The Tennessee Department of Commerce and Insurance recently issued a bulletin providing guidance to the Tennessee captive insurance industry on credit for reinsurance obtained by Tennessee captives from unauthorized reinsurers. Pursuant to Tennessee Insurance Code Section 56-13-112, 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. In deciding whether to grant a captive insurance company credit for reinsurance purchased from an unauthorized reinsurer, both at formation and for new arrangements, the Department stated in the bulletin that it 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.
However, the bulletin makes clear that the Department retains the discretion to grant credit for reinsurance to any unauthorized reinsurance on a case-by-case basis.