Reinsurance Captive

August 05, 2014

Response by John Salisbury, CPCU, ARM & ARe

Let me begin answering your question by briefly distinguishing among three coverage types: (1) primary insurance, (2) excess insurance and (3) reinsurance. Primary insurance provides first dollar and or coverage with a deductible. Excess insurance is coverage for a self-insured or insurer that may not follow the form being used by self-insured or insurer. Reinsurance is coverage provided to a insurer or captive that follows the form being issued by that insurer or captive.

Technically, any captive that uses a fronting carrier is a reinsurance captive. Captives are licensed in a domiciliary state. As a general rule, captives cannot operate in other states without being licensed in each state where they do business. For that reason, they use a fronting insurer that is licensed to issue the coverage forms and reinsure the fronting insurer.

There are exceptions that permit industrial insureds under some state laws to participate and purchase insurance from a captive. In those states, it is not necessary for the captive to get a license in the state. Industrial insureds are defined in selected state statues as those of a certain size, and have a full-time risk manager.

Risk Retention Groups (RRG's) are captives that are also an exception. They do not need to be licensed in each state in which they operate. RRG's are created under federal laws and are licensed and domiciled in one state and are only required to register to operate in other states. RRG's however, can only provide liability insurance. They cannot provide worker's compensation or property insurance coverage.

With this background, let me address your question. A "true" reinsurance captive is one which reinsures other captives. It issues follow form coverage to insure other captives that are acting as primary insurers.

I recently retired as the CEO of a reinsurance captive. This entity reinsured public entity pools and mutual insurance companies. Reinsurers are not subject to the same state regulations as primary insurers.