including consumer business, reinsurance, brokers

Report (SFCR) and all resources in place to meet

and insurance managers, all regulated by the Malta

other quarterly and annual reporting as one single

Financial Services Authority (MFSA).

legal entity.

Maltaâ&#x20AC;&#x2122;s

historic

experience

with

protected

per

Solvency

II,

the

minimum

capital

cell companies (PCCs) includes the first re-

requirements at an entity level are EUR 2.5 million

domiciliation of a PCC to Malta thanks to a

or EUR 3.7 million depending on the class of

framework introduced in 2002 that allows for

business reduced to EUR 1.2 million for reinsurance

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

157

business. These minimums, however, do not apply

With Brexit, to avoid the use of fronting insurers

to individual protected cells of PCCs. Thanks

or the need for multiple branch authorisations

to the support of the non-cellular core, a cell

per country, UK and Gibraltar based companies

owner will typically only need to invest own funds

could maintain direct access to the EU single

equivalent to the cellâ&#x20AC;&#x2122;s notional solvency capital

market through Maltese Cells. Such could retain

requirement,

undertakings,

or reinsure back the risks. On the flip side, access

often falls far below the typical standalone insurer

which,

with

small

to the UK market could be maintained via a single

minimums. At all times, cells retain full protection

UK branch authorisation.

of their assets from liabilities of the core or other cells per legislation.

The application process for a captive or cell with the MFSA is interactive involving contact and

With its EU single passport rights, captives,

consultation between applicants and the MFSA prior

insurers and cells based in Malta can provide

to and after an application is formally submitted.

insurance in other EU/EEA member states using their Malta license without having to apply for

a separate license in each host territory and

preliminary meeting with the MFSA to outline their

recommended

that

promoters

hold

thus eliminating the need of having additional

proposal in advance of applying for authorisation.

fronting insurers. At the forefront of introducing new legislation and It is common for captives and cells in Malta to use

innovative structures such as the reinsurance

this direct access to the EU single market to go

special purpose vehicle (RSPV) legislation and

beyond self-insurance and create profit centres by

securitisation cell companies (SCC) Regulations,

including customer and ancillary business. Besides

Malta has positioned itself as an onshore domicile

added revenue, the diversification enables capital

for insurance-linked securities (ILS) and CAT bonds.

and risk financing cost efficiencies.

More recently are governmentâ&#x20AC;&#x2122;s initiatives to

158

Malta

making Malta a blockchain capital of Europe

Malta offers businesses wishing to reduce their

with the creation of the Malta Digital Innovation

expenses

Authority and a framework for the voluntary

operational costs yet a highly qualified and experienced

certification of distributed ledger technology and

local workforce ensuring professional management.

efficient

environment

with

lower

related service providers. As an onshore EU domicile of choice for a growing This intends to offer legal certainty in a space

number of insurance operators with EU and OECD

that is otherwise unregulated and touches upon

compliant financial and tax regulations facilitated

several issues including types of authorisations,

further by its over 70 double taxation treaties,

legal personality, and the applicability of law on

Malta has a reputation as an established finance

smart contracts.

centre with an accessible and responsive regulator.

With these developments and full access to

Other strong factors include its Central European

the EU single market, cells based in Malta can

Time Zone and strategic location in the middle of

be ideal digital insurers. PCCs can be seen as

the Mediterranean Sea, excellent flight connections

sandbox platforms to experiment, incubate,

and English as a business language.

launch

and

scale

new

technology-driven

business models at a far lower cost and capital

Itâ&#x20AC;&#x2122;s growing and stable economy with euro as its

than a standalone insurer.

official currency, reliable and well-developed IT infrastructure, and safe and pleasant lifestyle, have

They help break the barrier to entry for new captives

proven to be further attractions to international

or start-up insurtechs unintentionally created by

business promoters.

regulation. These are exciting times with the financial services community merging with the tech start-up

Information provided by Ian-Edward Stafrace, chief

community to shape the future of the sector.

strategy officer of Atlas Insurance PCC Limited.

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

159

Set up an EU based protected cell with the independent experts

People you can trust

â&#x20AC;˘ Direct access to the UK and EU market â&#x20AC;˘ Capital, time & cost efficient alternative to a standalone insurer of captive

Discover the advantages of our protected cell facilities Why Atlas?

Why Malta?

A leading Maltese insurer since the 1920s. In 2006 was the first EU insurer to convert to a PCC.

Only full EU member state with PCC legislation

Recognised independent EU PCC experts having assessed and implemented a variety of direct to consumer insurtech, traditional, captive and reinsurance cells, including hosting cells for clients of global management companies and consultancies. Active non-cellular core - Allows greater flexibility including cells writing third party or compulsory classes.

Avoid fronting cost through EU Passporting. We offer benefits under Solvency II Less costs thanks to shared governance, risk management and reporting. Less capital required as Atlas core capital surplus over SII requirements provides significant support.

Contact us to find out what we can do for your company t: +356 2343 5221 e: cells@atlaspcc.eu www.atlaspcc.eu Atlas Insurance PCC Limited is a cell company authorised by the Malta Financial Services Authority to carry on general insurance business.

Mauritius

ince

the

enactment

Mauritius’s

•

Class 1 third-party: Gross written premium,

Captive Insurance Act 2015, there has

originating from risks or insurable interests

been an increasing interest in the African

of affiliated corporations in which the parent

domicile from captive managers and

holds at least 20 percent but not more than

companies worldwide.

50 percent of voting rights, will be at least 10

percent and will neither exceed 50 percent of

Mauritius is already home to a number of global

the total gross premium nor MUR 300 million

players,

including

multinational

companies,

global investment funds, international banks,

(USD 8.5 million) for a financial year •

Class 2 third-party: Gross written premium,

legal firms and audit firms.

originating from risks or insurable interests

of any person with which the captive insurer

The country provides security and stability as a

is related through an insurable interest, or of

proven financial centre that adheres to global best

affiliated corporations in which the parent

practices; risk mitigation possibilities through a

holds at least 20 percent but not more than 50

network of investment promotion and protection

percent of voting rights, will neither exceed

agreements; no exchange control; a pool of

50 percent of the total gross premium nor

innovative financial products and structures; and long-standing bilateral relations with Africa.

MUR 300 million for a financial year •

Class 3 third-party: Gross written premium

will not exceed MUR 300 million and it

Its new captive rules, which are still in draft form

will provide benefits through a contract of

and subject to change, proposes four classes of

insurance with a non-related person in return

captive business:

for a premium

•

Pure: Gross written premium, originating

The

from risks or insurable interests of affiliated

requirements stand at MUR 3 million (USD 86,750)

minimum

unimpaired

paid-up

capital

corporations in which the parent holds

for pure captives, MUR 5 million (USD 144,600)

at least 20 percent but not more than 50

for Class 1, and MUR 10 million (USD 290,000) for

percent of voting rights, will neither exceed

Classes 2 and 3.

10 percent of the total gross premium nor MUR 30 million (USD 842,700) for a

More information on captive insurance in Mauritius

financial year

can be found at www.fscmauritius.org/en.

Domicile did not respond to request for data. Information correct as of 31 December 2018.

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

163

Michigan

M The

state

ichigan can license pure captives. In

Michigan

terms of association captives, they

requirement, meaning two of three captive

can be incorporated as a stock insurer

incorporators/organisers

or a mutual insurer, or organised as a

residents. Annual board meetings of directors

limited liability company.

must be held in Michigan.

also

licenses

industrial

does

have

resident must

agent state

insured

Captive managers are required to apply for

captives, either as a stock insurer or a limited

placement on the captive manager Approval

liability company, as well as sponsored captives,

Listing in order to qualify to be employed by a

non-profit pure captives and special purpose

Michigan-domiciled captive insurance company.

financial captives. The

domicile

altered

its

captive

reporting

The capitalisation requirements for these types

requirements in 2018, so that a captive must

are:

now submit its financial report no later than 60

•

Pure captive: USD 150,000

days after the end of its fiscal year, as opposed

•

Association (stock insurer or limited liability

to the 1 March date previously required.

company): USD 400,000 •

Association (mutual insurer): USD 750,000

Finally, the state does not have a tax rate, but

•

Industrial insured (stock insurer or limited

it does have a renewal fee based on premium

liability company): USD 300,000

volume.

•

sponsored,

insured and risk retention group.

www.captiveinsurancetimes.com

industrial

More information on captive insurance in Utah can be found at insurance.utah.gov/captive.

Captive Insurance Times Domicile Guidebook

221

In Utah, we understand that companies are sophisticated and able to take greater control of their own insurance risks. It is our goal to provide affordable, diverse and flexible solutions that protect against any companyâ&#x20AC;&#x2122;s dynamic business environment. Utah is recognized as an innovative state, fostering and supporting innovative solutions. If you are looking for an onshore domicile to form a captive insurance company, a Utah domiciled captive is the choice for you, where Risk Management, Cost Control, and Regulation connect.

Utah Captive Insurance, 3110 State Office Building, Salt Lake City, UT 84114

Vanuatu

anuatu is a full-service financial centre

be maintained in Vanuatu, and appointment of a

and covers all financial services, including

resident auditor.

company formation, trusts, mutual funds, international and captive insurance.

Three pieces of legislation govern captive insurance

Vanuatuâ&#x20AC;&#x2122;s minimum capital requirements are USD 100,000 for general classes USD 200,000 for life and long term.

business in Vanuatu: the Insurance Act of 2005, Protected Cell Company Act of 2005 and the

Vanuatuâ&#x20AC;&#x2122;s regulatory framework offers choice and

Incorporated Cell Company Act of 2009.

flexibility and accommodates the challenges faced and outcomes sought by the captive insurance

The Reserve Bank of Vanuatu is the chief captive

market. Capital requirements and reporting systems

insurance regulator. Its licensing fees are: USD 250

are similar to other well-regulated jurisdictions.

to file an application and USD 2,000 for a licence. The establishment of a new captive programme or The basic requirements for filing for a licence

the repatriation of an existing captive from another

include a certificate of incorporation, a minimum

jurisdiction can be effected easily and seamlessly.

of two directors (do not need to be local), a detailed business plan, the appointment of a

More information on captive insurance in Vanuatu is

resident insurance manager, books and records to

available at www.insurance.vu.

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

225

Vermont Sponsored by

Vermont

he State of Vermont was one of the

Since its inception in 1981, the captive industry

first states in the US to adopt captive

in the State of Vermont has continued to adopt

legislation. Nearly 40 years later, the

legislation to enhance the captive market.

state continues to reign as a leader in the captive insurance industry.

While the state has consistently pushed captive legislation over the past 40 years, legislative acts

The captive insurance market in the State of

were key in influencing the captive industry in

Vermont began in 1981 when Vermont Governor

Vermont.

Richard Snellings signed the Special Insurers Act of 1981. This law provided captive parents

In 1987, the state designated a portion of

with the freedom to no longer have to prove

premium taxes paid by Vermont captives to be

the unavailability of insurance in the traditional

used exclusively for captive regulation.

market to function, unlike domestic domiciles. Within the next six years, the State of Vermont The Special Insurers Act of 1981 also created a

enacted legislation to allow captives to directly

space where rate and form regulatory approval

write excess workers compensation risks as

was not required for a captive to be established.

well as dramatically reduce Vermont captive

In that same year, the Vermont Department of

premium taxes.

Bank and Insurance licensed the state’s first captive—First Charter Insurance Company.

With these changes in legislation, the premium volume generated by Vermont captives exceeded

In just four years, the State of Vermont became

the USD 1 billion mark in 1990. In 2016, the State of

the largest US domicile with 28 captives. In 2002,

Vermont added the dormancy options for captive

the state of Vermont gained the title of the world’s

owners that were not currently active but wanted

third-largest captive domicile.

to keep their captive entity. In 2018, the State of Vermont adopted legislation that strengthened

To date, the State of Vermont continues to lead the

the state’s Financial Services industry by allowing

captive industry as the largest captive domicile in

insurers to form affiliated reinsurance companies.

the US and the third-largest in the world.

Most recently, the Vermont Captive Insurance

www.captiveinsurancetimes.com

Captive Insurance Times Domicile Guidebook

227

Association (VCIA), the Vermont Department of

•

Economic Development, and the Department of Financial Regulation collaborated to push

Clarification of the definition of “independent director”

•

Application of the requirements for an Own

captive legislation to amend the Vermont captive

Risk and Solvency Assessment to RRGs

insurance statutes in 2019. The amendments

(drm.com/resources/captive-insurance-

included:

update-fall-edition-2019)

•

• •

Clarification that included protected cells performing as nonprofit entities to be eligible

The current captive market in Vermont is growing

to pay dividends

at a consistent rate. The state licensed 22 new

An expansion of the type of entity available

captive insurance companies in 2019, bringing the

for use by a captive

total number of licensed captives for the State of

An exemption from bonding requirements for

Vermont to 585. The 22 new captives included: 14

an attorney-in-fact of a captive organised as

pure captives, four sponsored captives, two risk

a reciprocal

retention groups, one special purpose financial

A change in the examination frequency to a

insurer and one industrial insured captive. Six

minimum of once every five years

of the new captives were redomesticated from

Increased flexibility for captives to develop

other captive markets outside of the state of

their own investment policies

Vermont. Keeping with the pattern of innovation

228

Vermont

and growth in the captive market in the State

The minimum solvency capital requirements are:

of Vermont, these captives were licensed in a

•

wide range of industries, including healthcare, real

estate,

manufacturing,

insurance,

Pure, sponsored and branch captives: USD 250,000

•

transportation, technology, construction and

Association, industrial insured and agency: USD 500,000

professional services. Currently, the healthcare

•

Risk retention groups: USD 1 million

industry has the largest share of the captive

•

Special purpose financial insurance and

market in the State of Vermont with nearly 18

affiliated reinsurance companies: USD 5

percent of the captives in the state belonging to the healthcare industry. Since the establishment

million •

As growth in the captive insurance industry

of the captive market in the State of Vermont

continues in 2020, the State of Vermont is

in 1981, the state has licensed a total of 1,159

expected to continue to be a leading captive

captive insurance companies.

domicile in the US and worldwide

Although the captive industry in the State of

Additional information can be found online at

Vermont is continuously growing, the capital

www.vermontcaptive.com.

requirements have remained consistent.

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Your Company. Your Risk. Your Way. Arsenal, a leader in the captive industry,

provides unique insurance and business solutions in the alternative risk sector not available through traditional risk management mechanisms. With broad experience in P&C and L&H risks within regulatory and industry frameworks, the Arsenal team manages the full process for our clients from design and implementation to management and consulting. With physical locations in Alabama, Florida, Tennessee, New York, Texas, Vermont, and a strategic partnership in the Cayman Islands, Arsenal is one of the few independent captive managers that provides services in the top captive domiciles.

Virginia

lthough Virginia does not market itself as

Pure captives must show that their total insurance

a captive domicile, the state does cater

coverage necessary to insure all risks, hazards, and

for this type of insurance. Its law allows

liabilities would develop, in the aggregate, gross

for pure and association captives, which

annual premiums of at least USD 500,000.

can write fire, fidelity, motor vehicle and

marine insurance.

This figure has been set at USD 1 million for association captives, which must also show that

Captives in Virginia can be incorporated as stock

the insurance association has been in existence for

companies with USD 1 million in capital and USD 3

at least one year, although this would be waived

million in surplus, or as non-stock companies with

if each member has a gross annual premium in

USD 4 million in surplus.

excess of USD 100,000.

The premium tax rate has been set at 2.25 percent

More information on captive insurance in Virginia

of gross premium written in Virginia and in any state

can be found at www.scc.virginia.gov/boi.

in which the captive is not licensed and not subject to premium tax.

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Captive Figures The latest captive insurance figures from domiciles around the globe

234

Captive Figures

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2019 Figures Year established

Total no. of captives in 2019

New licenses in 2019

Closures in 2019

Abu Dhabi

2015

Alabama

2006

Anguilla

2004

287*

Arizona

2001

128

Arkansas

2002

Aruba

2002

Barbados

1983

294

Bahrain

2003

Bermuda

1978

715

British Columbia

1988

British Virgin Islands

1994

73*

Cayman Islands

1979

646

*Domicile did not respond to request for data. Information correct as of 31 December 2018

236

Captive Figures

Year established

Total no. of captives in 2019

New licenses in 2019

Closures in 2019

China

Connecticut

2008

Cook Islands

2013

Delaware

1984

906

118

District of Columbia

2001

148

Dubai

Florida

1982

Georgia

1988

Germany

Gibraltar

1967

Guam

Guernsey

1986

305

Hawaii

1986

231

Hong Kong

1999

Illinois

1987

Ireland

1989

Isle of Man

1986

102

Jersey

1996

*Domicile did not respond to request for data. Information correct as of 31 December 2018 www.captiveinsurancetimes.com

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Year established

Total no. of captives in 2019

New licenses in 2019

Closures in 2019

Kansas

1988

Kentucky

2000

Labuan

1994

Liechtenstein

Luxembourg

1983

196 reinsurance companies

Malta

2003

Mauritius

2016

Michigan

2008

Micronesia

2006

Missouri

2007

Montana

2001

293

Nevada

1999

174

Nevis

2004

214*

New Jersey

2011

New Zealand

2012

North Carolina

2013

235 (447 cells)

Oklahoma

2012

Oregon

2012

*Domicile did not respond to request for data. Information correct as of 31 December 2018

238

Captive Figures

Year established

Total no. of captives in 2019

New licenses in 2019

Closures in 2019

Panama

1996

Puerto Rico

2009

Singapore

1983

South Carolina

2000

179

South Dakota

1996

St Lucia

2000

13*

Switzerland

23 captive reinsurers

Tennessee

1978

140

Texas

2014

The Bahamas

1983

The Netherlands

Turks and Caicos

1990

US Virgin Islands

1994

Utah

2003

435

Vanuatu

Vermont

1981

585

Virginia

1980

*Domicile did not respond to request for data. Information correct as of 31 December 2018 www.captiveinsurancetimes.com

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Glossary

Actual Loss Sustained: Coverage applies to the actual loss sustained by the insured as a result of a covered loss. Actuary: An individual, often holding a professional designation, who computes statistics relating to insurance. Actuaries are most frequently used to estimate loss reserves (for both insurers and self-insureds) and to determine premiums for various coverage lines. Professional designations are awarded by the Casualty Actuarial Society and the Society of Actuaries. Admitted Insurer: An insurance company licensed to do business in a specified jurisdiction to underwrite insurance in that jurisdiction. Aggregate Excess of Loss Reinsurance: A form of reinsurance that requires participation by the reinsurer when aggregate excess losses for the primary insurer exceed a certain stated retention level. Aggregate Limit of Liability: An insurance contract provision limiting the maximum liability of an insurer for a series of losses in a given time period, for example, a year or for the entire period of the contract. Aggregate limits may be equal to or greater than the per occurrence or per accident policy limit. An insurance policy may have one or more aggregate limits. For example, the standard commercial general liability policy has two: the general aggregate that applies to all claims except those that fall in the products-completed operations hazard and a separate products-completed operations aggregate. Alien Insurer: An insurer domiciled outside the US. Alternative Market: A term commonly used in risk financing to refer to one of a number of risk funding techniques or facilities that provide coverages or services outside the realm of those provided by most traditional property and casualty insurers. The alternative market may be utilised by large corporations, for example, to provide high limits of coverage over a large self-insured retention. It may also be utilised by groups of smaller entities, for example, participating in a risk retention group or group captive programme. Note that the distinction between traditional and alternative markets tends to blur over time as many traditional insurers have expanded their offering of products to encompass alternative-type funding techniques, and vice versa. Finally, retrospective funding plans, especially paid loss plans, are sometimes identified with the alternative market. Association Captive: A captive insurance company formed and owned by a trade or professional association. Attachment Point: The point at which excess insurance or reinsurance limits apply. For example, a captiveâ&#x20AC;&#x2122;s retention may be USD 250,000. This is the attachment point at which excess reinsurance limits would apply. Automatic Treaty: A reinsurance treaty under which the ceding company must transfer exposures of a defined class that the reinsurer must accept in accordance with the terms of the treaty.

Bordereau: A report providing premium or loss data with respect to identified specific risks. This report is periodically furnished to a reinsurer by the ceding insurers or reinsurers.

240

Glossary

Bornhuetter-Ferguson Technique: An actuarial technique for developing losses to estimate their ultimate amount. An amount for expected unreported losses (derived using the reciprocal of the loss development factor) is added to the actual reported losses to obtain the estimated ultimate loss for a given accident year. The technique is most useful when actual reported losses for an accident year are a poor indicator of future incurred but not reported claims for the same accident year, as is often the case where there is low frequency of loss but a very high potential severity. Break Point: The loss level at which losses below the level are considered ‘primary’ losses and losses above are ‘excess’ losses. The appropriate break point in any risk financing programme is a matter of judgement and is dependent upon that programme’s individual characteristics. Brokerage Market: Reinsurers that write business through reinsurance intermediaries. Reinsurers that do not generally accept such business are referred to as the direct market. Buffer Layer: Any layer of insurance (or risk retention) that resides between the primary (burning) layer and the excess layers. For example, if the insured’s primary commercial general liability limit is USD 500,000 and its umbrella attachment point is USD 1 million, the layer of USD 500,000 excess of USD 500,000 coverage between the two is the buffer layer. Business Income: The net income (net profit or loss before income taxes) that would have been earned by the insured if a loss hadn’t occurred, as well as the numerical value of the insured’s regular operating expenses.

Captive Insurer: A captive insurer is an insurance company that insures the risks of an associated business. For example, a parent corporation may own both an operating company and a captive insurance company as brother-sister subsidiaries where the captive insures risks of the operating company, such as for illustration, ABC Parent Corporation owns both ABC Manufacturing Company and ABC Captive Insurance Company, and ABC Captive Insurance Company insures certain of the risks of ABC Manufacturing Company. This arrangement is often called a single-owner captive. There are many other forms of captive. As an example of an alternative arrangement, a captive may be owned by a number of unrelated companies in the same industry and insure a set of risks unique or common to that group of companies. This form of captive is often referred to as an association captive (meaning that it insures a specific industry or trade group). There are many more ways of classifying captives by type, for example, pure captives (those that write no outside business) and so on. Catastrophic Loss: Loss in excess of the working layer, usually of such magnitude as to be difficult to predict and therefore rarely self-insured or retained. Catastrophic Reinsurance: A form of reinsurance that indemnifies the ceding company for the accumulation of losses in excess of a stated sum arising from a single catastrophic event or series of events. Cedant: A ceding insurer or reinsurer. A ceding insurer is an insurer that underwrites and issues an original, primary policy to an insured and contractually transfers (cedes) a portion of the risk to a reinsurer. A ceding reinsurer is a reinsurer that in turn transfers (cedes) a portion of its reinsurance layer to a retrocessionnaire.

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Glossary

Ceding Commission: A percentage of the reinsurance premium retained by a ceding company to cover its acquisition costs, and sometimes, to provide a profit. Claims Reserve: An amount of money set aside to meet future payments associated with claims incurred but not yet settled at the time of a given date. Combined Ratio: The sum of two ratios, loss and expense, calculated by dividing incurred losses and all other expenses by earned premiums. Used in both insurance and reinsurance, a combined ratio below 100 percent indicates an underwriting profit.

Glossary Contingent Business Interruption (CBI) Coverage: This covers an insured’s income loss resulting from covered losses experienced by an entity which the insured relies upon, ie, suppliers, manufacturers and distributors. Contingent Commission: In reinsurance, an allowance payable to the ceding company in addition to the normal ceding commission allowance. It is a predetermined percentage of the reinsurer’s net profits after a charge for the reinsurer’s overhead, derived from the subject treaty. Credibility: An actuarial term describing the degree of accuracy in forecasting future events based on statistical reporting of past events. Credibility tends to increase with the number of exposure bases in the observed data and to decrease with higher levels of variability in the observed data.

Deductible: An amount agreed between the insured and insurer whereby the insured reimburses the insurer for losses it pays within the specified deductible amount. Dividend: The return of premium to an insured by the insurance company. Policies on which dividends may be paid are often called participating insurance. It is important to note that it is illegal for insurers to guarantee that dividends will be paid. Domicile: The location or venue in which a captive insurer is licensed to do business. Some factors to be considered in selecting the best domicile for a given captive include capitalisation and surplus requirements, investment restrictions, income and local taxes, formation costs, acceptance by fronting insurers and reinsurers, availability of banking and other services, and proximity considerations.

Earned Premium: An insurer ‘earns’ a portion of a policy’s premium as time elapses during the policy period. Earned Surplus: Funds earned by an insurance company (including captives and risk retention groups) after all losses and expenses have been paid. Once earned surplus is recognised, it can be allocated to capital and/or dividends. Enterprise Risk Management: A risk management approach that totally integrates both financial (ie, speculative) and event (ie, pure) risk into one broad programme of multiple retentions and high-excess aggregate insurance limits. To date, however, few firms have implemented such a comprehensive programme. Nevertheless, companies are increasingly buying multi-year, multiline insurance programmes that cover disparate forms of risk (for example, property and directors and officers liability), which are designed to maximise the benefits of portfolio diversification.

242

Glossary

Excess Insurance: A policy or bond covering the insured against certain hazards, and applying only to loss or damage in excess of a stated amount, a specified primary limit, or a self-insurance limit. It is also that portion of the amount insured that exceeds the amount retained by an entity for its own account. Excess of Loss Reinsurance: A form of reinsurance that indemnifies the ceding company against the amount of loss excess of only the specified retention. Expected Loss: Estimated loss frequency multiplied by estimated loss severity, summed for all exposures. This measure of loss generally refers to the total losses of an organisation of a particular type, for example, workers’ compensation or general liability. Experience Ratio: Describes any plan that uses the past loss experience and exposure levels, for example, payrolls, of the individual risk as a basis of determining premiums. Exposure: The state of being subject to loss because of some hazard or contingency. Also used as a measure of the rating units or the premium base of a risk. Extra Expense: The expenses incurred by the insured during the period of restoration. These would not have been necessary if there had been no physical loss to real or personal property caused by a covered loss. For example, temporary business equipment rentals.

Facultative Obligatory Treaty: The hybrid of the facultative versus treaty reinsurance approach. It is a treaty under which the primary insurer has the option to cede or not cede individual risks. However, the reinsurer must accept any risks that are ceded. Facultative Reinsurance: Reinsurance of individual risks on an individual ‘offer’ and ‘acceptance’ basis wherein the reinsurer has the option to accept or reject each risk offered. Feasibility Study: A study undertaken to determine whether a contemplated risk financing programme is practicable for an organisation or group of organisations. An actuarial analysis is often performed in conjunction with a feasibility study. The term is often used in reference to studies that attempt to ascertain whether or not the formation of a captive insurance company is a viable risk financing option under a given set of circumstances. Foreign Insurer: An insurer domiciled in the US but outside the state in which the insurance is to be written. Frequency: The likelihood that a loss will occur. Expressed as low frequency (meaning that the loss event is possible but the event has not happened in the past and is not likely to occur in the future), moderate frequency (meaning the loss event has happened once in awhile and can be expected to occur sometime in the future), or high frequency (meaning the loss event happens regularly and can be expected to occur regularly in the future). Workers’ compensation losses normally have a high frequency as do automobile collision losses. General liability losses are usually of a moderate frequency, and property losses often have a low frequency.

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Glossary

Fronting: The process whereby an insurance company issues an insurance policy to the insured and then reinsures all or most of the risk with the insured’s captive insurance company or elsewhere as directed by the insured. This approach allows the insured to issue certificates of insurance acceptable to regulators and lenders and avoids the burden of licensing the insured’s captive in all states or of becoming a qualified self-insurer in all states.

H I

Hard Market: One side of the market cycle that is characterised by high rates, low limits, and restricted coverage. Incurred But Not Reported (IBNR): Recognition that events have taken place in such a manner as to eventually produce claims but that these events have not yet been reported. In other words, IBNR is a loss that has happened but is not known about. Since it is impossible to know the value of a case not yet reported or investigated, a subjective estimate is often used by insurance companies to recognise losses incurred but not reported. Incurred Losses: All open and closed claims occurring within a fixed period, usually a year. Incurred losses include reserves for open claims but do not usually include incurred but not reported losses. Interruption by Civil or Military Authority Coverage: Provided for the insured’s actual loss incurred during the length of time when access to real or personal property is prohibited by order of civil authority. For example, the surrounding area of the business is labeled a ‘crime scene’, and ordered to be closed off by local law enforcement. Investment Income: The income of an insurance company derived from its investments, as opposed to its underwriting operations. The term has special significance in the insurance industry as various factions consider whether such income should be considered in ratemaking.

Judgement Rates: Rates that are established by judgement of an underwriter rather than by a rating authority. Judgement rates are used most often for those lines of insurance in which there are not enough similar exposure units to develop statistically credible rates.

Large Deductible Plan: An insurance programme that allows the insured to retain a portion of each loss through a substantial deductible and to transfer to an insurer losses in excess of that deductible. The insurer typically handles losses falling below the deductible and bills these costs back to the insured. Law of Large Numbers: A tool used in probability and statistics. The larger the number of units independently exposed to loss, the more accurate the ability to predict loss results arising from those exposure units. Letter of Credit: A legal commitment issued by a bank or other entity stating that, upon receipt of certain documents, the bank will pay against drafts meeting the terms of the letter of credit. Letters of credit are frequently used for risk financing purposes to collateralise monies owed by an insured under various cash flow programmes such as incurred but not paid losses in a paid loss retrospective rating programme. Letters of credit also provide a means of meeting capitalisation requirements of captives, and are used to satisfy the security requirements in ‘fronted’ deductible or retention programmes.

244

Glossary

Loss Adjustment Expense: The cost of investigating and adjusting losses. Such expenses may be termed allocated loss adjustment expenses (ALAE) or unallocated loss adjustment expenses. Loss Development: The difference between the original loss as first reported to an insurer and its subsequent evaluation at a later date or at the time of its final disposal. Loss Forecasting: Predicting future losses through an analysis of past losses. Loss Portfolio Transfer: A financial reinsurance transaction in which loss obligations that are already incurred and will ultimately be paid are ceded to a reinsurer. Loss Ratio: Proportionate relationship of incurred losses to earned premiums expressed as a percentage. If, for example, a firm pays a USD 100,000 annual premium for workers’ compensation insurance, and its insurer pays and reserves USD 50,000 in claims, its loss ratio is 50 percent (USD 50,000/USD 100,000). Loss Reserve: An estimate of the value of a claim or group of claims not yet paid. A case reserve is an estimate of the amount for which a particular claim will ultimately be settled or adjudicated. An insurer will also set reserves for its entire books of business to estimate its future liabilities. Loss Trending: One step in the process of predicting future losses, through an analysis of past losses. Leader Property: Otherwise known as an ‘attraction property’, a leader property is not owned, controlled, or operated by the insured. Instead, it attracts customers to an insured’s place of business. For example, a souvenir shop located next to a museum, selling museum-related merchandise.

Market Cycles: Market-wide fluctuations in the prevailing level of insurance and reinsurance premiums. A soft market, ie, a period of increased competition, depressed premiums, and excess capacity, is followed by a hard market—a period of rising premiums and decreased capacity. Medical Stop-Loss: Insurance coverage that protects against unforeseen or catastrophic losses. Medical stop-loss insurance is typically purchased by employers looking to reduce health benefit costs, maintain control over cash reserves, and offer comprehensive health coverage for employees. Under medical stop-loss policies, employers that have opted to self-insure their employee benefit plans do not assume 100 percent of the liability for losses that may arise from those plans. Liability is transferred to the insurance company for eligible losses that exceed certain limits called deductibles. Minimum Premium: The least amount of premium to be charged for providing a particular insurance coverage. The minimum premium may apply in any number of ways such as per location, type of coverage or policy.

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Glossary

Obligatory Treaty: A reinsurance treaty between an insurer and a reinsurer (usually involving pro rata reinsurance), in which the insurer agrees to automatically cede all business that falls within the terms of the treaty. The reinsurer, in turn, is obligated to accept such business. Automatic treaty is another term for obligatory treaty. Outstanding Losses: Losses that have been reported to the insurer but are still in the process of settlement. Paid losses plus outstanding losses equal incurred losses.

Participating Reinsurance: A form of reinsurance under which the reinsurer and primary insurer share losses in the same proportion as they share premiums and policy limits. Quota share reinsurance and surplus share reinsurance are the two types of participating reinsurance. Pro rata reinsurance is another term often used to describe participating reinsurance. Payout Profile: A schedule illustrating the typical rate of dollars paid out in claim settlements over time. For example, on average, less than 30 cents of the total loss dollar for workers’ compensation claims is paid during the first year of coverage. Even less is paid on average for general liability claims. Depending upon the particular type of risk, an additional five to 10 years can elapse before the full 100 percent of the loss reserve is paid out on a particular claim. During this long pay-out period, the loss reserves (ie, the not-yet-paid-out funds that are set aside by the insurer to cover the loss claims) can be a source of significant investment income to the insurer, and the payout profile is instrumental in estimating this source of profit for any given category of risk. Period of Restoration: The time needed to repair or replace property after loss or damage occurs. Pool: An organisation of insurers or reinsurers through which particular types of risks are underwritten with premiums, losses, and expenses shared in agreed ratios. Pools are also groups of organisations that are not large enough to self-insure individually and so form a shared risk pool, also referred to as risk pooling. Portfolio Reinsurance: A form of reinsurance under which a reinsurer assumes the entire book of the ceding company’s business in a certain class or classes. Pro Forma Financial Statements: A set of financial statements (usually an income statement, balance sheet, and statement of cash flows) designed to exhibit ‘as-if’ financial results, often used to project future financial results, based on a set of assumptions. These statements are commonly used to evaluate the feasibility of proposed risk funding programmes such as captives and risk retention groups. Pro Rata Reinsurance: A term describing all forms of ‘proportional’ reinsurance. Under pro rata reinsurance, the reinsurer shares losses in the same proportion as it shares premiums and policy amounts. Quota share and surplus share are the two major types of pro rata reinsurance. Probability: A numerical measure of the chance or likelihood that a particular event will occur. Probabilities are generally assigned on a scale from zero to one. A probability near zero indicates an outcome that is unlikely to occur, while a probability near one indicates an outcome that is almost certain to occur.

246

Glossary

Producer-Owned Reinsurance Captive (PORC): This is a type of captive reinsurance company that underwrites risks of an affiliated operating business by means of having those risks directly underwritten by a fronting insurance company, which then cedes those risks on through to the captive as reinsurer. The insurance is ‘producer-owned’ in the sense that the producer of the initial insurance contract owns the captive. In some instances, this type of reinsurance company is owned by an insurance agent and broker, in which case, it is not technically-speaking a captive insurer since it is not owned by the owners of the affiliated operating company. Professional Reinsurer: A company whose business is confined solely to reinsurance and peripheral services offered by a reinsurer to its customers. This is in contrast to primary insurers that exchange reinsurance or operate reinsurance departments as adjuncts to their basic business of primary insurance. Profit Commission: A provision found in some reinsurance agreements that provides for profit sharing. Parties agree to a formula for calculating profit, an allowance for the reinsurer’s expenses, and the cedant’s share of profit after expenses. Prospective Rating: A method used in arriving at an insurance or reinsurance rate and premium for a specified period based in whole or in part on the loss experience of the prior period. Purchasing Group: Authorised by the US Liability Risk Retention Act of 1986, a group formed to obtain liability coverage for its members, all of whoch must have similar or related exposures. The act requires a purchasing group to be domiciled in a specific US state. In contrast to risk retention groups, purchasing groups are not risk-bearing entities. Pure Risk: The risk involved in situations that present the opportunity for loss but no opportunity for gain. Pure risks are generally insurable, whereas speculative risks (which also present the opportunity for gain) generally are not. See Speculative Risk.

Quota Share Reinsurance: A form of reinsurance whereby the reinsurer accepts a stated percentage of each exposure written by the ceding company on a defined class of business.

Rating Bureau: An organisation that collects statistical data on losses and exposures of businesses and promulgates rates for use by insurers in calculating premiums. The two most important US rating bureaus are the National Council on Compensation Insurance and the Insurance Services Office. However, a number of US states also use their own rating bureaus. Reinsurance: Insurance in which one insurer, the reinsurer, accepts all or part of the exposures insured in a policy issued by another insurer, the ceding insurer. In essence, it is insurance for insurance companies. Reinsurance Assumed: That portion of a risk that a reinsurer accepts from an original insurer (also known as a primary insurer) in return for a stated premium. Reinsurance Ceded: That portion of a risk that an original insurer (also known as a primary insurer) transfers to a reinsurer in return for a stated premium.

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Glossary

Reinsurance Intermediaries: Brokers who act as intermediaries between reinsurers and ceding companies. For the reinsurer, intermediaries operate as an outside sales force. They also act as advisers to ceding companies in assessing and locating markets that meet their reinsurance needs. Reinsured: An insurer that contracts with a reinsurer to share all or a portion of its losses under reinsurance contracts it has issued in return for a stated premium. Also called a ceding company. Reinsurer: An insurer that accepts all or part of the liabilities of the ceding company in return for a stated premium. Rent-A-Captive: An arrangement in which a captive insurer ‘rents’ its facilities to an outside organisation, thereby providing the benefits that captives offer without the financial commitments that captives require. In return for a fee (usually a percentage of the premium paid by the renter), certain captives agree to provide underwriting, rating, claims management, accounting, reinsurance, and financial expertise to unrelated organisations. Reporting Lag: The span of time between the occurrence of a claim and the date it is first reported to the insurer. Reserve: An amount of money earmarked for a specific purpose. Insurers establish unearned premium reserves and loss reserves indicated on their balance sheets. Unearned premium reserves show the aggregate amount of premiums that would be returned to policyholders if all policies were canceled on the date the balance sheet was prepared. Loss reserves are estimates of outstanding losses, loss adjustment expenses, and other related items. Self-insured organisations also maintain loss reserves. Retention: Assumption of risk of loss, generally through the use of non-insurance, self-insurance, or deductibles. This retention can be intentional or, when exposures are not identified, unintentional. In reinsurance, it is the net amount of risk the ceding company keeps for its own account or that of specified others. Retention Plan: A dividend plan normally used in writing workers’ compensation insurance in which the net cost to the policyholder is equal to a ‘retention factor’ (insurance company profit and expenses) plus actual incurred losses subject to a maximum premium equal to standard premium less premium discount. Retrocession: A transaction in which a reinsurer transfers risks it has reinsured to another reinsurer. Risk-based Capital (RBC) Requirements: A method developed by the National Association of Insurance Commissioners (NAIC) to determine the minimum amount of capital required of an insurer to support its operations and write coverage. The insurer’s risk profile (ie, the amount and classes of business it writes) is used to determine its risk-based capital requirement. Four categories of risk are analysed in arriving at an insurer’s minimum capital requirement: asset, credit, underwriting, and off-balance sheet. Risk Financing: Achievement of the least-cost coverage of an organisation’s loss exposures, while assuring post-loss financial resource availability. The risk financing process consists of five steps: identifying and analysing exposures, analysing alternative risk financing techniques, selecting the best risk financing techniques, implementing the techniques, and monitoring the selected techniques. Risk financing programmes can involve insurance rating plans, such as retrospective rating, self-insurance programmes, or captive insurers.

248

Glossary

Risk Purchasing Group: A group formed in compliance with the Liability Risk Retention Act of 1986 for the purpose of negotiating for and purchasing insurance from a commercial insurer. Unlike a risk retention group which actually bears the group’s risk, a risk purchasing group merely serves as a vehicle for obtaining coverage, typically at favourable rates and coverage terms. Risk Quantification: Measurement of risk to make risk financing decisions. Loss frequency and loss severity are the dimensions of measurement. The value of loss and the variation in value from one period to the next will quantify the impact of the risk. Risk Retention: Planned acceptance of losses by deductibles, deliberate non-insurance, and loss-sensitive plans where some, but not all, risk is consciously retained rather than transferred. Risk Retention Act: Federal legislation that facilitates the formation of purchasing groups and group self-insurance for commercial liability exposures. Risk Retention Group: A group self-insurance plan or group captive operating under the auspices of the US Liability Risk Retention Act of 1986. A risk retention group can cover the liability exposures, other than workers’ compensation, of its owners. Risk Sharing: Also known as ‘risk distribution’, risk sharing means that the premiums and losses of each member of a group of policyholders are allocated within the group, based on a predetermined formula. Risk is considered to be shared if there is no policyholder-specific correlation between premiums paid into a captive, for example, and losses paid from the captive’s reserve pool.

Self-Insurance: A formal system whereby a firm pays out of operating earnings or a special fund any losses that occur that could ordinarily be covered under an insurance programme. The moneys that would normally be used for premium payments may be added to this special fund for payment of losses incurred. Self-Insured Retention: The amount of each loss for which the insured agrees to be responsible before a commercial insurer begins to participate in a loss. This is in contrast to a deductible in that the commercial insurer is responsible for losses even within the deductible limit. Although the deductible insurer looks to the insured for reimbursement of such losses, the insurer’s responsibilities are unaffected by the insured’s failure to reimburse. Service Interruption: Coverage for an insured for direct physical loss, damage or destruction to electrical, steam, gas, water, sewer, or other utility. Settlement Lag: The span of time between the first report of a claim and the date on which it is ultimately settled. Severity: The amount of damage that is (or that may be) inflicted by a loss or catastrophe. Severity is sometimes quantified as a severity rate, which is a ratio relating the amount of loss to values exposed to loss during a specified period of time. Soft Market: One side of the market cycle characterised by low rates, high limits, flexible contracts, and high availability of coverage. Contrast with hard market.

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Glossary

Speculative Risk: Uncertainty about an event under consideration that could produce either a profit or a loss, such as a business venture or gambling transaction. A pure risk is generally insurable, while a speculative risk is usually not. Spread of Risk: Consideration of the number of independent exposures to loss in a given time period. As the number of units exposed independently to loss increases, the spread of risk expands and the likelihood that all units will suffer loss diminishes. Predictive ability increases as the spread of risk increases. This is often called the ‘law of large numbers’. Stop-Loss Reinsurance: A form of reinsurance also known as ‘aggregate excess of loss reinsurance’ under which a reinsurer is liable for all losses, regardless of size, that occur after a specified loss ratio or total dollar amount of losses has been reached. Structured Settlement: A settlement under which the plaintiff agrees to accept a stream of payments in lieu of a lump sum. Structured settlements can be tailored to the individual’s inflation-adjusted living costs, anticipated future medical expenses, education costs for children, and other lifetime needs. Annuities are usually used as funding mechanisms. Surplus Reinsurance: Reinsurance amounts that exceed a ceding company’s retention. In surplus reinsurance, the reinsurer contributes to the payment of losses in proportion to its share of the total limit of coverage. Surplus Share Reinsurance: Proportional reinsurance in which the reinsurer assumes pro rata responsibility for only that portion of the risk that exceeds the ceding company’s established retention.

Third-Party Administrator (TPA): A firm that handles various types of administrative responsibilities on a fee-for-services basis for organisations involved in cash flow programmes. These responsibilities typically include claims administration, loss control, risk management information systems, and risk management consulting. Treaty: An agreement between an insurer and a reinsurer stating the types or classes of businesses that the reinsurer will accept from the ceding insurer. Treaty Reinsurance: A form of reinsurance in which the ceding company makes an agreement to cede certain classes of business to a reinsurer. The reinsurer in turn agrees to accept all business qualifying under the agreement, known as the ‘treaty’. Under a reinsurance treaty, the ceding company is assured that all of its risks falling within the terms of the treaty will be reinsured in accordance with treaty terms.

Unallocated Loss Adjustment Expense: Salaries, overhead, and other related adjustment costs not specifically allocated to the expense incurred for a particular claim. Unbundling: The practice of separating risk handling and risk funding services either from a multiline insurer or from themselves. Captives that require a ‘front’ may also be required to purchase all or some of the services from the same insurer. This is a ‘bundled’ programme. Unbundling indicates the ability to purchase services from any vendor, not just those associated with the fronting insurer.

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Glossary

Valuation Date: The cutoff date for adjustments made to paid claims and reserve estimates in a loss report. For example, a workersâ&#x20AC;&#x2122; compensation loss report for the 1996 policy year that has a 1998 valuation date includes all claim payments and changes in loss reserves made prior to the 1998 valuation date.

Weighted Average Loss Forecasting: A method of forecasting losses that assigns greater weight, typically to more recent years, when developing a forecast of future losses. Recent years receive a greater weight because they tend to more closely approximate current conditions (for example, benefit levels, nature of company operations and medical expenses). Working Layer: A dollar range in which an insured or, in the case of an insurance portfolio, a group of insureds, is expected to experience a fairly high level of loss frequency. For many organisations, this loss frequency is adequate to provide some degree of statistical credibility to actuarial forecasts of the total expected losses during a specific period of time, for example, one year. This is the layer typically subject to deductibles, self-insured retentions, retrospective rating and similar programmes. Wrap-Around Risk Financing Programme: A risk financing programme in which two or more different risk financing approaches are combined into one overall programme. Typically, a wrap-around is used for workersâ&#x20AC;&#x2122; compensation insurance so that the most cost-effective programme in each state can be used to an insuredâ&#x20AC;&#x2122;s advantage.

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S e r v i c e P ro v i d e r D i r e c to r y

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Actuaries

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Actuaries

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Consultancies

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Notes

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