Regulators should use consulting actuaries to analyse captive loss projections: VCIA

18-08-2020

Regulators should use consulting actuaries to analyse captive loss projections: VCIA

Captive insurance regulators should use consulting actuaries to analyse the loss projections of captives under their oversight to determine whether they are engaged in genuine risk transfer. 

That is the view of David Provost, deputy commissioner in Vermont’s Captive Insurance Division in the Vermont Department of Financial Regulation, speaking at the Vermont Captive Insurance Association’s 2020 conference, in the Hot Topics With Dave Provost session. 

Provost warned the captives industry has to “get real” when it comes to 831bs, or microcaptives. If an insurance company consistently projects thousands of dollars worth of losses every year, but has never received a claim, “that is not realistic,” he said. 

Provost defended the use of 831bs when used appropriately. He cited the example of Bluegrass Insurance Company, an 831b captive that was formed in Vermont in 2014 on behalf of Sazerac, an alcoholic beverage company. 

Bluegrass saw very few claims between 2014 and 2018, according to Kent Broussard, president of Bluegrass Insurance Company, before covering a large claim in 2018 when the roof of a storage unit containing 19,500 barrels of bourbon collapsed.

Provost described this as a perfect example of an 831b captive working exactly the way it should, acting like a genuine insurance company and helping its parent company manage risk. 

Provost stressed that Delaware was well within its rights when it refused to provide confidential information to the IRS, which was gathering information about 831b captives it believes could be engaged in fraudulent activity. The IRS petitioned the US District Court for the District of Delaware to enforce a summons for documents in June, after Delaware refused to hand the information over. 

“I think that is what Vermont would have done” if it had been put in that situation, Provost said, given the confidentiality of the information in question is guaranteed by statute. 

The panel discussed other innovative ways captives are being used. One possibility is that captives could provide professional liability to police officers, noted Dave Tatlock, director at Strategic Risk Solutions. 

According to a Wall Street Journal investigation in 2015, the 10 biggest police departments spent around $1 billion over five years settling cases related to things like shootings, beatings and wrongful imprisonment, Tatlock noted. While it is not clear how or even if it could work, there is interest in looking at how captives could help municipalities manage this risk, he said. 

Captives will probably not be able to solve the problem of pandemic insurance - at least not on their own, the panel agreed. The insurance industry will not be able to manage pandemic risk itself, given the highly correlated nature of claims during a pandemic, Provost argued. The government is likely to proceed with one of the proposals being examined for government-supported pandemic coverage schemes, he said. 

However, captives are being increasingly used by businesses as they attempt to navigate the hardening pricing environment and falling capacity, said Sandra Bigglestone, director of captive insurance in the Vermont Department of Financial Regulation. This environment has “placed captives front and centre” for many businesses, she said, with captives increasingly writing a broad range of coverages, including auto, directors and officers, professional and general liability and property. 

Almost all lines of insurance have experienced price rises this year, she noted, with the notable exception of workers’ compensation, which has seen small price falls. This has encouraged businesses to look at setting up captives, or increasing the use of existing captives, in some cases as a way to negotiate better prices for commercial cover. 

Bigglestone added that she expects to see an increasing number of group captives setting up in Vermont. Group captives now have less reason to be worried about retaining members, she noted, although in some cases bankruptcies could hit group captives’ memberships. 

VCIA 2020, Dave Provost, Sandy Bigglestone, Vermont Department of Financial Regulation, 831b, Bluegrass Insurance, Dave Tatlock, Strategic Risk Solutions

Captive International