Article

Captive insurance companies are a long term strategy to designed to mature and grow for many years. However, as business needs change—through mergers, shifts in risk appetite, or evolving regulatory environments—some captives become redundant or are no longer actively used. In such cases, legacy solutions like dormancy and run-off are employed to manage or exit these captives efficiently. Understanding the distinction between these approaches is crucial for stakeholders seeking to optimize capital, reduce administrative burdens, or achieve finality on outstanding liabilities.

Dormancy: Pausing a Captive’s Operations

Dormancy is a regulatory status that allows a captive insurance company to cease writing new business while retaining its license for potential future use. To qualify for dormancy, the captive must have settled all outstanding insurance liabilities and stopped issuing new policies. The company then applies for a certificate or letter of dormancy from its regulator, often accompanied by requirements such as maintaining a minimum level of capital and filing periodic financial reports.

Dormant status is ideal when a parent company wants to pause operations, possibly due to a temporary lack of need for the captive, but wishes to retain the option to reactivate it later. During dormancy, ongoing costs and regulatory requirements are significantly reduced, but the captive remains a legal entity and can be reactivated if business needs change.

Run-off: Settling Outstanding Liabilities

Run-off is the process used when a captive has stopped writing new business but still has outstanding claims or obligations to settle. Rather than dissolving immediately, the captive continues to manage and pay claims as they arise, sometimes over many years. During run-off, the captive must maintain sufficient capital to cover its liabilities and comply with regulatory oversight.

Legacy solutions in run-off often involve transferring liabilities to third parties to achieve financial finality and free up trapped capital. Common mechanisms include:

• Loss Portfolio Transfers (LPTs): The captive transfers its outstanding claims to a reinsurer for a negotiated payment, removing liabilities from its balance sheet.
• Novation: Legal transfer of liabilities and policies to another insurer, fully releasing the captive from future obligations.
• Commutation Agreements: Settlement of outstanding policies through a lump-sum payment, closing out obligations.
• Acquisitions: Sale of the captive, including its assets and liabilities, to a third party specializing in run-off management.

Run-off is typically chosen when a captive has long-tail liabilities or when immediate dissolution is not feasible due to unresolved claims.

Strategic Considerations

Choosing between dormancy and run-off depends on several factors:

• Presence of Outstanding Liabilities: Dormancy requires all claims to be settled, while run-off manages ongoing obligations.
• Future Business Plans: Dormancy preserves the option to resume operations; run-off is generally a path toward eventual dissolution.
• Regulatory and Financial Implications: Each approach has unique capital, tax, and compliance requirements that must be carefully evaluated.

Aspect	Dormancy	Run-off
Definition	Ceases writing new business, no outstanding liabilities	Ceases writing new business, but liabilities remain open
Purpose	Pause operations, retain license for future use	Orderly settlement of existing claims and obligations
Trigger/When Used	All claims settled, no new business needed	No new business, but claims remain open
Key Requirements	Apply for dormancy, maintain minimum capital, annual reports	Continue claims management, regulatory oversight
Liabilities	No outstanding liabilities allowed	Outstanding liabilities must be managed until settled
Regulatory Status	Remains licensed but inactive	Remains licensed, active for claims only
Ongoing Costs	Reduced (annual fees, minimal reporting)	Ongoing (claims handling, regulatory, actuarial)
Capital Requirements	Lower minimum capital (e.g., $25,000–$125,000)	Must maintain capital to cover liabilities
Ability to Resume Operations	Yes, can apply to resume business	No, not until all liabilities are settled
Finality of Liabilities	All liabilities must be settled before dormancy	Liabilities gradually reduced as claims are paid
Common Tools/Mechanisms	Certificate of dormancy, regulatory approval	Loss portfolio transfer, novation, commutation, acquisition
Typical End State	Can be reactivated or dissolved later	Dissolution after all claims resolved

Legacy solutions for captive insurance companies—whether dormancy or run-off—offer strategic pathways for businesses to manage the end-of-life or transitional phases of their captives. Dormancy is best for captives with no outstanding liabilities that may be needed again, while run-off is suited to those with ongoing claims, employing tools like loss portfolio transfers and novations to achieve financial finality. The right approach depends on the captive’s current obligations, future plans, and regulatory environment.