Closing underwriting years provides stability for captive members by providing a predictable time frame for profits to be returned, or obligations to be settled in a consistent manner. The closing of underwriting years also illustrates an efficient exit strategy from the captive, if desired.
Once an underwriting year has developed for a number of years, at that time, a captive may seek to sell the “tail” of outstanding liabilities on that year to an outside insurance company or third party for a fee. If a captive’s Board of Directors determines that it is in the best interests of the captive to close the underwriting year and accept that cost, that tail liability cost is allocated to participating members of that underwriting year and the captive will no longer have liabilities related to that year.
If a tail liability option is unavailable from an outside source at an acceptable cost, the captive will typically consider closing the underwriting year into an internal Tail Fund. An appropriate level of reserves will be retained related to that underwriting year, which are transferred into the Tail Fund to continue to fund for claims development. Upon the closing of the underwriting year, a distribution of estimated net profit to the date of closure is made, or any closing cost obligations are collected, in relation to the participating members of that underwriting year. The internal Tail Fund, which remains the responsibility of the current captive members, allows years to consistently close and provides a time and distance tool until an acceptable external transaction becomes available.