Issue Brief: Captive Reinsurance

Abstract

Insurance companies, especially life insurance companies, often engage in “captive reinsurance” transactions involving captives that are located in states or foreign jurisdictions with more favorable capital regulation and tax laws, especially Bermuda and the Cayman Islands. These captives are entirely owned and operated by the parent company, but subject to the laws of the captive’s jurisdiction instead of those of the parent company’s jurisdiction. In a typical captive reinsurance transaction, a life insurance company effectively purchases an insurance policy from its own subsidiary. The insurance company (the “ceding” insurer) would have its captive (a legally separate corporate entity) “reinsure” an existing policy, or promise to cover payments owed to future policyholders on that policy. For some time, policymakers have raised concerns about the potential dangers of so-called “shadow insurance” arrangements that involve captive reinsurers. This memorandum provides information regarding the use and regulation of captive reinsurance companies.