Class 24

Question 1

captive

Answer 1

an org’s insurance subsidiary formed with the purpose of financing risk (providing capital to pay for the losses) of its parent (captives represent a form of retention)

Question 2

why were captives initially formed

Answer 2

to obtain tax deductibility of premiums (and of reserves) which requires a contract that meets the definition of insurance

Question 3

elements of the definition of insurance

Answer 3

1. risk transfer
2. risk distribution (pooling)
3. pure (insurance) risk

Question 4

pure captive

Answer 4

• a subsidiary designed to provide insurance to its owner (the “parent”)
• one parent and one policyholder, both of which are the same entity
• funds flow directly between parent/policyholder and captive

Question 5

pure captive with a fronting company

Answer 5

• a fronting co. is a “regular” admitted insurer
• funds flow btw parent and captive through the fronting co.
• retention achieved through purchase of (facultative) reinsurance from captive
• fronting co. may require a guarantee of captive’s ability to pay losses

Question 6

guarantee

Answer 6

parent promises to pay if captive can’t as stated in the reinsurance agreement

Question 7

broad captive

Answer 7

• captive sells reinsurance to “non-affiliated” entities (not part of the same economic family)
• might or might not use a fronting co.

Question 8

associative captive

Answer 8

multiple parents share each other’s losses

Question 9

another type of captive

Answer 9

captives provides insurance for “sibling” corporations

Question 10

reasons to use a captive

Answer 10

• hope to have tax deductibility
• lower cost source of capital-invest captive funds
• manage currencies
• control the program
• retain risk
• make a profit- sale of insurance/reinsurance

Question 11

pure captive set up

Answer 11

• Parent: give capital to subs. ; gets dividends from sub.

- captive: gets premium from parent; pays parent’s losses

Question 12

is a pure captive considered insurance?

Answer 12

• transfer: canceled out
• no distribution
• NOT INSURANCE

Question 13

broad captive set up

Answer 13

-same as pure captive, BUT sub. sells reinsurance to other co.s not affiliated with the parent co.

Question 14

is a broad captive considered insurance?

Answer 14

yes???

Question 15

pure captive w/ fronting co. set up

Answer 15

• Parent: pays premiums to fronting co.; fronting co. pays for losses; guarantee to fronting co.
• Captive: gets capital from parent; pays dividends to parent
• fronting co: pays parents losses; gets premiums; transfers risk to captive

Question 16

is a pure captive w/ a fronting co. considered insurance?

Answer 16

maybe if there is not a guarantee

Question 17

is an association captive considered insurance?

Answer 17

yes; its basically mutual insurance; policyholders= owners

Question 18

why do co’s want to be considered insurance co.s?

Answer 18

for tax deductibility reasons