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  #1  
Old 12-31-2017, 12:31 PM
dengel dengel is offline
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Default What's the point of Captive Reinsurers?

This is how I understand captive reinsurance to work. Correct me if this is inaccurate:
Company A owns Company B.
Company A sells life insurance.
Company B is a captive reinsurer for Company A.
Company A cedes a certain guarantee to Company B. Company A pays Company B a premium for this reinsurance and Company B pays all the guarantee benefits. This is the only thing that Company B reinsures for Company A or any other company.

What benefit does this provide Company A? If the guarantee ends up paying $100 million to policyholders, Company A pays the policyholders $100 million and Company B pays Company A $100 million. Thanks to this reinsurance agreement, Company A lost $0 and Company B lost $100 million. But Company A owns Company B, so effectively Company A still lost its original $100 million! How is this any different than if Company A didn't cede the guarantee at all? (other than the fact that Company A would've saved the expenses of setting up Company B as a captive reinsurer...)
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Old 12-31-2017, 06:13 PM
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Carol Marler
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Quote:
Originally Posted by dengel View Post
This is how I understand captive reinsurance to work. Correct me if this is inaccurate:
Company A owns Company B.
Company A sells life insurance.
Company B is a captive reinsurer for Company A.
Company A cedes a certain guarantee to Company B. Company A pays Company B a premium for this reinsurance and Company B pays all the guarantee benefits. This is the only thing that Company B reinsures for Company A or any other company.

What benefit does this provide Company A? If the guarantee ends up paying $100 million to policyholders, Company A pays the policyholders $100 million and Company B pays Company A $100 million. Thanks to this reinsurance agreement, Company A lost $0 and Company B lost $100 million. But Company A owns Company B, so effectively Company A still lost its original $100 million! How is this any different than if Company A didn't cede the guarantee at all? (other than the fact that Company A would've saved the expenses of setting up Company B as a captive reinsurer...)
If company B is subject to different regulatory requirements (such as being located in Bermuda) company B may be able to hold lower reserves.
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Old 12-31-2017, 11:26 PM
30pcssilver 30pcssilver is offline
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Capital relief in the form of lower capital requirements or differing regulations on the allowable assets backing reserves.
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Old 01-01-2018, 11:02 AM
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Also, a similar impact on reserves and capital requirements might be accomplished by using a third party reinsurer. But in that case the risk margin and profit would go to the third party. The captive reinsurer is intended to retain those elements rather than giving them away.
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Old 01-01-2018, 12:55 PM
dengel dengel is offline
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So if instead of being located in Bermuda, Company B was in the same country as Company A, there is no possible benefit?

And I would've thought that whatever reserves Company A cedes to Company B must then be assumed by Company B. But you're saying that this is not the case? If Company A cedes, say, $10 million of reserves, Company B doesn't necessarily need to hold $10 million of reserves? I would've thought U.S. regulations would only allow the reinsurance transaction to occur if Company B held enough reserves, regardless of what Bermuda regulations were. Otherwise, wouldn't it be technically be possible to find a country that has 0 reserve requirements? Then a company could reinsure all of its reserves to a captive in this hypothetical country and remove all reserves?

Unless, maybe Company B does need to hold the full $10 million, but then total surplus requirements for Company A and Company B are reduced by using captive reinsurance?

I must've missed something, because I don't remember this being discussed at all in the R&T module...
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Old 01-01-2018, 02:51 PM
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So if instead of being located in Bermuda, Company B was in the same country state of the US as Company A, there is no possible benefit?
Nope. Note my remark about retaining profit margin rather than paying to an independent reinsurer. This applies even if no benefit from reserves and required surplus.
Furthermore, IFYP. Rules can vary by state within US.

Quote:
And I would've thought that whatever reserves Company A cedes to Company B must then be assumed by Company B. But you're saying that this is not the case? If Company A cedes, say, $10 million of reserves, Company B doesn't necessarily need to hold $10 million of reserves? I would've thought U.S. regulations would only allow the reinsurance transaction to occur if Company B held enough reserves, regardless of what Bermuda regulations were. Otherwise, wouldn't it be technically be possible to find a country that has 0 reserve requirements? Then a company could reinsure all of its reserves to a captive in this hypothetical country and remove all reserves?
I don't think so, but I'm not going to try to explain why not. Maybe others will step up. I will say that most of the life insurance captives are used because the "economic" reserves are far less than those prescribed by overly conservative rules. (Search soa.org for information about regulation XXX. Don't just google XXX, though, you will not find what you are asking about.)

Quote:
Unless, maybe Company B does need to hold the full $10 million, but then total surplus requirements for Company A and Company B are reduced by using captive reinsurance?

I must've missed something, because I don't remember this being discussed at all in the R&T module...
What is R&T module?? And are you talking about Life or P/C? My experience with this has been on the life side.
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  #7  
Old 01-01-2018, 03:24 PM
dengel dengel is offline
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Right, you would retain the profit margin because you're reinsuring to a captive. BUT you would also retain the profit margin if you didn't reinsure the guarantee at all. The way I see it, there are 3 options:
(1) Don't reinsure the guarantee
(2) Reinsure the guarantee using a captive reinsurer.
(3) Reinsure the guarantee using a 3rd party reinsurer.
With option (3), Company A loses the risk and the profit associated with the guarantee. With both (1) and (2), Company A keeps all profit and all risk associated with the guarantee, so why bother setting up a captive reinsurer at all?

R&T Module = Regulation & Taxation Module, which is for the Life FSA track. (I mistakenly assumed you were familiar with it, because they mentioned Bermuda in the Module, and you also mentioned Bermuda. Coincidence I suppose...)

In the module, they have a question about the benefits of reinsurance in a certain situation, and I can't seem to find any, because it seems like it's just moving risks around within the same company. Just trying to make sense of it.

I have heard of reserve financing transactions where the excess of the Statutory reserve over the Economic reserve is ceded to a 3rd party. I don't think that is related to the question in the module though.
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Old 01-01-2018, 03:39 PM
Actuary321 Actuary321 is offline
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I am aware of a situation where Company A ceded redundant, but statutorialy required, reserves to Company B and Company B held a letter of credit as the asset backing those reserves.

I also am aware of a situation where Company A ceded reserves to Company B to keep the total assets of Company A under $500M so that Company A could still take the small company tax deduction.
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Old 01-01-2018, 03:50 PM
Actuary321 Actuary321 is offline
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Capital relief in the form of lower capital requirements or differing regulations on the allowable assets backing reserves.


What he said.
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Old 01-01-2018, 04:00 PM
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If Reg XXX hadn't been so redundant (and ridiculous), there would be a lot less point and profit in captives. If the regulatory vs industry battles over XXX and captives ultimately result in power to the FIO, both sides lose. FIO rules probably await the U.S. political power pendulum swinging liberal again.
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