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”
Transcript
Read the full transcript 8 turns
HostThat sounds lovely. I mean, having dealt with government my whole business career in the real estate business, I wish we had customer service, customer success metrics on some of our government counterparts. But it sounds like it's a really nice place to do business. Now, as regulators, what do you look forward or what do you look to in captives that come across your desk? What do you flag, what looks good, what looks
Hostbad, and what are some tips that you have for people looking to start a captive
Mark Wiedeman? So, I mean, that's kind of a broad question, you know, what do we look for? You know, we want to make sure that the programs that are being proposed are insurance-based, formed for insurance reasons. You know, is there a transfer of risk? Is there, you know, all the different components of what you would consider to be insurance? You know, we want to make sure, first and foremost, that the companies that sponsor those captives are able to maintain the solvency of the entity
Mark Wiedeman. You know, pay the claims. You know, they need to be willing to capitalize to, you know, the statutory minimum or higher if necessary. So, you know, funding the captives, servicing the captives, you know, having, you know
Mark Wiedeman, being invested enough into the company that they're going to maintain the governance. You know, obviously, compliance is a huge factor for regulations. As far as advice for captives wanting to kind of maybe look into the industry, I would recommend that they, you know, you know
Mark Wiedeman, the big picture of what
Mark Wiedeman's keeping them up at night. What is it that they're wanting to cover through their captive? You know, we don't necessarily help them develop their programs, but, you know, we can tell when a captive is really trying to be formed for the right reason. You know, you know, and a lot of that will focus on more long-term growth as opposed to short-term gains. You know, some captives, you know, setting
Mark Wiedemanit up for the right reason. I mean, tax implications are always a benefit to a captive program, but they, you know, from a regulatory standpoint, we don't believe that they should be the only or the main driver of the program. You know, it should be risk mitigation, risk financing, helping diversify a company's portfolio by offering a captive solution that can actually benefit them from that standpoint
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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