Although, the captive's coverage tier is set above the level of expected losses, the captive is exposed to some risk of loss in order for the program to qualify as reinsurance under financial accounting standards. I f actual losses develop to the expected level in the above example, the lender essentially receives a commission or profit sharing equal to a percentage of premium, less any administrative expense incurred to set up and operate the captive. However, there is risk involved as actual long-term results are uncertain. Forming a Captive I t typically takes from two to four months for a captive program to be licensed and begin operations with certain domiciles more conducive to forming a captive due to their regulatory environment and service provider infrastructure. G iven the potential profits for banks and other mortgage lenders, we expect more and more captive reinsurance companies to be set up in domestic and foreign domiciles over the next couple of years.
Banks assuming risk and providing insurance products is a reality.