6 June 2014USA analysis

New study shines light on captive reinsurance engagements

A new study has revealed that captive insurance companies are serving as important tools in helping life insurers fulfil their financial duties under state law.

This is according to Professor Scott Harrington from the University of Pennsylvania’s Wharton School of Business, who highlights the importance of captives despite them being subject to significant oversight by state regulators and analytical inspection from rating agencies.

‘The Use of Captive Reinsurance in Life Insurance’ contradicts conclusions reached in 2013 by researchers Ralph Koijen and Motohiro Yogo regarding captive transactions.

Harrington concludes that the use of captive reinsurance ensures lower prices and greater insurance protection for consumers without excessive solvency risk. Contrary to Koijen and Yogo, Harrington finds that "captive reinsurance arrangements have not taken place in the shadows."

"The use of captive reinsurance arrangements has received significant scrutiny by regulators and rating agencies," Professor Harrington says. "The arrangements require regulatory approval, generally by two different regulators and often accompanied by independent actuarial analysis. Rating agencies have been considering the arrangements' potential effects on ceding insurers' financial strength for at least a decade."

Professor Harrington is the Alan B. Miller professor in the health care management and business economic and public policy departments at theWharton School, University of Pennsylvania. He is also academic director of the Wharton/Penn Risk and insurance program, a senior fellow with the Leonard David Institute for Health Economics, and an adjunct scholar at the American Enterprise Institute.