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Captive Insurance Companies

Last Updated 2/27/20

Issue: Over the past several years, the NAIC and state insurance regulators have been keenly focused on the life insurance industry's use of captive insurance companies to finance reserves required under current regulations. These reserves are commonly referred to as "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, 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 life 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, implementation of principle-based reserving (PBR) requirements is expected to eliminate the reserving incentive for these transactions.

Moreover, 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 recently adopted revisions to the Part A: Laws and Regulations Accreditation Preamble. The revisions are currently 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."

Background: A captive is an insurance company created and wholly owned by one or more non-insurance companies to insure the risks of its owner (or owners). Captives are essentially a form of self-insurance whereby the insurer is owned wholly by the insured. They are typically established to meet the risk-management needs of the owners or members. 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—the vast majority of Fortune 500 companies have captive subsidiaries—to a nonprofit organization. Once established the captive operates like any commercial insurance company and are subject to 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 over 7,000 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. 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.

There are various types of captive structures. The vast majority of captives insure only the risk of its parent (single parent or 'pure' captive). In addition to single-parent captives, there are group/association captives, rent-a-captive, risk retention groups, agency captives, branch captives, senior or diversified captive, protected cell captive and producer owned reinsurance companies (PORCs). The list is not exhaustive; variations continue to flourish as companies come up with more sophisticated and innovative ways to use captives.

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. Regulatory concerns over the use of captives by life insurers led to the establishment of the NAIC Captive and Special Purpose Vehicle Use (E) Subgroup in early 2012. The Subgroup, which has been disbanded, was charged to study insurers' use of captives and SPVs to transfer insurance risk, other than self-insured risk, in relation to existing state laws and regulations, and establish appropriate regulatory requirements to address concerns identified in this study. To initiate this study, the Subgroup requested state insurance department's respond to a request for comment on the use of captives and SPVs by insurance companies. The request for comment was sent to all 50 states and the District of Columbia. Thirty-five responses were received.

In 2012, the Subgroup drafted a White Paper in 2012 on the use and regulation of captives. The Captive and Special Purpose Vehicles: An NAIC White Paper outlines the findings of the Subgroup's request for comment and offers seven recommendations for consideration and/or possible study. The recommendations address: accounting considerations; confidentiality; access to alternative markets; International Association of Insurance Supervisors principles, standards and guidance; enhancements to the credit for reinsurance models; disclosure and transparency; and Financial Analysis Handbook guidance.
The Financial Condition (E) Committee and the Executive (EX) Committee and Plenary formally adopted the White Paper on July 17 and July 26, 2013, respectively. The Financial Condition (E) Committee assigned the task of determining how to implement many of the recommendations to the Principle-Based Reserving Implementation (EX) Task Force and the Reinsurance (E) Task Force.

The NAIC also engaged the consultant Rector & Associates, Inc., to make recommendations for improving uniformity and transparency and to provide recommendations regarding the potential regulatory treatment of these transactions in light of PBR. An initial report from Rector & Associates was released on Sept. 13, 2013 and subsequent reports were issued on Feb. 17, 2014 and June 4, 2014. The Principle-Based Reserving Implementation (EX) Task Force adopted the recommendations in the June 4 Rector & Associates, Inc. report which includes: a proposal for an XXX/AXXX Reinsurance Framework (adopted in concept); a new reporting requirement in the 2014 financial statement blank for insurers ceding XXX/AXXX reserves; and the development of a new section in the Financial Analysis Handbook regarding XXX/AXXX transactions.

Another component adopted by the Principle-Based Reserving Implementation (EX) Task force, which has been in effect as of January 1, 2015 is Actuarial Guideline 48 (or AG 48.) 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 addition, 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 NAICs 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 to existing statutory reserving requirements and capital requirements to implement the changes. The language is expected to be effective January 1, 2020, with a three-year transition period allowed, and early application permitted.


i Used to describe the actuarial reserves required to be held under the Valuation of Life Insurance Policies Model Regulation (#830), which is commonly referred to as Regulation XXX (or, more simply, XXX).
ii Used to describe the actuarial reserves required to be held under the Actuarial Guideline XXXVIII - The Application of the Valuation of Life Insurance Policies Model Regulation (AG 38), which is commonly referred to as AXXX.

Committees Active on This Topic

Additional Resources

State Regulation of Captive Reinsurance Transactions
2017 presentation at the NAIC Insurance Summit

The Evolution of Captives
2015 presentation by Rob Hoyt during the CIPR Captives Event

Captives Presentation
2015 by Superintendent Joe Torti, III (RI) during the CIPR Captives Event

The Real Deal on Captives
2015 presentation by Superintendent Joe Torti, III (RI)

PBR Implementation Plan

Actuarial Guideline XLVIII (AG 48) adopted Dec. 16, 2014

XXX/AXXX Reinsurance Framework, adopted Aug. 7, 2014 in concept 

News Releases


Media queries should be directed to the NAIC Communications Division at 816-783-8909 or

Dan Daveline
Director-Financial Regulatory Services
Phone: 816.783.8134
Fax: 816.460.7809

Jane Koenigsman
Sr. Manager, L/H Financial Analysis
Phone: 816.783.8145

NAIC Center for Insurance Policy and Research (CIPR)

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