Held on June 19th and 20th, 2018, the Tennessee Captive Insurance Association’s (TCIA) 8th Annual Conference brought together insurance professionals from around the country. The event was held at the Westin Hotel in Nashville, Tennessee. During the conference, insurance professionals shared information about the captive insurance industry, including past industry achievements and developments as well as trends for other professionals to expect in the future.
Chris Murray, President of Caitlin Morgan Insurance Services, had a chance to speak with event attendees at two educational sessions. Chris has been with Caitlin Morgan since 2006, and has many years of high-level experience in the insurance industry, including alternative risk financing. Here is a look at the topics he presented to attendees of the educational sessions.
In the risk management field, collateral refers to financial assets that are set aside to ensure the satisfaction of a future liability. This is a form of security, and in the captive insurance world, collateral is commonly found in the form of a bank’s Letter of Credit (LOC) or in an insurance trust fund. Captive insurance firms typically provide this collateral to the insurance companies that have issued deductible policies to the firm’s insured parties.
Collateral may represent significant expenses; the amount of collateral required may greatly exceed other costs that the captive experiences, and as a cost-saving measure, many captives believe there is no real need to provide future risk losses financing through collateral, choosing instead to finance their own risks. The National Association of Insurance Commissioners (NAIC) has its own requirements as far as collateral is concerned. Admitted rated insurers must be able to show evidence that if they are not utilizing rated reinsurance, sufficient collateral has been secured to provide funding against future claims. NAIC accreditation may require that an LOC is in an amount 200% or more of maximum possible losses for the potential risks of an insured party.
The concept of Schedule F also plays a role in reinsurance. An insurer is required to file an annual insurance statement, part of which discloses reinsurance transactions. Regulators use this information to identify reinsurance arrangements and gives those regulators an indication of whether or not the insurer will be able to cover losses through reinsurance recoverables. According to regulations, insurers must be provided with approved collateral from reinsurers to take credit for reinsurance ceded to a non-admitted insurance carrier. Failure to satisfy this requirement may result in a “Schedule F penalty”, which can mean a significant statutory reduction in a reinsurance firm’s surplus balance.
Captives firms should be aware of several proposed changes to regulations, including the Credit for Reinsurance Model Law and the Credit for Reinsurance Model Regulation. These changes were proposed by the NAIC Reinsurance Task Force, and are being addressed to the collateral provisions of the Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance (Covered Agreement). Proposed revisions and changes include a proposal to eliminate reinsurance collateral requirements for qualified reinsurers having headquarters offices in an EU-member country or other non-US jurisdiction that is recognized by state insurance commissioners as a “Reciprocal Jurisdiction”. This proposal falls under revisions to the Credit for Reinsurance Models.
In the proposed revision, qualified reinsurers have specific requirements, including:
Captive insurance firms are advised to pay close attention to this proposed revision, as it may significantly impact the company’s financials if adopted. Further details on the proposal may be found here.
In Chris’ presentation to the TCIA conference attendees, the concept of assets was addressed. Financial assets are a critical part of a captive insurance firm’s risk management strategy, and certain aspects should be considered. Chris presented four topics related to captive risk management and assets, including:
Chris Murray provided a great level of detail to the attendees of the two educational sessions at the 8th Annual TCIA Conference. With his insights into asset management, collateral needs of captive agencies, and enterprise risk management, he was able to share valuable details to help propel the captive industry forward, even in changing economic conditions. His discussion of proposed regulatory changes were particularly enlightening, showcasing the industry’s need to remain flexible and to stay abreast of trends that may influence future business opportunities.
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.