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Conference coverage.

TIMES HAVE CHANGED FOR CAPTIVE insurers. As captives strive to maintain the economic benefits of alternative financing arrangements, they are also faced with a changing regulatory environment, the low returns on investment income coupled with the growing liability needs of their parent companies. The effects of these issues on captive insurers were discussed by several experts at the recent conference of the Captive Insurance Companies Association in Rancho Mirage, California.

Bermuda is still the largest domicile, with 1,240 captives, while the second largest would be the total number of captives in the United States at 750, said Hugh Rosenbaum, principal at Tillinghast. Cayman Islands, Barbados and Bermuda have 585 while the European domiciles of Ireland, Luxembourg, Isle of Man and Guernsey have 515.


The National Association of Insurance Commissioners is seeking limitations on fronting with a recently released proposal that imposes standards on fronting activities, said Vincent Laurenzano, assistant deputy superintendent for the New York State Insurance Department. "Fronting is a solvency issue because it has been a factor in recent insolvencies. While it can be profitable to both sides, it can also be subject to abuse," he said.

Mr. Laurenzano said that fronting insurers may be lulled into a false sense of security, and they may also lack a sufficient amount of management attention. "Insurers can mismanage their operations if management controls are not properly implemented," he explained.

Paul Brown, general counsel and the director of government and public affairs for RIMS, told the audience that there has been in the past and there still exists an inherent distrust of captives and other risk financing alternatives on the part of regulators. He said the solution to this problem lies in education--in educating the regulators on the importance of these alternatives and on their growing use and acceptance. He said that while the NAIC's working paper "is a substantial improvement over the last draft, RIMS will not support the bill but is trying to get it to the point where it is workable. He said certain problems still exist, such as the NAIC definition of captives, which may be too restrictive.

Financial Opportunities

In light of an uncertain regulatory future, Karen Cutts, editor of the "Risk Retention Reporter," urged single-parent captive owners to explore opportunities under the 1986 Risk Retention Act, which allowed organizations to meet their liability needs by forming risk retention groups. "There may be an extra expense to captives in terms of compliance and reporting," she said, adding that the benefits to forming a risk retention group include availability of coverage and the ability to offer coverage through an insurance program.

Another option for captive owners is financial reinsurance. "There has been an evolutionary change in the reinsurance business," said Charles Ruoff, senior vice president of Sedgwick James Inc. "There has been a significant regulatory agenda pursued within the last two years, which includes solvency concerns, abuses of the system and fear on the part of the regulators that innocent claimants will pay." He added that some of the issues confronting regulators are: managing general agents, fronting, lack of regulatory standards, alien insurers, risk-based capital requirements and reinsurance.

Financial reinsurance is playing a role in the regulatory agenda out of the fear that it may be used to bring distorted views of financial results such as loss ratios. Regulators fear that it could mask the financial condition of an insurer.

Mr. Ruoff said that with traditional reinsurance "there must be an underwriting risk as well as a timing risk." Financial reinsurance, however, is "to indemnify the ceding insurer against an unwanted change in the balance sheet or income statement values to produce desired results."

Clearly stated, the best way to distinguish between traditional and financial reinsurance, Mr Ruoff said, is to see whether or not the reinsurance agreement is arranged so that the underwriting results are known. If the end results of the arrangement are known, he said, then it is indeed financial reinsurance.
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Captive Insurance Companies Association conference
Author:Oshins, Alice
Publication:Risk Management
Date:Apr 1, 1992
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