Erich A. Brandt

Captive Dividend Assessment

An onshore, single parent captive was concerned with the amount of retained earnings and wanted to establish a policy for the minimum capital for the program to trigger dividend distributions. Pinnacle compared the program’s capitalization to a wide variety of industry standards for similar programs from rating agencies, regulators, and other sources. The results of this analysis lead to a recommended board policy regarding a minimum capital threshold for dividend distributions and ultimately to a significant dividend being declared to the parent company.

Captive Feasibility Study

When a regional physicians group, with a moderate deductible program realized they were not getting due credit for more than a decade of exceptional loss experience, they decided to explore other options.

They chose Pinnacle specifically due to our expertise in captive and self-insurance programs.

Initially, Pinnacle discussed options including segregated cell captives, single parent captives, and even risk retention groups once they began to consider marketing the program to other similar regional physician groups.

While the customer was considering the structural alternatives, Pinnacle pursued a funding analysis. Credibility weighting the customer’s experience with industry benchmark data, produced estimates of expected losses and loss variability in several different loss layers. This not only showed the additional risk associated with higher limits of self-insurance, but was also tremendously valuable in negotiations with fronting carriers and reinsurers.

The client decided to increase the deductible on the coverage provided by their insurer, which offered more responsive pricing due to Pinnacle’s funding analysis and to form an off-shore captive providing deductible buyback coverage.  The comfort level our client had with the insured’s services also influenced the decision.

Pinnacle also worked with the captive manager to develop the feasibility study and pro forma financial statements that become the foundation of the captive application. The application was approved as submitted and the captive is running quite successfully.

U S Domestic Statement of Actuarial Opinion

Domestic U.S. property/casualty insurers and risk retention groups are required to file an Annual Statement with state regulators each year by March 1. Part of that filing includes the submission of a formal Statement of Actuarial Opinion (SAO) by a qualified Appointed Actuary as to the reasonableness of held loss and loss adjustment expense reserves. The SAO must be one of five types:

• Reasonable
• Inadequate/Deficient
• Excessive/Redundant
• Qualified
• No Opinion

In addition to the SAO, most jurisdictions require an Actuarial Opinion Summary (AOS) providing more detail on the Appointed Actuary’s specific findings by March 15. Lastly, a formal report narrative in support of the SAO and AOS is required to be available by May 1.

As the SAO is a compliance document, the primary audience is state regulators but the individual company must arrange for the service to be provided.

A recent SAO for one of our clients touched on many of the required disclosures:

1. The adequacy of held reserves on a net basis were below the low end of our range of reasonable reserves until we took into account anticipated salvage and subrogation recoveries.
2. The unearned premium reserves for long duration contracts were substantial and we conducted a review to determine they were adequate
3. The Company held material loss and loss adjustment expense reserves for pools and associations. In order avoid having to issue a Qualified Opinion, we separately computed indicated reserves for two of the pools/associations, and obtained an SAO from the Appointed Actuary for the National Workers Compensation Reinsurance Pool.
4. Reinsurance recoveries were in doubt for certain carriers as balance were sometimes overdue by more than 90 days. After reviewing the reinsurers’ A. M. Best ratings, we made the required disclosures about reinsurance collectability.