As “AON’s Global Risk Management Survey 2015” points out almost all of the country’s financial institutions have captive insurance and reinsurance companies. Many of the captives explore for new opportunities beyond just insuring the risks of the parent corporation. When some of these strategies come under regulatory scrutiny, captive owners lack the experience to properly analyze the strategy, from an insurance and reinsurance custom and practice.

Let’s look at what has occurred with some of the sophisticated captive insurance/reinsurance companies:

  • failed to collect facultative reinsurance recoveries
  • lost a reinsurance arbitration
  • went insolvent for failing to properly reserve long tail worker’s compensation claims
  • fined for violating regulations
  • wrote “outside” reinsurance arrangements that were unprofitable
  • captive reinsurance arrangements not economically feasible
  • wrote retrocessions without any Directors experienced in underwriting retrocession business
  • structured unresponsive reinsurance programs
  • failed to understand the pricing details regarding direct procurement policies written by captives
  • participated in reinsurance pools that were unprofitable
  • aggressively invested in the equity market
  • appointed the wrong managing general agency
  • did not buy enough CAT protection for Florida hurricanes
  • invested in the wrong hedge fund
  • selected the wrong reinsurance broker
  • placed an inadequate reinsurance program with Lloyd’s Syndicates
  • selected the wrong insurance investment banker to buy a “shell” domicile company
  • failed to perform due diligence on selecting retail/wholesale and MGA distributors
  • appointed the wrong “Lloyd’s Broker”

In conclusion, captive insurance companies need very experienced insurance company directors and chief executive officers would be wise to retain them as another cost of doing a successful business.