What does a regulator look for before approving a captive?
Is it really insurance, and can the sponsor keep it solvent
Mark Wiedeman answers structurally rather than procedurally. The first test is whether the proposed program is insurance based and formed for insurance reasons, which he unpacks as whether there is transfer of risk and the other components of what you would consider to be insurance. The second is solvency: whether the companies sponsoring the captive can maintain the entity, pay the claims, and are willing to capitalize to the statutory minimum or higher if the program calls for it. From there he looks at funding, servicing and governance, and says compliance is a large factor. He is explicit that tax implications are a benefit of a captive program but should not, from a regulatory standpoint, be the only or main driver of it.
The risk transfer test comes first because it decides whether the thing in front of him is an insurance company at all. Wiedeman asks whether the program is insurance based and formed for insurance reasons, and lists transfer of risk among the components he expects to find.
This is the same line every regulator in this library draws, and it is drawn before capital is even discussed. A structure that fails it does not become approvable by adding money.
Key takeaways
The first test is whether the program is insurance based and formed for insurance reasons, with real transfer of risk.
The second is solvency at the sponsor level: can they maintain the entity, pay claims, and capitalize to the statutory minimum or higher if needed.
Wiedeman says tax implications are a benefit of a captive but should not be the only or main driver of the program.
Solvency is the second test and it points at the parent rather than the captive. He wants to see that the sponsoring companies can maintain the solvency of the entity and pay the claims, and that they are willing to capitalize to the statutory minimum or higher if necessary.
He groups funding, servicing and governance together as one question about whether the owner is invested enough in the company to keep it run properly, and adds that compliance is a huge factor for regulators.
From the conversation
Mark Wiedeman
Director, Captive Insurance Section, Tennessee Department of Commerce and Insurance
“we don't believe that they should be the only or the main driver of the program”
This answer begins at 5:04 of the full conversation. Watch or listen to the whole thing.
Citations
Sources
- Captive Insurance Section, Tennessee Department of Commerce and Insurancehttps://www.tn.gov/commerce/insurance/captive-insurance.html
The views expressed are those of the featured guest, drawn from a recorded conversation, and reflect their own professional experience. Nothing on this page is insurance, tax, legal, or investment advice. Consult your own advisors about your specific situation.
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