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🔍 '''Captive audit''' is a formal examination of a [[Definition:Captive insurance | captive insurance]] company's financial records, operational practices, and regulatory compliance, typically conducted by independent auditors or [[Definition:Domicile | domiciliary]] regulators. Unlike audits of traditional commercial insurers, captive audits focus on the unique risk-financing arrangements between the captive and its parent organization, scrutinizing whether [[Definition:Premium | premiums]] are actuarially justified, [[Definition:Case reserves | reserves]] are adequate, and [[Definition:Related-party transaction | related-party transactions]] are conducted at arm's length. Regulators in popular captive domiciles — such as Vermont, Bermuda, and the Cayman Islands — each maintain their own audit schedules and scope requirements.

⚙️ The process generally begins with the domiciliary regulator or the captive's board engaging an independent accounting firm experienced in insurance-specific auditing standards. Auditors review the captive's [[Definition:Loss reserve | loss reserves]], [[Definition:Investment portfolio | investment portfolio]], [[Definition:Reinsurance | reinsurance]] arrangements, and adherence to the [[Definition:Business plan | business plan]] filed at licensing. They also verify that the captive maintains required [[Definition:Capital and surplus | capital and surplus]] levels and that its [[Definition:Claims management | claims handling]] procedures are sound. Financial statement audits follow statutory accounting principles prescribed by the domicile, which may differ from [[Definition:Generally accepted accounting principles (GAAP) | GAAP]].

📊 A clean audit outcome protects the parent company's risk-financing strategy by confirming that the captive operates as a legitimate insurance entity — a distinction with real tax and regulatory consequences. The IRS, for instance, scrutinizes captives that lack economic substance, and a well-documented audit trail helps demonstrate that the captive bears genuine [[Definition:Underwriting risk | underwriting risk]] and operates independently. Beyond compliance, the audit process often surfaces operational improvements, from tightening [[Definition:Expense ratio | expense ratios]] to renegotiating [[Definition:Ceded reinsurance | ceded reinsurance]] terms, making it a valuable governance exercise rather than a mere regulatory checkbox.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Captive insurance]]
* [[Definition:Domicile]]
* [[Definition:Loss reserve]]
* [[Definition:Statutory accounting principles (SAP)]]
* [[Definition:Capital and surplus]]
* [[Definition:Risk retention group (RRG)]]
{{Div col end}}

Definition:Captive audit - Revision history

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