Captive Law Variability Across the Fruited Plain
Erich Brandt

Captive Law Variability Across the Fruited Plain

Erich Brandt June 30, 2016 Posted in: Blog Posts, Captives
More than 30 states, the District of Columbia and Puerto Rico have enacted captive laws, and others are exploring the idea. As the list of captive domiciles expands, so does the variability in the captive regulatory environment. Understanding the key regulatory differences is an important consideration in choosing (or changing) a captive domicile.

For a business exploring forming a captive insurance company for the first time, the differences in domiciles often center on traditional financial considerations like capital requirements, taxes and fees, and premium to surplus ratios. Once a captive is formed, additional regulatory differences emerge, such as the timing of the filing of the annual statement and report, requirements for the Statement of Actuarial Opinion (SAO) and the cost of regulatory services, including audits and financial examinations. Let’s consider some examples of these regulatory differences as they relate to Series LLC captives and similar protected cell and segregated account structures (Series captives for short).

With respect to Series captives, Delaware requires that “an SAO must be submitted for each series related to a single Core.” This information is valuable to know when setting up analysis for Series captives because of the costs associated with multiple SAOs and actuarial reports within a Series captive. In contrast, the North Carolina insurance department has this regulatory advice: “As an alternative to the filing of separate opinions, each protected cell captive insurance company may file a combined Statement of Actuarial Opinion, which certifies the adequacy of loss reserves and loss expense reserves of each cell and the protected cell captive insurance company, if applicable (emphasis added).” Similarly, Tennessee’s captive laws and regulations allow a single SAO, but require the opinion to identify any protected cell that is inadequately reserved. This approach maximizes the information provided to captive regulators while maintaining a cost advantage. Service providers to the captive industry need to refer to each states captive law for the specific treatment of Series captives.

There are also differences in the presentation of the captive’s financial statements among domiciles. Several states, like Texas and Arizona, require a specific modified form of the Property/Casualty Insurance company annual statement for their regulatory filings. Others, like South Carolina, have simplified financial statements that are typically presented on a GAAP basis rather than statutory basis. Some domiciles have unusual combinations, like D.C.’s NAIC annual statements, presented on a GAAP basis. The basis of the presentation of the captive’s financial statements can also vary depending upon the type of captive reinforcing the need to understand the domiciliary state’s captive laws.

With limited exceptions, the Texas Department of Insurance website stipulates that, “The captive insurance company must submit the actuarial opinion to the department no later than March 1 for the preceding calendar year….” The Delaware Department of Insurance website mentions that, “All Captive entities that retain risk must file a Statement of Actuarial Opinion by June 30th annually. For a Core with series business units, the Core files the Structure's Actuarial Report and each Series files an individual SAO.” Captive owners and service providers should understand their domiciliary state’s captive law regarding the dates financial statements and the associated support, such as the Statement of Actuarial Opinion, must be filed.

Finally, audit costs and, more significantly, financial examination costs, vary greatly by domicile. In a previous article for IRMI, Pinnacle demonstrated wide variances in financial examination costs for risk retention groups. These costs can have a material impact on a captive’s net income and are often not considered by the captive at formation, only to blindside the captive when the invoices for its first financial examination arrive. Understanding these differences plays a role in making informed domicile selections. Ensuring that the financial statements and actuarial work comply with the domiciliary requirements also contributes to a healthy relationship with the captive’s regulator as the insurance company matures.

The knowledge of differences in regulatory requirements between captive domiciles regarding financial statements and SAOs is becoming increasingly complicated as more states allow captive insurers, especially as they try to establish a competitive advantage through their regulation. If you are looking to form a captive or change your captive’s domicile, be sure to do your homework. The regulatory differences are significant.

Erich Brandt is a Consulting Actuary with Pinnacle Actuarial Resources, Inc. in the Bloomington, Illinois office. He has over 19 years of experience in assignments involving loss reserving, funding studies, cost allocation mechanisms, loss cost projections, competitive analysis, captive feasibility studies, personal lines ratemaking and financial analysis of insurance companies. Erich is a Fellow of the Casualty Actuarial Society (CAS), a Member of the American Academy of Actuaries (MAAA) and a member of the CAS Examination Committee.

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