The Captive Insurance Companies Association (CICA) recently released Commercial Insurance and Captive Insurance Industry: Commonly Accepted Practices. CICA is the world’s largest domicile-neutral captive insurance association. This guidance from CICA for captive managers and service providers focuses largely on risk pools and commonly accepted practices, and it comes on the heels of the Reserve Mechanical U.S. Tax Court Case. This guidance is particularly helpful as it describes commonly accepted risk pooling approaches used in BOTH THE COMMERCIAL INSURANCE AND CAPTIVE INSURANCE INDUSTRIES.
Refuting nonsense from some industry pundits regarding risk pooling, Sean King, JD, CPA of CIC Services published two articles in Captive Insurance Times (CIT) in July and August of 2018 on the Reserve Mechanical Tax Court Case. CIT’s July 11, 2018 cover included the headline: RISK POOLS ARE NOT DEAD.
CICA’s guidance goes well beyond a cursory description of commonly accepted pooling practices, and includes multiple examples. CICA also makes it clear that risk pools have been a mainstay in the insurance industry since its inception.
CICA’s guidance document also includes this gem:
Quota share risk pools are not unique to captives. The concept of risk pooling is fundamental to mutual insurance companies, group captives, and risk retention groups; more generally it is fundamental to risk distribution and insurance. There are many examples where similar risk pooling arrangements are used outside of captives.
a) Public entity pools. There are nearly 70,000 public entities in the United States that insure
some of their risk exposure through risk sharing pools. This includes municipalities, school
districts, cities, fire departments, and police departments.
b) Residual market pools. These are for risks that the commercial insurance market will not
write, for coverages mandated by state law (e.g., workers compensation and in some states
auto liability). These pools are also formed for coverages that are not mandated by law but
are generally needed as a safety net to society for high risk areas and often viewed as
insurance of last resort (e.g., homeowners, property).
c) Industry Pools. There are many industry specific pools that are often organized as group
captive insurance arrangements. This type of captive insures the risk of a group of
unrelated insureds. Examples of these kinds of arrangements are:
Oil Insurance Limited (OIL) is a risk pool for many of the world’s largest oil
Nuclear Electric Insurance Limited (NEIL) is a risk pool for many U.S. and
international nuclear power plants.
Airline risk pool.
Shipping risk pool for protection & indemnity clubs.
d) Economically, mutual insurance companies pool risks with the net profits flowing to the
benefit of policyholders, the insureds. An example of this is Associated Electric & Gas
Insurance Services Limited (AEGIS).
As can be seen Risk Pools are far from dead, and mis-information about them by industry pundits is not helpful to business owners and risk managers who are working to protect their companies. On the other hand, CICA’s guidance is very helpful (and timely as well), and we thank them for it.
As a leading edge, client-focused, conservative and compliance-focused captive manager, CIC Services applauds the Commercial Insurance and Captive Insurance Industry: Commonly Accepted Practices released by CICA. CIC Services captive management practices are consistent with the practices outlined by CICA. CIC services will continue to abide by industry best practices and will continue to provide unrivaled expertise and high touch service to its clients and advisor partners.
CLICK HERE to read CICA’s Commercial Insurance and Captive Insurance Industry: Commonly Accepted Practices.