A company can take on insurance risk in the United States directly through ownership of an insurance carrier. An insurance carrier can either be newly formed or acquired as a shell insurance company.
Advantages:
- Control over operations of the insurance business, including product design, scope of offerings (territory and benefits) and customer experience.
- Cost savings from not having to pay a fronting carrier.
Disadvantages:
- Extensive regulation by state insurance departments.
- Significant capital requirements, typically driven by risk-based capital (RBC) ratio maintenance requirements and, to the extent applicable, capital requirements imposed by rating agencies.
- Significant operational requirements, including quarterly financial reporting and regulatory compliance.
Key considerations:
- Method of Obtaining an Insurance Carrier: Two methods of obtaining an insurance carrier are available: (1) an insurance carrier can be newly formed and licensed in the domiciliary state of its owner’s choosing, or (2) a shell insurance company can be acquired from a third party. Each of these methods has its advantages (in green below) and disadvantages (in red below) :
| Forming and Licensing a New Insurance Carrier | Acquiring an Insurance Carrier from a Third Party | |
| Residual Liabilities | No residual liabilities since the insurance carrier is set up as a new operating entity. | May carry residual liabilities from its previous operations under its former ownership. Diligence is required to determine the scope of these liabilities and whether they present any material concerns. |
| Licensing in Other States | After being formed and licensed in its domiciliary state, the new insurance carrier will not initially be licensed in any other state. If licenses in any other states are required, the process to obtain them will take additional time and effort. In addition, certain states impose seasoning requirements on a newly established insurer before they’ll grant a license. Pursuant to these requirements, the insurer would need to show a successful record of transacting an insurance business in other states for several years before it may apply for a license. These seasoning requirements may result in significant delays (i.e., up to a few years) in the newly established insurer obtaining a licenses in other states. Seasoning requirements may not be as problematic for certain business models (e.g., programs being written entirely on a surplus lines basis or programs with a narrow geographic scope that does not include states that impose material seasoning requirements). |
Depending on market availability, it may be possible to acquire a shell insurance company that possesses licenses to write the relevant lines of insurance business in every state, which can significantly accelerate the speed-to-market process for the carrier’s products. Diligence is required in order to ensure that the target shell insurance company possesses unrestricted licenses in each of the relevant states with all of the relevant lines of authority. |
| Approval from the Domiciliary Insurance Regulator | Regulatory approval to form and obtain a license for the new insurance carrier must be obtained from the carrier’s domiciliary insurance regulator. The timeline for obtaining this approval is typically longer than the timeline for obtaining approval for an acquisition of control of a shell insurance company from a third party. |
Regulatory approval for the acquisition of control of the insurance carrier must be obtained from the carrier’s domiciliary insurance regulator. |
| Domiciliary Jurisdiction | The owner can “cherry-pick” a domiciliary jurisdiction for the carrier based on the criteria that it deems to be important (e.g., regulatory environment, physical presence requirements, types of permissible investments, etc.). | The shell insurance companies that are available on the market may not be domiciled in the optimal jurisdiction(s). However, in most cases, it is possible to redomesticate a newly acquired shell insurance company to another jurisdiction. This additional step requires separate insurance regulatory approvals and takes additional time to complete. |
State of Domicile
Because certain aspects of an insurance carrier’s operations are regulated primarily by the insurance department of its domiciliary state, choosing the optimal domiciliary state in the United States for the insurance carrier (either as a domiciliary state of a newly formed carrier or as a domiciliary state to which an acquired carrier would redomesticate) is critical. Examples of criteria that are often considered by insurance carriers in choosing their domiciliary states are:
- The regulatory environment in the state and the domiciliary insurance regulator’s experience with the types of products that the carrier proposes to offer.
- Whether the state has any physical presence requirements.
- Whether the state’s restrictions on permissible investments for domestic insurance companies pose any concerns vis-à-vis the proposed strategy for the investment of the insurer’s assets.
- The materiality thresholds for dividends and transactions with affiliates that require regulatory approval.
- Whether the state imposes a particularly high premium tax on the products that the insurer proposes to write (if so, certain other states may impose the same premium taxes on the insurer as retaliatory measures against the insurer’s domiciliary state).
Outsourcing
A new insurance carrier will often need to seek out third-party service providers to fill operational gaps initially or permanently. Services that could be provided by third parties in this fashion include, for example, claims handling and adjustment, administrative support services, customer service operations and systems, and information technology services. An insurance carrier should vet any third-party service providers it intends to use and carefully review commercial agreements with these service providers.
Reinsurance
Unless the insurance carrier is willing and able to take on 100% of the risk under the policies that it issues, it will likely need to look to the reinsurance market for additional capacity. If so, the insurance carrier’s operations may be influenced by its reinsurers’ requirements. For example, the insurance carrier will have to comply with underwriting guidelines negotiated with the reinsurers to ensure reinsurance coverage for the risks written by the insurance carrier. In addition, reinsurance coverage for a new insurance carrier may be more costly than that for an established insurance carrier.