Chapter 3901-11 Captive Insurance Companies

3901-11-01 Captive insurance company application.

(A) Purpose

The purpose of this rule is to establish the information to be filed by an applicant for authority to form and license an Ohio domiciled captive insurance company pursuant to section 3964.03 of the Revised Code.

(B) Authority

This rule is promulgated pursuant to the authority vested in the superintendent under section 3964.21 of the Revised Code.

(C) Form of application

The superintendent of insurance shall post on the department of insurance website the forms to be used in applying for a license as an Ohio domiciled captive insurance company.

(D) Information to be provided

In addition to the information required to be filed pursuant to division (D) of section 3964.03 of the Revised Code, an applicant for a license as a captive insurance company shall complete form INS7020 made available on the department website, and provide:

(1) A one or two page executive summary of the captive insurance company's plan of operation;

(2) A plan of operation;

(3) An investment policy adopted by the board of directors;

(4) A detailed description of the coverages, deductibles, coverage limits, proposed rates or rating plans, documentation from a qualified actuary that demonstrates the actuarial soundness of the proposed rates or rating plans, for each insurance company that offers direct insurance to its parent;

(5) The place and date of the Ohio meeting of its board of directors;

(6) The Ohio address of the captive insurance company's place of business;

(7) The Ohio residential address of the captive manager of the captive insurance company;

(8) The name and Ohio address of the captive insurance company's agent for service of process;

(9) Biographical affidavits for all captive insurance company's officers, directors and captive managers on forms provided by the superintendent of insurance, and third party verification of biographical affidavits by an approved firm; and

(10) Any other information requested by the superintendent of insurance.

(E) Changes to information

filed in support of the application Any change to the information required to be filed pursuant to division (D) of section 3964.03 of the Revised Code or this rule shall be filed with the superintendent of insurance within thirty days after the change for information purposes only.

A captive insurance company seeking to change the information required to be filed pursuant to division (G)(1) of section 3964.03 of the Revised Code must comply with the provisions of division (G)(2)(a) of section 3964.03 of the Revised Code and the captive insurance company shall submit such information for the department's prior approval. Pursuant to division (G)(2)(b) of section 3964.03 of the Revised Code, each filing under division (G)(2)(a) of section 3964.03 of the Revised Code is deemed approved thirty days after the filing is received by the superintendent of insurance, unless the filing is disapproved by the superintendent of insurance during that thirty day period.

(F) Fees for protected cell captives

At the time of paying the annual fee required under section 3964.13 of the Revised Code, a protected cell captive shall pay an additional fee of fifty dollars for each protected cell.

(G) Severability

If any paragraph, term or provision of this rule is adjudged invalid for any reason, the judgment shall not affect, impair or invalidate any other paragraph, term or provision of this rule, but the remaining paragraphs, terms and provisions shall be and continue in full force and effect.

Effective: 12/21/2014
Five Year Review (FYR) Dates: 08/26/2019
Promulgated Under: 119.03
Statutory Authority: 3901.041, 3964.21
Rule Amplifies: 3964.03

3901-11-02 Additional capital and surplus required.

(A) Purpose

The purpose of this rule is to establish the procedure for the superintendent of insurance to require additional capital and surplus of a captive insurance company pursuant to section 3964.05 of the Revised Code.

(B) Authority

This rule is promulgated pursuant to the authority vested in the superintendent under section 3964.21 of the Revised Code.

(C) Basis of determination

(1) In determining whether to require a captive insurance company to increase its capital and surplus, the superintendent of insurance shall take into consideration the following:

(a) The type of risks insured by the captive insurance company;

(b) The volume of coverage being written by the captive insurance company; and

(c) The general business environment and economic conditions.

(2) In making a determination to require a captive insurance company to increase its capital and surplus, the superintendent of insurance may rely on:

(a) Reports and analysis prepared by or for the national association of insurance commissioners;

(b) Economic forecasts prepared by the federal reserve banks, the United States department of treasury, and other federal and state governmental or quasi-governmental entities;

(c) Economic and business reports prepared by private bank economists and private insurance industry rating agencies;

(d) The expert opinion of professionals, such as actuaries, certified public accountants, and economists, engaged by the superintendent of insurance to analyze the financial condition of a captive insurance company; and

(e) Any other information that the superintendent of insurance finds relevant.

(D) Notice to captive insurance company

The superintendent of insurance shall provide written notice of any determination to require an increase of the capital and surplus of a captive insurance company, which shall include:

(1) The reason for the required increase of the capital and surplus;

(2) The amount of the increase of the capital and surplus; and

(3) The date by which the captive insurance company shall achieve the additional required capital and surplus.

(E) Severability If any paragraph, term or provision of this rule is adjudged invalid for any reason, the judgment shall not affect, impair or invalidate any other paragraph, term or provision of this rule, but the remaining paragraphs, terms and provisions shall be and continue in full force and effect.

Effective: 12/21/2014
Five Year Review (FYR) Dates: 08/26/2019
Promulgated Under: 119.03
Statutory Authority: 3901.041, 3964.21
Rule Amplifies: 3964.05

3901-11-03 Auditor appointment, audited financial statements, actuarial opinion, and annual statements.

(A) Purpose

The purpose of this rule is to establish the process and procedure for a captive insurance company to appoint an independent certified public accountant and file audited annual financial statements, an actuarial opinion on policy reserves, and annual statements with the superintendent of insurance pursuant to section 3964.07 of the Revised Code.

(B) Authority

This rule is promulgated pursuant to the authority vested in the superintendent under section 3964.21 of the Revised Code.

(C) Definitions

(1) "Audited Financial Report" means the annual report defined in the items specified in paragraph (E) of this rule.

(2) "Accountant" and "Independent Certified Public Accountant" mean an independent certified public accountant or accounting firm, as defined by the general standards of the "American Institute of Certified Public Accountants," in good standing with the "American Institute of Certified Public Accountants" and in all states in which it is licensed to practice; for Canadian and British companies, it means a Canadian-chartered or British-chartered accountant.

(3) "Department" means the department of insurance.

(4) "Statutory accounting practices" has the meaning defined in the current editions of "Annual Statement Instructions" and the "Accounting Practices and Procedures Manual" published by the "National Association of Insurance Commissioners," or as otherwise prescribed by the insurance department of the captive insurance company's state of domicile.

(5) "Superintendent" means the superintendent of insurance of the state of Ohio.

(6) "Work papers" means the records kept by an independent certified public accountant of the procedures followed, the tests performed, the information obtained, and the conclusions reached pertinent to his or her audit of the financial statements of a captive insurance company. Work papers may include audit planning documentation, work programs, analyses, memoranda, letters of confirmation and representations, abstracts of company documents, and schedules of commentaries prepared or obtained by the independent certified public accountant in the course of his or her audit of the financial statements of a captive insurance company and, which supports his or her opinion thereof.

(D) Appointment

(1) No later than ninety days after receiving a certificate of authority to do the business of a captive insurance company in the state of Ohio, a captive insurance company shall report to the superintendent of insurance, in writing, the name and address of the independent certified public accountant retained to conduct the annual audit required by section 3964.07 of the Revised Code.

(2) If a captive insurance company terminated the appointment of an independent certified public accountant retained to conduct the annual audit required by section 3964.07 of the Revised Code, the captive insurance company shall:

(a) Within ten days of the termination notify the superintendent of insurance, in writing, of the fact of the termination, and a detailed account as to the reasons for the termination; and

(b) Within thirty days of the termination, report to the superintendent of insurance, in writing, the name and address of the new independent certified public account retained by the company.

(E) Annual audit certification

(1) All captive insurance companies shall have an annual audit by an independent certified public accountant, and shall file such audited financial reports with the superintendent of insurance on or before June first for the immediately preceding year ending December thirty-first. The annual audit report must include:

(a) A report of an independent certified public accountant;

(b) Financial statements filed pursuant to this rule shall be prepared in accordance with generally accepted accounting principles, unless the superintendent of insurance has required, approved, or accepted in writing the use of statutory accounting principles or any other comprehensive basis of accounting;

(c) The financial statements shall be audited by an independent certified public accountant in accordance with generally accepted auditing standards as determined by the American institute of certified public accountants;

(d) The report of the independent certified public accountant shall cover all years presented; and

(e) The report shall be addressed to the captive insurance company on stationary of the accountant showing the address of issuance, and shall be signed and dated.

(2) Captive insurance companies shall also file a report by the independent certified public accountant of the evaluation of internal controls.

(a) The report shall include an evaluation of the internal controls of the captive insurance company relating to the methods and procedures used in the securing of assets and the reliability of the financial records, including but not limited to such controls as the system of authorization and approval and the segregation of duties.

(b) The review shall be conducted in accordance with generally accepted auditing standards and the report filed with the superintendent of insurance.

(3) The accountant shall furnish the captive insurance company, for inclusion in the filing of the annual audit report, a letter stating:

(a) That the accountant is independent with respect to the captive insurance company and conforms to the standards of the profession, as contained in the "Code of Professional Conduct" of the American institute of certified public accountants and the "Rules of Professional Conduct" of the accountancy board of Ohio;

(b) The general background and experience of the staff engaged in the audit, including experience in auditing captives or other insurance companies;

(c) That the accountant understands that the annual audit report and the accountant's opinions thereon will be filed in compliance with this rule with the department of insurance;

(d) That the accountant consents to the requirements in paragraph (F) of this rule and that the accountant consents and agrees to make available for review by the superintendent of insurance, the superintendent of insurance's designee or appointed agent, the work papers prepared in the conduct of the audit and any communications related to the audit between the accountant and the captive insurance company; and

(e) That the accountant is properly licensed by an appropriate state licensing authority and the accountant is a member in good standing in the American institute of certified public accountants.

(4) Audited financial statements shall include:

(a) Balance sheet reporting assets, liabilities and equity;

(b) Statements of gain or loss from operations;

(c) Statements of changes in equity;

(d) Statements of cash flow; and

(e) Notes to financial statements shall be those required by generally accepted accounting principles, or as required by any other comprehensive basis of accounting in use by the captive insurance company and approved by the superintendent of insurance, and shall include:

(i) A reconciliation of differences, if any, between the audited financial report and the annual statement of its financial condition filed with the superintendent of insurance;

(ii) A summary of ownership and relationship of the captive insurance company and all affiliated companies insured by the captive insurance company; and

(iii) A narrative explanation of all transactions that involve three per cent or more of a captive insurance company's assets as of the previous December thirty-first, and ending balances with the captive insurance company.

(5) The audited financial statements shall be comparative, presenting the amounts as of December thirty-first of the current year and amounts as of the immediately preceding year ending December thirty-first. (However, in the first year in which an insurer is required to file an audited financial report, the comparative data may be omitted); and amounts may be rounded to the nearest thousand dollars.

(F) Every captive insurance company required to file an audited financial report pursuant to this rule shall require the accountant to make available for review by department examiners the work papers prepared in the conduct of his or her audit and any communications related to the audit between the accountant and the captive insurance company, at the offices of the captive insurance company, at the department, or at any other reasonable place designated by the superintendent of insurance. The captive insurance company shall require that the accountant retain the work papers and communications until the department has filed a report on examination covering the period of the audit, but for no longer than seven years from the date of the audit report.

(G) Conduct of captive insurance company in connection with the preparation of required reports and documents

(1) No director, officer, or member of a captive insurance company shall, directly or indirectly:

(a) Make or cause to be made a materially false or misleading statement to an accountant in connection with any audit, review or communication required under this rule; or

(b) Omit to state, or cause another person to omit to state, any material fact necessary in order to make statements made, in light of the circumstances under which the statements were made, not misleading to an accountant in connection with any audit, review or communication required under this rule.

(2) No officer or director of a captive insurance company, or any other person acting under the direction thereof, shall directly or indirectly take any action to coerce, manipulate, mislead or fraudulently influence any accountant engaged in the performance of an audit pursuant to this rule if that person knew or should have known that the action, if successful, could result in rendering the captive insurance company's financial statements materially misleading.

(3) Actions that, "if successful, could result in rendering the captive insurance company's financial statements materially misleading" include, but are not limited to, actions taken at any time with respect to the professional engagement period to coerce, manipulate, mislead or fraudulently influence an accountant:

(a) To issue or reissue a report on a captive insurance company's financial statements that is not warranted in the circumstances (due to material violations of any accounting principles prescribed by the superintendent, generally accepted auditing standards, or other professional or regulatory standards);

(b) Not to perform audit, review or other procedures required by generally accepted auditing standards or other professional standards;

(c) Not to withdraw an issued report; or

(d) Not to communicate matters to a captive insurance company's audit committee.

(H) Notwithstanding paragraphs (D), (E), (F), and (G) of this rule, special purpose financial captive insurance companies shall be subject to the requirements of rule 3901-1-50 of the Administrative Code.

(I) Certification of policy reserves and other liabilities

(1) The captive insurance company's annual statement shall be filed with a statement of actuarial opinion evaluating the captive insurance company's policy reserves and other liabilities. The individual who prepares the statement of actuarial opinion shall be a member in good standing of the American academy of actuaries.

(2) Certification shall be in the form proscribed in rule 3901-3-11 of the Administrative Code.

(J) Annual statement

In preparing the annual statement of financial condition as required by division (B) of section 3964.07 of the Revised Code:

(1) Every pure and protected cell captive insurance company shall complete and file form INS7021 made available on the department website.

(2) Every special purpose financial captive insurance company shall complete and file its annual statement using the forms and instructions of the national association of insurance commissioners for life, accident and health companies using the accounting method identified under division (C) of section 3964.07 of the Revised Code. Such filing shall be made directly to the department and may be filed electronically with an affidavit of electronic filing authenticity.

(K) Severability

If any paragraph, term or provision of this rule is adjudged invalid for any reason, the judgment shall not affect, impair or invalidate any other paragraph, term or provision of this rule, but the remaining paragraphs, terms and provisions shall be and continue in full force and effect.

Effective: 12/21/2014
Five Year Review (FYR) Dates: 08/26/2019
Promulgated Under: 119.03
Statutory Authority: 3901.041, 3964.21
Rule Amplifies: 3964.07

3901-11-04 Notification of materially misstated financial condition.

(A) Purpose

The purpose of this rule is to establish the notice requirements of the captive insurance company's independent certified public accountant in the event of the determination that the captive insurance company materially misstated its financial condition in its report to the superintendent of insurance pursuant to section 3964.07 of the Revised Code.

(B) Authority

This rule is promulgated pursuant to the authority vested in the superintendent under section 3964.21 of the Revised Code.

(C) Notification of adverse financial condition

A captive insurance company shall require the independent certified public accountant retained by the captive insurance company to prepare the audited financial report to be filed with the superintendent of insurance to immediately notify in writing an officer and all members of the board of directors of the captive insurance company of any determination by the independent certified public accountant that the captive insurance company has materially misstated its financial condition in its report to the superintendent of insurance as required by section 3964.07 of the Revised Code or that, since its last financial report the captive has experienced results which lead the certified public accountant to the determination that the captive is in adverse financial condition. The independent certified public accountant shall furnish a copy of such notification to the superintendent of insurance within five business days of notifying the captive insurance company.

(D) Severability

If any paragraph, term or provision of this rule is adjudged invalid for any reason, the judgment shall not affect, impair or invalidate any other paragraph, term or provision of this rule, but the remaining paragraphs, terms and provisions shall be and continue in full force and effect.

Effective: 12/21/2014
Five Year Review (FYR) Dates: 08/26/2019
Promulgated Under: 119.03
Statutory Authority: 3901.041, 3964.21
Rule Amplifies: 3964.07

3901-11-05 Special purpose financial captive alternative reserve methodologies.

(A) Purpose

The purpose of this rule is to amplify section 3964.03 of the Revised Code and establish acceptable information to be submitted to the superintendent when a special purpose financial captive requests to use an alternative reserve methodology pursuant to division (E)(2) of section 3964.03 of the Revised Code.

(B) Authority

This rule is promulgated pursuant to the authority vested in the superintendent under section 3901.041 of the Revised Code and division (E)(2) of section 3964.03 of the Revised Code.

(C) Scope

This rule applies to all requests made pursuant to division (E)(2) of section 3964.03 of the Revised Code, by a special purpose financial captive to use a reserve basis other than that found in "Statements on Statutory Accounting Principles" as set out in the "National Association of Insurance Commissioner's" (NAIC) "Accounting Practices and Procedures Manual."

(D) Life insurance policy and annuity contract reserves

For its reserve basis on risks reinsured through the special purpose financial captive, an Ohio domiciled special purpose financial captive is required to hold reserves either based upon the "Statements on Statutory Accounting Principles" as set out in the NAIC "Accounting Practices and Procedures Manual" or an alternative principle-based valuation method acceptable to the superintendent. A request to use an alternative principle-based valuation method shall be accompanied by an unqualified written actuarial opinion that is signed by the appointed actuary for the special purpose financial captive insurance company and the ceding insurer.

(E) Alternative principle-based valuation method

(1) An alternative methodology shall be a principle-based valuation method that uses one or more methods or one or more assumptions proposed by the special purpose financial captive insurance company and shall be in compliance with the following:

(a) Address all material risks:

(i) Associated with the contracts being valued, and their supporting assets; and

(ii) Determined capable of materially affecting the valuation of its obligations with respect to the risks assumed.

Examples of risks to be included in the principle-based valuation method include but are not limited to risks associated with policyholder behavior (such as lapse and utilization risk), mortality risk, interest rate risk, asset default risk, separate account fund performance, and the risk related to the performance of indices for contractual guarantees.

(b) Be consistent with current actuarial standards of practice;

(c) Consider the risk factors, risk analysis methods, and models that are incorporated in the company's overall risk assessment process. The overall risk assessment process may include but is not limited to the following analysis processes: asset adequacy testing, GAAP analysis, internal capital evaluation process and internal risk management and solvency assessments; and

(d) Incorporate appropriate margins for uncertainty and/or adverse deviation for any assumptions not stochastically modeled.

(2) The special purpose financial captive shall provide any information the superintendent may require to assess the proposed alternative methodology for approval or disapproval.

(3) If such an alternative methodology is approved by the superintendent, then the captive is required to use such alternative methodology until, and unless, the superintendent approves an alternative method.

(F) Independent qualified actuary

Upon the superintendent's request, the special purpose financial captive requesting an alternative reserve methodology, shall secure the affirmation of an independent qualified actuary that the alternative methodology is compliant with paragraph (E) of this rule. The independent qualified actuary shall be approved by the department and provide a written actuarial opinion detailing their affirmation and a report supporting that opinion to the superintendent. The report supporting the opinion shall comply with the provisions of division (E)(3) of section 3964.03 of the Revised Code.

(G) Severability

If any paragraph, term or provision of this rule is adjudged invalid for any reason, the judgment shall not affect, impair or invalidate any other paragraph, term or provision of this rule, but the remaining paragraphs, terms and provisions shall be and continue in full force and effect.

Effective: 6/11/2015
Five Year Review (FYR) Dates: 08/31/2019
Promulgated Under: 119.03
Statutory Authority: 3901.041, 3964.03
Rule Amplifies: 3964.03

3901-11-06 Capital and surplus requirements for life insurance companies ceding to a special purpose financial captive insurance company and for special purpose financial captive insurance companies.

(A) Purpose

The purpose of this rule is to establish the information required by the superintendent in setting an acceptable total capital and surplus requirement for insurers that cede risks and obligations to a special purpose financial captive insurance company pursuant to division (E)(6) of section 3964.03 of the Revised Code and for special purpose financial captive insurance companies pursuant to division (G)(2) of section 3964.07 of the Revised Code.

(B) Authority

This rule is promulgated pursuant to the authority vested in the superintendent under sections 3901.041 and 3964.21 of the Revised Code.

(C) Definitions

(1) "Insurer" means a domestic legal reserve life insurance company organized pursuant to Chapter 3907. of the Revised Code.

(2) "Qualified Actuary" means an individual who is both of the following:

(a) A member of the American academy of actuaries; and

(b) Qualified to provide such certifications as described in the United States qualifications standards promulgated by the American academy of actuaries pursuant to the code of professional conduct adopted by the American academy of actuaries, the society of actuaries, the American society of pension professionals and actuaries, the casualty actuarial society and the conference of consulting actuaries.

(3) "Special Purpose Financial Captive Insurance Company" means a captive insurance company organized pursuant to sections 3964.19 to 3964.194 of the Revised Code.

(D) Methodology

(1) In determining the capital and surplus requirement for an insurer that will cede risks and obligations to a special purpose financial captive insurance company, and the capital and surplus of a special purpose financial captive insurance company, the superintendent is by statute required to employ a methodology that:

(a) Is consistent with current risk-based capital principles; and

(b) Takes into account all material risks and obligations, as well as the assets of the insurer or special purpose financial captive insurance company, as appropriate.

(2) Pursuant to division (E)(6) of section 3964.03 of the Revised Code an insurer that cedes risks and obligations to a special purpose financial captive insurance company shall provide the superintendent a proposed capital and surplus requirement that is supported by:

(a) An actuarial report prepared by a qualified actuary. The qualified actuary shall perform a risk evaluation for purposes of enterprise risk management and provide the superintendent an actuarial report documenting that evaluation. The risk evaluation shall conform to all applicable actuarial standards of practice including those specifically addressing risk evaluation and risk treatment in enterprise risk management; and

(b) Any other information the superintendent deems necessary.

(3) Pursuant to division (G) of section 3964.07 of the Revised Code an applicant for authority to be licensed as a special purpose financial captive insurance company shall provide the superintendent a proposed capital and surplus requirement that is supported by:

(a) An actuarial report prepared by a qualified actuary. The qualified actuary shall perform a risk evaluation for purposes of enterprise risk management of the risks and obligations specific to the special purpose financial captive insurance company and provide the superintendent an actuarial report documenting that evaluation. The risk evaluation shall conform to all applicable actuarial standards of practice including those specifically addressing risk evaluation and risk treatment in enterprise risk management; and

(b) Any other information the superintendent deems necessary.

(E) Severability

If any paragraph, term or provision of this rule is adjudged invalid for any reason, the judgment shall not affect, impair or invalidate any other paragraph, term or provision of this rule, but the remaining paragraphs, terms and provisions shall be and continue in full force and effect.

Effective: 6/11/2015
Five Year Review (FYR) Dates: 08/31/2019
Promulgated Under: 119.03
Statutory Authority: 3901.041, 3964.21
Rule Amplifies: 3964.03, 3964.07