Disruptor (dis·rup′tor) n. [from Latin disrumpere, disrupt-, to break apart]


A force that can 1) throw into confusion or disorder; 2) interrupt or impede the progress of; 3) break apart or alter so as to prevent normal or expected functioning.

Disruptors are in vogue these days, especially when it comes to technology (think Amazon v. bricks-and-mortar). Captives were a disruptor to the traditional insurance industry when they broke onto the scene over 50 years ago, and even today, because of the flexibility and innovative nature of captives, they still are a disruptive force. But we are also seeing disruptors emerge in the traditional insurance industry in the past few years which I think may have an effect on the captive industry.

A recent KPMG survey reported that while insurance executives overwhelmingly know that innovation will drive future competitive advantage and growth, most seem to be struggling to ignite innovation within their own organizations. According to the report, “rapid innovation has created significant challenges for insurers, with 48 percent saying that their organizations are already experiencing disruption from new, more nimble competitors”. More than three-quarters said they are “already running just to keep up with their day-to-day requirements” and slightly fewer said they “lack the internal core skills needed to drive innovation”. But change is coming.

One interesting disruptor is the use of algorithms to aggregate small insurance policies in a way that prices some of the traditional companies out of the market, especially smaller enterprises looking for easy, quick and cheap. This commoditization pushes traditional insurance companies and agents to put more focus on larger business and specialized accounts – areas that should be ripe for the captive industry. Combine this with the growing use of technology and social media, such as Google Compare, and it can look daunting. But that’s what makes captives more alluring that ever. While businesses will still have concerns about coverage gaps in these types of programs, not to mention the fact that the specific needs of individual enterprises may not be available, the lack of personal accountability with these products would make any captive manager or TPA look like a hero!

This is where captives could excel. For instance, sponsored cell captive insurance companies provide the sponsor of the captive program a great deal of flexibility by allowing for individual cells that can be customized to each participant. This type of structure is growing in popularity because of the options and customization it provides. It can also be a good way for smaller companies to access the captive insurance marketplace, because typically the startup cost is less than establishing their own captive.

So keep the disruption coming! What doesn’t kill you makes you stronger…

Thank you all very much, and I look forward to hearing from you.

Rich Smith
VCIA President

The Cyber Conundrum

cyberattack_1805164b Last month, the Federal Insurance Office (FIO) issued its third annual report on the insurance industry, and I found two things of note. First, the report criticized state insurance regulators for not doing enough to address ongoing concerns about captive reinsurance. Now, of course that caught my attention, and we know this is an ongoing issue between the NAIC and the FIO, but it was the report’s discussion of cyber risk that really caught my eye.

The report estimated that the U.S. cyber insurance market has about $2 billion in capacity, and the FIO indicated that underwriters should improve cyber risk processes to encourage the pooling of insurance data and improvements in cyber risk expertise. “Recently, concerns have been raised regarding the capacity and scope limitations of the cyber risk insurance market, with some market participants describing market capacity for cyber risks as ‘very small’ and observing that billion dollar coverage limits are needed to adequately address the losses posed by cyber risks,” said the report. There has been a lot of discussion of writing cyber risk in captives, and we have a good example in the case of Penn State’s captive, Nittany Insurance, writing cyber for all their students, researchers and faculty.  As Nittany’s Gary Langsdale outlined in the cyber webinar VCIA held in May of last year, on the average day at Penn State, 170,000 email accounts on over 100 separate systems receive 3.2 million emails; in addition, last year their email system filters blocked over 95 million spam emails!

As with terrorism risk, the question becomes are we now at a place where the impact of a cyber-attack could be so great and cover a large swath of territory, businesses and systems in the U.S., that cyber risk insurance programs will be overwhelmed?  To me it raises the question whether a program similar to TRIA, with the US government as a backstop, needs to be devised.  TRIA and its subsequent extensions serve as reinsurance for commercial Property and Casualty policies covering losses due to acts of terrorism in the U.S. In exchange for federal support, insurers are required to offer terrorism coverage.

As with terrorism coverage, a captive providing cyber risk with a federal backstop could offer several advantages over a commercial insurance carrier in addition to the typical advantages of a captive program. Because the typical aggregate-earned premium for a captive insurer is minimal compared to that of commercial insurers, the deductible amount is often quite low. The government, using similar TRIA guidelines, could respond to certified losses typically excluded in commercial cyber policies. Captives are not required to pay funds to their policyholders in advance of receiving reimbursement from the federal government, alleviating cash flow issues.  On the whole, corporations accessing TRIA directly through their captives generally have broader coverage, and, in the event of no loss, may recoup premiums.

My fear is that without a federal backstop similar to TRIA, capacity could dry up with one or two big cyber-attacks.  Something to think about.

Thanks and keep in touch!

Rich Smith
VCIA President

Team Vermont in Acronym City

Acronym city

The spring meeting of the NAIC just concluded in Phoenix this week, and as usual our stalwart group of captive insurance sentinels were on hand to carefully monitor the activities that might impact captives.  Representing Team Vermont was Commissioner Susan Donegan, Deputy Commissioner Dave Provost, Director of Captives Sandy Bigglestone, and of course, VCIA’s own Jim McIntyre.

The Principle-Based Reserving Implementation (EX) Task Force Executive (EX) Committee considered the adoption of PBR Review (EX) Working Group Report and received an update on PBR progress from the Life Actuarial (A) Task Force, as well as other written updates on the XXX/AXXX Reinsurance Framework Charges.

The Risk Retention Group (E) Task Force discussed a number of items, including revisions and the applicability of? RRGs to?of annual disclosures and reporting regulations. They instructed NAIC staff to draft a number of comment letters to the Financial Regulation Standards and Accreditation (F) Committee on the following issues:

  • stating its opinion that the Corporate Governance Annual Disclosure Model Act (#305) and the Corporate Governance Annual Disclosure Model Regulation (#306) should not be required for risk retention groups (RRGs) for accreditation purposes and explaining their reasons, including the Model Risk Retention Act’s (#705) corporate governance provisions;
  • stating its opinion that the 2014 revisions to the Annual Financial Reporting Model Regulation (#205) should not be required for RRGs for accreditation purposes and explaining the reasons therefore;
  • stating its opinion that the 2014 revisions to the Insurance Holding Company System Regulatory Act (#440) would likely never apply to an RRG, as it would not fit the definition of an “internationally active insurance group.”

The RRG Task Force also discussed the reference to “captive” RRGs in the Review Team Guideline within the financial analysis procedure that is specific to RRGs, and decided: 1) it will be discussed further on a future conference call; and 2) that the Model Risk Retention Act (#705) should apply to both RRGs organized under a state’s captive statutes, as well as those organized under a state’s P/C statutes.

The Financial Regulation Standards and Accreditation (F) Committee, whose mission is to establish and maintain standards to promote sound insurance company financial solvency regulation through the NAIC’s accreditation program, took time to discuss the proposed Preamble that would include, in the scope of the Accreditation Program, captive insurers and special purpose vehicles that assume business written in accordance with Regulation XXX, Regulation AXXX, variable annuities and long-term care insurance. The Committee discussed comments received and instructed NAIC staff to revise the Preamble to clarify that these are the only type of captives (other than risk retention groups) to be included in the scope of the Accreditation Program. The Committee is considering holding an interim meeting prior to the Summer National Meeting to discuss this issue further.

Jim McIntyre’s full report  on  these committee and other issues that impact captives will be available to our members at www.vcia.com in the coming days.

Richard Smith,
VCIA President

Multi-State Pile-Up


Berwyn car spindleThe National Association of Insurance Commissioners (NAIC) is attempting once more to get a handle on some of the complex risks and financial arrangements that can be encompassed by captive insurance companies. The first draft by NAIC staff proposed revisions of the preambles to Parts A and B  of the NAIC Accreditation Program Manual sought to clarify the definition of a multi-state reinsurer that assumes business written in any state other than its state of domicile constitutes multi-state business, and would
subject such a multi-state reinsurer to the accreditation standards. Their main concern 
was the use of captives for life insurers XXX/AXXX redundant reserves.  Unfortunately, the definition was written so broadly that one could argue that captives of many types could be swept up in the accreditation process unnecessarily.

With many comments delineating these issues (including from the VCIA), the NAIC staff withdrew the draft and is now out with a second draft. The second draft looks better and seems to be more narrowly focused. But here again, the language defining the scope of the Part A standards covering life/health and property/casualty insurers appears to conflict with the stated purposes because some categories identified are so broad that they could  be read to include captives other than captive life/health reinsurers.  The NAIC took what I believe the unprecedented step of issuing a clarification to their clarification!  Hey, I have been there myself, so I have some sympathy.

Well, hopefully with the latest round of comments and review, the NAIC can finally put this issue to bed – until the next captive issue burbles up for their consideration…

Thank you all very much, and I look forward to hearing from you soon.

Best in Show

Rich in OrlandoI just returned from the CICA conference in toasty Orlando.  As one of the prominent gatherings of captive insurance professionals, it’s a great opportunity to check in with folks and discuss issues facing captives, both bad and good.

Not surprisingly, the issues of the OECD Base Erosion and Profit Shifting Action Plan, 831(b)s, and the NAIC efforts regarding XXX/AXXX captives were front and center. But there were also great discussions around new opportunities for the industry such as medical stop-loss and employee benefits, using your captive to cover credit and political risk, and the growing interest to add cyber and reputational risk coverage. Tom Jones and Bruce Wright provided a very in-depth review of recent tax rulings that, for the most part, was fairly upbeat.  Much still in flux (as it always is)!

On a more humorous note, you can see by the picture that Dennis Harwick, President of CICA,  loaded up the ribbons on my conference badge (I think to try and slow me down). I was talking to Joel Chansky of Milliman, telling him I felt like Generalissimo Franco. He thought I looked more like Best in Show at the Westminster Dog Show! Definitely more accurate…

Thank you all very much, and I look forward to hearing from you soon.