January Pulse Survey Analysis:
In partnership with captive.com, Towers Watson conducted this pulse survey to take a look at how the recent GAO report might impact the captive industry..
This analysis was written by analysts at Towers Watson.
The January pulse survey asked several accounting questions and elicited 35 responses.
When asked what type of accounting method their captive used, 71.4% responded that they only used GAAP. Just 8.6% use SAP, while the remaining 20% used both. We asked this question because of the recent GAO report on risk retention groups, which by implication may be extended to all captives. The GAO is worried that multiple accounting systems make it difficult for insurance regulators to monitor RRGs, and recommended that the NAIC consider whether to insist on SAP accounting, which is what traditional insurers use. SAP accounting penalizes small and growing insurers, such as captives.
If this change in accounting systems meant that letters of credit couldn’t be relied on as acceptable formation capital, would this be a problem? 54.3% said yes, 34.3% said no, and the remaining 11.4% weren’t sure. If captive domiciles are forced to adopt more traditional forms of capitalization because the NAIC demands it, this will be a concern for many captive owners. Captives regularly rely on letters of credit as formation capital.
An additional issue is that the NAIC may no longer accredit a particular state because it did not meet particular NAIC standards. 60% of respondents agree that would be a concern. If other states will not recognize a state’s examinations, the other states are likely to request that outside examiners review the state’s books. This could be quite burdensome and problematic for the domicile and hence the captives within that domicile.
This topic was addressed in the lead article in
January’s issue of the Captive
Insurance Company Reports, entitled Captives: Heed GAO Report.