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One creative area in some captive insurance companies' investment portfolios is in their approach to what typically would be characterized as loans to their parent companies.
In some cases, the parent companies are using captive assets to purchase various items with “liquidation value” that they otherwise would have purchased themselves, said Edward Koral, specialist leader at Deloitte Consulting L.L.P. in New York.
Those items could take the form of vehicles, construction equipment, property, diagnostic equipment or other capital investments, Mr. Koral said. The approach, he said, integrates the captive with the parent company's capital spending program.
“Another thing that's frequently done is having the captive buy receivables from the parent,” said Mr. Koral, with the captive purchasing those receivables the parent might otherwise sell into another market.
Ultimately, the structure of the investments is more complex than the captive simply buying the equipment, Mr. Koral said. But, he said, “I think it's a terrific idea. It really just kind of rationalizes the financial management of the consolidated organization.”
David F. Provost, deputy commissioner of the Captive Insurance Division in the Vermont Department of Banking, Insurance, Securities and Health Care Administration, said he's seen several examples of such variations on the intercompany loan theme.
“We've had a couple of captives where the trademark becomes an asset of the captive and generates revenue for the captive,” he said. “I've seen some buildings in captives, at least one art collection, a couple of airplanes.”
In taking such an approach, “I think the challenge is to make sure the (captive's) investment policy is being respected,” Mr. Koral said. In general, that means “explaining to regulators why having a lien on an asset would be preferable to having an IOU from the parent.”
Looking at such transactions as a regulator, Mr. Provost said that in Vermont, in the case of single-parent captive's investments, “there was no rule other than I can veto anything that threatens the solvency of the captive.”
With that in mind, Mr. Provost said, the more unusual captive investments are usually “icing on the cake” of a captive's investment portfolio, not something on which the captive will rely for its solvency. Instead, he said, such twists on intercompany loans tend to be ways to go beyond the bulk of the captive's investment portfolio to allow it to help meet a particular goal of the parent.
Captive insurance company sponsors, long accustomed to taking on a wide range of property and casualty risks, are far more cautious when it comes to investing captive assets.