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Captive Reinsurance & Coinsurance

What is Captive Reinsurance?

It’s easy to get lost in the incredibly complex language surrounding finance. Most of us still don’t understand derivatives, let alone some of the even more arcane fiscal alchemy at work these days, and the willfully obscure terminology of the market obfuscates even the relatively straightforward parts of the economy. With this in mind, it is worth spending the time to understand a term that has become increasingly important in the insurance industry: captive reinsurance. The term refers to a practice designed to transfer risk to smaller companies owned by a larger insurance company. It is a way to hedge a company’s bets, and also has the side effect of boosting an insurance company’s reported holdings. This practice is becoming more and more common in life insurance, and is also seemingly accepted by those whose task it is to watch over the industry. The reason they give is simple: the established rules of life insurance are too restrictive to turn a sizable profit.

What are the Rules of Captive Reinsurance?

Life insurance has been among the most highly regulated financial industries for over a century, since sweeping reforms were put in place to control the rampant fraud and outright theft that plagued the industry. Chief among these reforms is the requirement that insurance companies must have sufficient reserves at all times to cover what they owe. While this seems like a commonsense requirement to most, those in charge of insurance companies have begun to chafe under this rule. In an attempt to circumvent it, many began to explore the complicated financial schemes used on Wall Street to use the law to their advantage.

How Does Captive Reinsurance Work?

The “captive” refers to a distinct business entity controlled by the primary insurance company, and the “reinsurance” consists of transferring risk to that entity to make the primary insurer seem more profitable and secure, and to evade the tighter scrutiny on insurance companies than on their subsidiaries. Essentially, the practice allows them to place their toxic risk in a sequestered receptacle, in case times get tough and they need to jettison it. While this can be risky to the financial market at large, and makes it more difficult for regulators to accurately judge the health of an insurance company, businesses claim that it allows them to be more profitable and to pass that profit on to their customers.

Why Captive Reinsurance Allowed?

If this seems like a practice that the government would set out to quash ASAP, particularly in the light of the Great Recession, you’re not wrong. Shifting risk around is not popular at the moment. Then why is it allowed? The answer lies in the states’ attitudes toward regulation, and the massive reserves of capital that insurance companies have. Certain states, eager for an opportunity to boost their tax revenue, have minimal regulations on captive reinsurance, and these states become home to the majority of “captive” entities. Insurance companies tend to have massive coffers, filled with what they would like you to believe are “redundant reserves,” money they are legally obligated not to risk or invest. These funds are what both insurance companies and states would like to get flowing into the market, and thus they’ve struck up a deal that makes life insurance a less solid investment than it appears.

Where Can I Learn More?

Evans Law Firm handles consumer rights, insurance and banking fraud, elder financial abuse, and whistleblower protection. We are committed to protecting the rights of individuals who are victimized by predatory lenders, living trust mills, or sundry other unscrupulous financial actors. Call us at (415) 441-8669, or contact us by email at

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"We contacted Evans Law Firm when we were unable to collect on a Long-Term Life Insurance policy for an elderly family member. Ingrid responded almost immediately with an offer of a free consultation. I was immediately impressed with her passion for justice!!"
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