Last Updated: 1/5/2026

Issue: In its simplest form, a captive is a wholly owned subsidiary created to provide insurance to its non-insurance parent company (or companies). Captives are essentially a form of self-insurance whereby the insurer is owned wholly by the insured. They are typically established to meet the unique risk-management needs of the owners or members. Additionally, they provide potentially significant tax advantages, which can prove integral to longevity and company profitability. Captives are formed to cover a wide range of risks; practically every risk underwritten by a commercial insurer can be provided by a captive. The type of entity forming a captive varies from a major multinational corporation—approximately 90% of Fortune 500 companies have captive subsidiaries—to nonprofit organizations. Once established, the captive operates similar to a commercial insurance company and is subject to some of the same state regulatory requirements including reporting, capital and reserve requirements.

Captive insurance companies have been in existence for over 100 years. The term "captive insurance" was coined by Frederic Reiss, a property-protection engineer in Youngstown, OH, in 1955. Reiss established the first captive insurance company in Bermuda in 1962. Over the past 30 years, there has been significant growth in the captive market. Today, there are approximately 8,000 captives globally compared to roughly 1,000 in 1980 according to AM Best Captive Center. Captives can be domiciled and licensed in a wide number of jurisdictions, both in the U.S. and offshore. The captive's primary jurisdiction is known as its “domicile.” The number of captive domiciles is growing and remains competitive, with jurisdictions differentiating themselves through regulatory expertise, capital requirements, and administrative efficiency. More than 70 jurisdictions have some form of captive legislation. In terms of number of captives, Bermuda is the largest single jurisdiction followed by the Cayman Islands. In Europe, Guernsey, Luxemburg and Ireland are the market leaders. In the U.S., Vermont is the largest domicile and is considered a leader in captive legislation.

Classification of Captives:

• Pure Captive: Any company that insures risks of its parent and affiliated companies or controlled unaffiliated business.
• Group Captive: Any domestic insurance company licensed under the provisions of this article for the purpose of making insurance and reinsurance, including any company organized under the federal “Liability Risk Retention Act of 1986,” as amended, 15 U.S.C. §3901-3905. Such insurance and reinsurance shall be limited to the risks, hazards and liabilities of its group members and employee benefits coverages.
• Association Captives: Any company that insures risks of the member organizations of the association, and their affiliated companies.
• Industrial Captives: Any company that insures risks of the industrial insured that comprise the industrial insured group, and their affiliated companies.
• Branch Captives: Any alien captive licensed by the commissioner to transact the business of insurance through a business with its principal place of business in the District
• Rental Captives: A captive insurer formed to enter into contractual agreements with policyholders or associations to offer some or all of the benefits of a program of captive insurance and that only insures risks of the policyholders or associations
• Protected Cell Captives: Also known as segregated cell captives. Protected Cell Captives are similar to rental captives except that the assets of each user are protected from one another by law.
• Micro Captives: A micro captive is a captive insurance company that has an annual written premium of less than $2.8 million (for 2024). These can succor smaller entities who would normally struggle to create a captive.
• Risk Retention Groups: Captive insurer organized under 15 U.S.C. §§3901-02, as a stock or mutual corporation, a reciprocal or other limited liability entity.

The variety of captives provides options for each company’s needs and strategic plans. This diversity supports a company’s ability to finance its risk in a way that is conducive to its unique dynamics and structure.  Without being forced to fit into a homogeneous captive model, companies can afford to be creative and adaptive in their short- and long-term risk-management planning. The list above is not exhaustive; variations continue to flourish as companies come up with more sophisticated and innovative ways to use captives effectively.

Overview: Over recent years, the NAIC and state insurance regulators have been keenly focused on the life insurance industry's use of captive insurance companies. One common use has been to finance "XXX reserves" for certain term life insurance policies and "AXXX reserves" for certain universal life insurance policies. In cases where reserves are viewed as excessive or redundant relative to underlying economic risk, life insurers have increasingly turned to captive reinsurers to finance the redundant statutory reserves on these products.

The NAIC and state insurance regulators have made significant strides towards bringing more uniformity to captive reinsurance transactions. In December 2014, Actuarial Guideline XLVIII (AG 48) was adopted by the NAIC Executive (EX) Committee and Plenary and was put into effect on January 1, 2015. AG 48 defines the rules for new XXX and AXXX reserve financing transactions executed after the effective date and is a key item needed to implement the XXX/AXXX Reinsurance Framework (Framework) as adopted in 2014. The Framework sets forth an action plan specific to life insurance reserve financing transactions. Furthermore, the implementation of Principle-Based Reserving (PBR), now mandatory for accredited states as of January 1, 2020, has substantially reduced the incentive for captive reserve financing transactions. Product-specific Valuation Manual requirements implementing PBR, such as VM-22 for non-variable annuities, may further influence statutory reserve levels over time.

Building on AG 48, the NAIC later codified these principles in the Term and Universal Life Insurance Reserve Financing Model Regulation (#787), also known as the XXX/AXXX Model Regulation. Model #787 harmonizes reserve financing standards, specifies how “primary security” and additional backing assets must be held even if reinsurance is assumed through a captive, and became an accreditation standard for states beginning in the early 2020s. As of August 2025, 42 jurisdictions have implemented #787, while 9 jurisdictions continue to rely on AG 48 as the governing framework for XXX/AXXX reserve financing transactions.

In addition to their work on XXX/AXXX reserve financing, regulators have also examined the use of captive reinsurance arrangements in other life insurance product lines. In its 2014 Annual Report, the Financial Stability Oversight Council (FSOC) identified variable annuity and long-term care captive transactions as areas of particular concern, in addition to XXX/AXXX transactions. In response, the NAIC Financial Regulation Standards and Accreditation (F) Committee  adopted revisions to the Part A: Laws and Regulations Accreditation Preamble. The revisions were focused on captive reinsurance transactions for XXX/AXXX, variable annuity and long-term care business. The NAIC also established the Variable Annuities Issues (E) Working Group to "study and address, as appropriate, regulatory issues resulting in variable annuity captive reinsurance transactions."

Relatedly, the NAIC has also considered the regulatory treatment of risk retention groups (RRGs) that are organized as captives. Through the Risk Retention Group (E) Task Force, the NAIC has examined opportunities to improve uniformity and oversight in this area. In November 2020, the Group (E) Task Force disseminated relevant information regarding how to provide better uniform regulation and oversight for risk retention groups operating as captives. Most recently, state insurance regulators have identified concerns with the level of life insurance and annuity business ceded to offshore captives and have studied the causes and incentives for this activity. In November 2025, the International Association of Insurance Supervisors published an “Issues Paper on Structural Shifts in the Life Insurance Sector” that state insurance regulators contributed to. The paper discusses the rise of cross-border asset intensive reinsurance, often through offshore captives, as well as supervisory responses.

State insurance regulators have responded to the rise in asset intensive reinsurance by taking a number of actions including enhanced reporting and disclosure requirements, the development of new regulator tools to review proposed reinsurance transactions, and the development of a new actuarial guideline (AG 55) requiring asset adequacy testing to be performed on business ceded through asset intensive reinsurance treaties.   

Life Insurer-Owned Captives

Traditionally, captives were established by non-insurance companies. However, life insurers turned to captives to "finance" purported "reserve redundancies" associated with requirements under Regulation XXXi and AXXXii. Captives and Special Purpose Vehicles (SPVs) owned by life insurers are fundamentally different from captives used by non-insurance companies as a form of self-insurance.

The Principle-Based Reserving Implementation (EX) Task force adopted Actuarial Guideline 48 (or AG 48), which has been in effect since January 1, 2015. In the adoption of AG 48, the NAIC establishes national standards regarding XXX/AXXX captive reinsurance transactions. This guidance includes regulation of the types of assets held in backing insurer's statutory reserve.

AG 48 does not prohibit XXX/AXXX captive reserve transactions. It establishes uniform, national standards so all companies and regulators will use the same approach, thereby providing a far more level playing field than exists today. AG 48 is also applicable prospectively, for the most part. It does not apply to policies that were issued prior to 1/1/2015 if those policies are part of a captive reserve financing arrangement when AG 48 takes effect.

In May 2015, the Financial Regulation Standards and Accreditation (F) Committee adopted revisions to the Part A: Laws and Regulations Accreditation Preamble. The revisions add certain captive insurers and SPVs into the accreditation program. Specifically, the revisions include the regulation of those captives and SPVs that assume XXX or AXXX business, variable annuities and long-term care business. The revisions were put into effect on January 1, 2016.

In addition to XXX/AXXX, the NAIC began a project in 2015 to modify the current reserving and RBC requirements on variable annuities. Unlike the reserving issue for XXX/AXXX, this project is focused less on the required level of reserves, and more on the non-economic volatility that is reportedly created from the current requirements. Life insurers have used captives to help reduce this unnecessary non-economic volatility. In July 2018, the NAIC’s Financial Condition (E) Committee adopted a revised variable annuities framework and corresponding charges to other NAIC groups to begin developing the necessary language changes needed for existing statutory reserving requirements and capital requirements to implement the changes. Since January 1, 2020, compliance with PBR is mandatory, unless given an exemption on a case-by-case basis.

At the 2019 Fall National Meeting, the Financial Regulation Standards and Accreditation (F) Committee adopted the Term and Universal Life Insurance Reserve Financing Model Regulation (#787), commonly known as the XXX/AXXX model, as a new accreditation standard. The Plenary adoption was completed on August 14, 2020.

In Actuarial Guideline XLVIII—adopted by the Life Actuarial (A) Task Force on February 20, 2020, and by the Life Insurance and Annuities (A) Committee on July 10, 2020—it reasserts the vital need for uniform national standards governing XXX and AXXX reserve financing arrangements in conformity with the PBRI (Principle-Based Reserving Implementation) Task Force framework. The revision in 2020 was minor edit to align AG 48 with changes to model #787.

In 2025, the NAIC adopted Actuarial Guideline 55 (AG 55), which strengthens asset adequacy testing requirements for certain life reinsurance treaties, including those involving captive insurers and affiliated reinsurers. AG 55 focuses on asset-intensive reinsurance arrangements and enhances expectations around cash-flow testing, reserve adequacy, and transparency, complementing existing reserve financing standards under AG 48 and Model #787.

The complex and evolving nature of captive insurance can make it difficult to prescribe one-size-fits-all review standards. That is why Actuarial Guideline XLVIII is a minimum recommendation rather than a cure-all for every conceivable scenario. Directly stating from the Guideline, “A regulator should impose requirements in addition to those set out in this actuarial guideline if the facts and circumstances warrant such action.”