The Importance of Monitoring for Insurance Captives

Captive insurance has transformed business insurance, especially for companies with hard-to-place risks or unique risk exposures inherent in their industries. This form of self-insurance has the potential to save money while protecting against expected and unforeseen risks. With the ever-increasing market share of captive insurance entities comes increased scrutiny. Regulators on both the state and federal levels have stepped up their vigilance in an effort to prevent abuse, particularly in the avoidance of taxes. It is in the interest of both captives and their regulators to engage in regular and ongoing monitoring practices, staving off the possibility of additional requirements and financial standards.

Taking Responsibility for Captive Insurance Creation

In the state of Vermont, the Vermont Department of Financial Regulation is tasked with the responsibility of monitoring and regulating captive insurers doing business in the state. In Vermont and in other states, some captive insurance firms have been established solely as a means of gaining favorable tax treatment. Vermont’s regulators believe that it is in their best interests to carefully scrutinize the creation and licensing of captive insurance entities. Ensuring that these entities are aligned with insurance needs – standing as a tool for business risk management and the financing of business risks – protects the reputation of companies and regulatory jurisdictions.

The European Captives Regulatory Model

Industry analysts have cautioned captives and their regulators to avoid the European regulatory model for captives. In this regulatory framework, captives are bound by the same regulations and standards as traditional insurance companies. Some of the regulations include minimum capital requirements and the concept of economic substance, or the ability to demonstrate that a captive transaction is for insurance purposes and not simply to gain favorable tax liabilities. While the European model works for most of the captives in that region, the same may not be said if this model is adopted for U.S.-based firms. Competition for business is intense between states, and some states may choose to create a favorable landscape by having fewer or more flexible captive regulations. A captive insurance framework that applies to all 50 states is seen as a good, but unworkable, idea in this highly-competitive business market.

Takeaways for the Captive Insurance Industry

Faced with scrutiny of their industry niche, captive insurance entities have a responsibility to adhere to established regulations and standards. This has a two-fold benefit: it protects the insurance company and the company or companies it was set up to insure, and it helps ward off the possibility of even more rigorous regulatory efforts by government agencies.

How can captives protect themselves and their insureds? The answer is simple: by setting up comprehensive monitoring practices. Reviewing regulatory status and taking the steps needed to remain in compliance with local, state, and federal standards is the core of this monitoring process. Industry analysts suggest that board oversight is a proven method to bolster captive monitoring.

The National Association of Insurance Commissioners (NAIC) released a code of conduct for captive insurance managers in the latter part of 2018. This code serves as a set of ethical guidelines which captive managers and firms should follow. It was developed to help address criticisms of the captive insurance model and may help in preventing tighter regulations in the future.

About Caitlin Morgan Captive Services

Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (317) 575-4440.