TN Insurance Bulletin 15-02: Credit for Reinsurance Ceded to Unauthorized Reinsurers by Tennessee Captive Insurance Companies

BILL HASLAM

GOVERNOR

TO:

FROM:

RE:

DATE:

STATE OF TENNESSEE

DEPARTMENT OF COMMERCE AND INSURANCE

500 JAMES ROBERTSON PARKWAY

NASHVILLE, TENNESSEE 37243-5065

615-741-6007

Bulletin No. 15-02

JULIE MIX McPEAK

COMMISSIONER

All Tennessee Captive Insurance Companies and Approved Captive Managers

julie Mix McPeak, Commissioner~

VII.; Vt{, Pull.

Credit for Reinsurance Ceded to Unauthorized Reinsurers by Tennessee

Captive Insurance Companies

October ),~ . 2015

The purpose of this Bulletin is to provide guidance to the Tennessee captive insurance

industry on credit for reinsurance obtained by Tennessee captives from unauthorized

reinsurers.

Tenn. Code Ann. § 56-13-112(b) states, in part

The commissioner shall have the discretion to allow a captive insurance

company to take credit for the reinsurance of risks or portions of risks ceded

to an unauthorized reinsurer, after review, on a case by case basis. The

commissioner may require any documents, financial information or other

evidence that such an unauthorized reinsurer will be able to demonstrate

adequate security for its financial obligations.

Tenn. Code Ann.§ 56-13-112(c) states:

In addition to reinsurers authorized by this title, a captive insurance company

may take credit for the reinsurance of risks or portions of risks ceded to a

pool, exchange or association to the extent authorized by the commissioner.

The commissioner may require any documents, financial information or

other evidence that such a pool, exchange or association will be able to

provide adequate security for its financial obligations. The commissioner

may deny authorization or impose any limitations on the activities of a

reinsurance pool, exchange or association that, in the commissioner's

judgment, are necessary and proper to provide adequate security for the

ceding captive insurance company and for the protection and consequent

ange or association will be able to

provide adequate security for its financial obligations. The commissioner

may deny authorization or impose any limitations on the activities of a

reinsurance pool, exchange or association that, in the commissioner's

judgment, are necessary and proper to provide adequate security for the

ceding captive insurance company and for the protection and consequent

October~. 2015

Page 2 of3

ceding captive insurance company and for the protection and consequent

benefit of the public at large.

The Department makes an initial determination whether to allow a Tennessee captive

insurance company to take credit for reinsurance at the time the company is formed.

Captives who desire to utilize an unauthorized reinsurer will include specific information

with their proposed business plan filed with the application. Absent adverse notification

from the Department, captive insurance companies may deem their existing unauthorized

reinsurance arrangements that were included in the original business plan, or were

included in an approved change of business plan, to be allowed on an ongoing basis under

Tenn. Code Ann. § 56-13-112. Such reinsurance contracts will be reviewed during the

captive insurance company's Tenn. Code Ann. § 56-13-1 09 examination, or as needed.

Notwithstanding the above, any authorization made by the Department for a captive

insurance company to take credit for reinsurance from an unauthorized reinsurer is valid

for that captive only in accordance with the terms of its business plan. Other Tennessee

captives seeking to enter into a reinsurance contract with the same unauthorized reinsurer

should likewise include the details of the proposed reinsurance agreement in its proposed

business plan or submit a change of business plan

mpany to take credit for reinsurance from an unauthorized reinsurer is valid

for that captive only in accordance with the terms of its business plan. Other Tennessee

captives seeking to enter into a reinsurance contract with the same unauthorized reinsurer

should likewise include the details of the proposed reinsurance agreement in its proposed

business plan or submit a change of business plan.

In deciding whether to grant a captive insurance company credit for reinsurance purchased

from an unauthorized reinsurer, the Department will give the greatest weight to the

following criteria:

•

The policy issued to the original named insured is issued by a traditional admitted

domestic insurance carrier acting as a front.

•

The reinsurance agreement is made upon secured collateral.

This includes

reinsurance agreements made on a funds withheld basis, via a domestic U.S. trust,

or via a letter of credit issued by a reputable U.S. based financial institution.

•

The reinsurance agreements are obtained from an accredited reinsurer as defined

by Tenn. Code Ann. § 56-2-208.

•

Reinsurance is obtained from a reinsurer that is highly rated by a reputable rating

agency.

•

The reinsurer has a paid in unencumbered capital and surplus of at least

$20,000,000 and agrees to submit to Tennessee copies of its audited annual

financial statements as well as copies of any examination report conducted by its

home domicile.

Additionally, the Department will give weight to arrangements where the reinsurer is

domiciled in a jurisdiction with a solid reputation for providing accountability and oversight

to its insurers. The Department also places weight on the experience and reputation of the

captive manager and other service providers selected by the captive owner.

Tennessee Department of Commerce and Insurance, Insurance Division • 500 james

Robertson Parkway· 7th Floor, Davy Crockett Tower· Nashville, TN 37243

Tel: 615-741-2176 • tn.gov/commerce/section/insurance

untability and oversight

to its insurers. The Department also places weight on the experience and reputation of the

captive manager and other service providers selected by the captive owner.

Tennessee Department of Commerce and Insurance, Insurance Division • 500 james

Robertson Parkway· 7th Floor, Davy Crockett Tower· Nashville, TN 37243

Tel: 615-741-2176 • tn.gov/commerce/section/insurance

October '112015

Page3of3

Some captives choose to participate in reinsurance exchange pooling arrangements

structured in any number of ways. When such pooling arrangements include scenarios

where a Tennessee captive insurance company cedes risk to an unauthorized reinsurer,

the Department will give the greatest weight to arrangements where the ceded premium is

held in a domestic U.S. trust, or where all pool participants are managed by the same

captive manager. Any type of proposed pooling arrangement should include information

sufficient to satisfy the Department that adequate controls are present and that the

pooling arrangement, and its participants, possesses sufficient liquidity and accountability.

The foregoing is not intended to be an exhaustive list of acceptable reinsurance structures.

The Department retains the discretion to grant credit for reinsurance to any unauthorized

reinsurer on a case-by-case basis. Captive owners, and prospective captive owners, are

encouraged to meet with the Department to discuss their proposed plan of operations to

work out an acceptable arrangement where credit for reinsurance can be granted.

Due to the unique nature of the captive insurance industry, this guidance is only applicable

to captive insurance companies and is not applicable to other insurance companies

licensed by the Department of Commerce and Insurance. This guidance also does not

apply to risk retention groups, including risk retention groups organized as captive

insurance companies

t for reinsurance can be granted.

Due to the unique nature of the captive insurance industry, this guidance is only applicable

to captive insurance companies and is not applicable to other insurance companies

licensed by the Department of Commerce and Insurance. This guidance also does not

apply to risk retention groups, including risk retention groups organized as captive

insurance companies.

Any questions about the intent of this Bulletin should be directed to the Insurance Division,

Captive Insurance Section, 7th Floor, Davy Crockett Tower, 500 james Robertson Parkway,

Nashville, Tennessee, 37243, and/or telephone number (615) 741-3805.

Tennessee Department of Commerce and Insurance, Insurance Division • 500 james

Robertson Parkway• 7th Floor, Davy Crockett Tower· Nashville, TN 37243

Tel: 615-741-2176 • tn.gov/commerce/section/insurance