November 14th - 17th, 1999
Hyatt Regency Miami, Florida

Captives 101: The Benchmark Course

Nicholas Dove, President, Skandia International Risk Management
D. Hugh Rosenbaum, Principal, Tillinghast-Towers Perrin

Monday, November 15th, 8:00-10:00 a.m.
 

"Growth Continues as Captive Insurance Evolves"

Despite changes in tax laws, low prices from commercial insurers and companies' concerns about assuming their own risk, the growth of captive insurance companies is continuing unabated, two experts in that field said.

Hugh Rosenbaum, a principal with Tillinghast-Towers Perrin, London, estimated there are more than 4,000 captive insurance units worldwide, with less than a quarter of that amount being formed in the United States in recent years. Captive insurers are special-purposes risk entities formed to insure the risks of a company, group of companies, association or group.

Rosenbaum was a panelist at the opening session of the Ninth World Captive and Alternative Risk Financing Form, held in Miami.

Captives began being formed in earnest two decades ago, and since then several trends have emerged, including:

• The number of captives identified worldwide has reached 4,135, according to Captive Insurance Company Reports. Most captives are formed offshore in countries such as Bermuda, the Cayman Islands, Barbados and the British Virgin Islands.
• The range of possible captive domiciles is expanding. Lloyd's recently announced it has begun hosting its first captive and France has declared itself a captive-friendly nation.
• More than 14 U.S. states have adopted legislation and regulation encouraging captives, but states differ in their ability to attract the business of captive insurers. For instance, Vermont alone now accounts for 339 captive entities, while all other U.S. states combined account for 174 captives. "You don't hear about too many of them because they open up and then go away," Rosenbaum said. The newest U.S. entrants: Nevada and Rhode Island.
• Top captive domiciles continue to attract the biggest share of new business. That's because the people forming captives are seeking experience and infrastructure, which is why they tend to migrate to regions that have proven records, speakers said.
• The growth of risk-retention groups, a strictly U.S.-based phenomena, appears stalled. Risk retention groups cover only commercial liability, are owned by the insureds and can't be based offshore. Speakers estimated there are up to 80 risk-retention groups in the U.S. today.
• Vermont has formed a new type of captive, called "reciprocals," that shows promise in fueling new captive growth. In reciprocals, earnings are distributed to owners within 75 days of declaring earnings, and at least one of the organizers must be based in Vermont. Reciprocals are best suited to serving the needs of for-profit companies, Nicholas Dove, president of Scandia International Risk Management, Bermuda, said.
• Since the 1980s, most taxing authorities have begun treating captive insurers on an equal footing with traditional insurers, removing some tax advantages formerly enjoyed by captives. But the growth of captives is continuing worldwide at the estimated rate of about 200 new units per year. "Most captives being formed today are not being formed for tax reasons; they're being formed for insurance reasons," Dove said.
• Covering credit life insurance is the leading reason to form captive insurance companies. The next leading uses are for small-business companies or groups, particularly to provide workers compensation coverage.
• Originally, individual companies and associations led the way in forming new captives but today's startups are more likely to be initiated by brokers and agents, Dove said. That's because brokers and agents already know their clients' business needs, have control of the business and may resent insurance companies' moves toward lower commissions. Brokers and agents now account for about 40% of standalone captives, with 60% of the growth in "rent-a-captives," in which a manager operates a captive company on behalf of one or more insureds, speakers said.

Rosenbaum estimated that various forms of captive insurers are capturing about 8% of the world's nonlife insurance premium, a portion that has remained relatively stable in recent years. "Don't let anyone tell you that captive insurers are 35% of anything," Rosenbaum said. "They're not."

While forming a captive means investing in startup costs and taking on more risk than companies once were comfortable with, insureds have discovered that captives can carry pleasant surprises. Dove cited the case of a group of doctors who banded together to form a captive insurer to handle their medical-malpractice coverage. After several years of favorable losses and strong investment returns, the doctors last year paid an annual premium of $1.

Rosenbaum cited another frequent appeal of many captives: location. "I know a doctor-owned captive company that has its domicile in the Cayman Islands," he said. "They hold their annual meeting--guess where?--in February. No surprise: they all show up.