The IAIS Captive Issues Paper

1
The IAIS Captive Issues Paper

• ICP 26 new ICP - drafted 2003 - together with
  Standard in 2004 on Disclosures Concerning
  Technical Performance of Non-life Insurers and
  Reinsurers
• Covers disclosure of the financial position of
  insurers and the risks to which they are exposed,
  whether they are publicly traded or not

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Disadvantages to Captives

• detrimental exposure for captives writing
  liability business because the existence of an
  insurance programme for the parent company would
  become public knowledge and might encourage
  malicious claimants or a larger number of
  claimants than would otherwise be the case
• detrimental exposure of public knowledge for
  captives writing specialty lines eg Kidnap and
  Ransom business, Suretyship

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As a result of these concerns..

• Supervisors permitted to disapply the Standard to
  captives
• A Captive Issues Paper was proposed following
  comments from certain IAIS members who sought
  more information on the regulation of captives
  there appeared to be a lack of understanding of
  the characteristics of captives on the part of
  some mainstream insurance regulators

4
The IAIS Captive Guidance Paper

• Resulted from the Issues Paper following requests
  from certain IAIS members who sought closer
  guidance on the regulation of captives

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Some Issues arising....

• What is a captive definition
• An insurance or reinsurance entity created and
  owned, directly or indirectly, by one or more
  industrial, commercial or financial entities, the
  purpose of which is to provide insurance or
  reinsurance cover for risks of the entity or
  entities to which it belongs, or for entities
  connected to those entities and only a small part
  if any of any of its risk exposure is related to
  providing insurance or reinsurance to other
  parties

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Issues Paper four broad categories of captive

• Pure captives single parent companies writing
  only the risks of their owner and/or affiliates
• Group and/or association captives multi-owned
  insurance companies writing only the risks of
  their owners and/or affiliates, usually within a
  specific trade or activity

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Issues Paper four broad categories of captive

• 3. Rental captives insurers specifically
  formed to provide captive facilities to unrelated
  bodies for a fee. They are used by entities
  that prefer not to form their own dedicated
  captive
• 4. Diversified captives these are captives
  writing a limited portion of unrelated business
  in addition to the risks of their owner and/or
  affiliates. Some jurisdictions consider that an
  insurance company writing any unrelated party
  business cannot be classified as a captive

8
Relative Risk Profiles of different captive
types Level 1 - single parent, property/BI
only Level 2 - single parent, including
liability risks Level 3 - rental captives
Level 4 - diversified captives
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Jurisdictional decision

• In effect it will be for each jurisdiction and
  its regulators and lawmakers to decide what
  definition they wish to apply to a captive, if
  any, and what level of regulation they wish to
  apply
• Should jurisdictions introduce separate
  legislation for captive insurance companies ?

10
Fronting arrangements

• Many captives undertake reinsurance only
• Primary cover given by a licensed insurance
  company
• Cost of fronting

11
Risks in fronting arrangements

• May compromise the integrity of the fronting
  carrier
• May compromise the integrity of the captive
• Will imply the captive outsourcing services to
  the fronting carrier

12
Insurance Managers

• Larger captives may be free-standing as they will
  have sufficient income to support the costs of
  establishment
• Most captives will be managed by an insurance
  manager as a method of minimising cost and
  accessing expertise

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Management tasks undertaken by Insurance Managers

• Underwriting and policy issue
• Reinsurance placement
• Claims handling and payments
• Company management and secretarial services
• Accounting
• Investment
• Regulatory reporting
• Compliance and AML/CFT
• Administration

14
Captive Manager skills requirements and staffing

• Accountants
• Insurance professionals underwriting and claims
• Investment skills and knowledge
• Compliance
• Company secretarial/administration

15
First Line of Regulation

• Manager is the principal point of contact between
  the captive and the regulator.
• Captive manager will undertake due diligence on
  new clients, create a business plan for new
  captives
• Captive manager is usually required to report to
  the Regulator any deviations from business plans
• In day-to-day transactions, any fraud or other
  misuse of the captive will probably require
  collaboration between the captive managers staff
  and the captive itself

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Insurance Managers

• Need to license insurance managers !
• includes fitness and propriety of persons
• includes a sufficient capital base
• Need to undertake on-going regulation of
  insurance managers !
• includes on-site inspection
• Includes annual accounts and a return

17
Licensing of Captives suitability of persons

• Directors unlikely to have insurance experience
• Try to have the companys risk manager on the
  board

18
Changes in control and portfolio transfers

• Few takeovers
• Portfolio transfers and novations

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Investments

• Statement of investment policy in application
• Conservatism
• Over concentration in cash/banks
• Equity portfolios
• Personal mutual funds
• Loan-backs

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Why regulate captives ?

• Protection of policyholders
• Third party policyholders
• Third party claimants including employees, some
  protected by legislation
• Protection of other stakeholders
• AML/CFT
• Fronting carriers
• Captive owners and boards
• Prevent fraud

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Need for successful Captive market

• Captive premiums amount to some 50 billion
• Some 5500 captive insurance companies
• Significant role in the financing of risk
  worldwide