Top Terms to Know regarding Captives:


Top Terms to Know regarding Captives:

This is a list of top terms to know regarding captives and captive insurance companies.  It is a list that we will be regularly updating, referencing, and revising so please come back regularly to learn more.

If you have additional questions, terms, or recommendations please comment below.

Top Terms to Know regarding Captives:

  • Admitted Insurer:
    • An insurer licensed to do business in the state or country in which the insured exposure is located
  • Agency Captive:
    • A captive formed by an insurance agency to reinsure the risks of third parties from the agent’s chosen fronting insurer
  • Aggregate Deductible:
    • The maximum amount the insured can pay as deductibles over a specific period of time, typically one year.
  • Aggregate limit:
    • The insurer’s maximum liability for a series of losses over a specified period of time, typically one year.
  • Aggregate stop loss reinsurance:
    • A type of reinsurance in which the reinsurer pays losses in excess of the aggregate deductible or attachment point
  • Alien Insurer:
    • An insurer located outside the United States
  • Allocated loss adjustment expense (ALAE):
    • Insurer’s expense associated with adjusting claims
  • Alternative markets:
    • Ways to fund self-insurance, which include captives
  • Asset Allocation:
    • The optimal mix of assets by asset class
  • Association captive:
    • A captive insurer having two or more owners, typically members of an industry or trade association
  • Attachment point:
    • The point at which the reinsurer or excess insurer starts paying losses on a specific or aggregate stop loss basis
  • Audit cycles:
    • Audit of departments on regular cycles based upon risk assessments
  • Binder:
    • A record of reinsurance coverage pending replacement by a formal reinsurance contract
  • Bordereau:
    • A report by the reinsured detailing the reinsurance premiums and reinsurance losses regarding risks ceded under the reinsurance agreement
  • Branch captive:
    • A unit of an existing offshore captive currently licensed to write employee benefit business for owners and affiliates onshore
  • Branch profits tax:
    • A tax payable on dividend remittance by offshore captives that are found to be engaged in trade or business.
  • Brother-sister relationship:
    • Refers to separate subsidiaries owned by the same parent, such as a captive insurance company and an operating subsidiary.
  • Burning cost:
    • The theoretical premium needed to cover losses only.
  • Capacity:
    • The supply of insurance available to meet demand. Capacity depends on the industry’s financial ability to accept risk.
  • Capital allocation:
    • The deployment of capital to different business units
  • Capital attribution:
    • Assignment of enterprise level capital to the various business segments.
  • Capital structure:
    • The determination of the optimal mix of capital by type (i.e. debt, common equity, preferred equity), given the risk profile and performance objectives of the enterprise
  • Capital:
    • Shareholders’ equity and retained earnings
  • Captive Insurance Company Association (CICA):
    • A trade association of captive insurers
  • Captive insurance company reports:
    • International risk management institute’s monthly newsletter that covers global developments in the captive industry
  • Captive Insurance company:
    • Any company which insurers the risks of the parent organization
  • Cedant:
    • An insurer that cedes all or part of the insurance risk it has written to a reinsurer
  • Cede:
    • To transfer to a reinsurer all or part of the insurance or reinsurance risk written by a ceding company
  • Cession:
    • The amount of insurance risk transferred to the reinsurer by the ceding company
  • Commercial insurer:
    • A company that sells insurance to anyone who requires a quote, not merely shareholders of the insurer
  • Commutation:
    • The cancelling of a reinsurance contract where there are profits or losses to be allocated
  • Contingency planning:
    • The process of developing crisis management protocols prior to a crisis
  • Controlled foreign corporation:
    • Offshore captives in which United States shareholders own more than 25 percent of the voting control.
  • Convention blank:
    • A report form required by some states for reporting annual captive financial results
  • Economic valued added:
    • A corporate performance measure frequently state as net operating profits after tax minus product of required capital times the firm’s average costs of capital
  • Election:
    • The option an offshore captive has to pay United States income taxes directly rather than put the tax burden on its shareholders.
  • Embedded value:
    • A measure of the value of business currently on the books of an insurance company
  • Engaged in trade or business:
    • A United States income tax term referring to an offshore captive whose business is actually run from onshore, in which case it is fully taxable
  • Evergreen letter of credit:
    • A letter of credit that contains an initial expiration date as well as a clause that states it will be automatically extended for additional periods unless the issuing bank gives notice stating otherwise
  • Excess of loss reinsurance
    • Coverage provided to a captive for losses that excess a stated limit or attachment point
  • Excess/Surplus lines insurance:
    • Business placed in non-admitted markets on an unregulated basis in accordance with state insurance law.
  • Expense ratio:
    • Total expenses divided by net written premiums
  • Facultative reinsurance:
    • A policy that provides an insurer with coverage for specific risks that are so unusual or so large that they aren’t covered in the company’s reinsurance treaties.
  • FAS 113 :
    • accounting standard for reinsurance that requires reinsurance receivables and prepared reinsurance premiums be reported as assets
  • FAS 115:
    • Accounting standards for evaluating assets that require a captive’s investments to be classified and accounted for into three categories: held to maturity, trading securities, or available for sale securities.
  • FAS 5:
    • Accounting standard that prevents captives from setting up catastrophe or equalization reserves.
  • Feasibility study:
    • A comprehensive analysis of the potential or continued viability of a captive insurance company.
  • Fronting:
    • When a primary insurer acts as the insurer of record by issuing a policy, but then passes the entire risk to a reinsurer in exchange for a commission
  • Funded self-insurance:
    • A more formalized approach to self- insurance involving the creation of an earmarked asset account to match loss reserves.
  • Generally accepted accounting principles (GAAP):
    • Uniform method used to prepare financial statements
  • Group-owned captive:
    • A captive insurance company with more than one owner
  • Incurred but not reported (IBNR) losses:
    • Losses that have occurred but have not been reported to the insurer as of a particular date
  • Industrial insured captive insurance company:
    • Insures risks of the industrial insureds
  • Inherent Risk:
    • The risk in the absence of any actions take to otherwise alter the likelihood the risk could result in an event with a negative impact.
  • Insolvency clause:
    • A contractual provision under which the reinsurer agrees to pay its reinsurance obligations under the contract whether or not the insurer has paid its obligations.
  • Letter of credit (LOC):
    • A financial guarantee issued by a bank ensuring that funds will be available if requested
  • Loss Control:
    • The technique of minimizing the frequency/severity of loss or its impact once it occurs
  • Management Company:
    • A firm in the captive domicile specializing in accounting and other related services for captive insurance companies.
  • Maximum foreseeable loss (MFL):
    • The worst loss that is likely to occur from a single event
  • Maximum possible loss (MPL):
    • The worst loss that could possible happen from a single event
  • Membership accounting:
    • Financial modeling for each captive participant that shows past history, status of the account, and liquidation valued.
  • NAIC:
    • The National Association of Insurance Commissioners, which was historically anti-captive and anti-fronting
  • Net written premium:
    • The premium that is received by a captive
  • Non-admitted insurer:
    • An insurer not licensed to do business in the state in which the insured exposure is located
  • ODECO:
    • A tax case which ultimately sank the offshore captive business
  • Onshore captive:
    • A captive domiciled in an United States state or territory.
  • Participant:
    • The insured whose risks are underwritten by a sponsored captive.
  • Policy Holder dividends:
    • Money paid back through the insurance premium process to the insureds
  • Pool:
    • Any jointing underwriting operation of insurance or reinsurance
  • Portfolio transfer:
    • Sending all or a portion of the captive’s liabilities and assets to cover them to a reinsurance company.
  • Primary reserve ratio:
    • Illustrates how long an institution can survive if it were to totally shut down
  • Probability of ruin:
    • The point at which capital is exhausted
  • Pure captive insurance company
    • Insures the risks of its parents and affiliated companies: also known as a single parent captive
  • Reciprocal insurance:
    • Mutually protects entities against specified kinds of losses via an exchange of insurance contracts
  • Reinsurance:
    • Insurance bought by insurers.
  • Rent-a-Captive:
    • Programs where the policyholder is insured by the captive without owning, or without having voting control of the captive
  • Retention:
    • The amount of liability retained by an insurance company and not ceded to a reinsurer
  • Retrocession:
    • The reinsurance of reinsurance
  • Retrocessionaire:
    • A reinsurer of a reinsurer
  • Risk retention group (RRG):
    • An insurer formed under the laws of a United States state that is designed to assume all liability coverage except for personal risk. An RRG must be owned by its policy holders and it policyholders must be insured by the group
  • Risk sharing:
    • Reducing the risk likelihood or impact by transferring some portion of the risk.
  • Risk tolerance:
    • Acceptable level of risk relative to the achievement of an objective
  • Risk based capital:
    • The need for insurance companies to be capitalized according to the inherent riskiness of the type of insurance they sell.
  • Self-Insurance:
    • When a company sets up a loss reserve account
  • Self-Insured retention (SIR):
    • The amount of each loss the insured pays out of pocket before the insurer starts covering it; similar to a deductible.
  • Self-procurement taxes:
    • State taxes of up to four percent on premiums paid to most captives
  • Shareholder dividends:
    • Money paid to the captive’s shareholders after tax
  • Single-parent captive:
    • A captive with one shareholder; the most common type of captive
  • Sponsor:
    • The legal entity that contributes capital to form a sponsored or association captive.
  • Sponsored captive:
    • When a participant is only exposed to the risk of its own underwriting performance
  • Subpart F income:
    • Investment income earning by an offshore insurer/reinsurer covering United States risks
  • Surplus notes:
    • A loan to a captive to gain additional capital
  • Surplus:
    • The amount by which assets exceed liabilities
  • Tail events:
    • Rare outcomes, usually representing large losses
  • Tax Reform Act of 1986:
    • Required all insurers, including captives, to change the way their taxable income was computed.
  • Technical and Miscellaneous Revenue Act of 1988:
    • Decreed offshore captives to be taxed as United States domestic corporations
  • Treaty reinsurance:
    • An agreement between insurers and reinsurer where each party automatically accepts specific percentages of the insurer’s business.
  • Trust fund:
    • An onshore guarantee fund using assets of the captive to gain admission onto the NAIC
  • Ultimate loss:
    • Total sum paid for a loss
  • Umbrella policy:
    • Coverage that provides extra protection from loss or liability
  • Unearned premium:
    • The gross written premium minus the earned premium
  • Value at Risk (VaR):
    • The maximum loss an organization can suffer, under normal market conditions, over a given period of time: VaR is a come measure of risk in the banking sector
  • Warehousing:
    • When a fronting insurer accepts premiums for a captive that isn’t yet ready to receive the premiums.

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