Tag Archives: Captive Insurers

Captive Commentary

Medical malpractice continues to be the dominant line of business for U.S. captives. The performance of this line therefore can have a significant impact on the overall captive insurance market. A new report by ratings agency A.M. Best notes that medical malpractice net premiums written fell 26 percent in 2007, leading to a 15 percent drop in net premiums written for a composite of 177 captive insurance companies. However, captives overall benefited from favorable underwriting trends. Solid underwriting results in medical malpractice helped the captive composite’s loss ratio to improve substantially in 2007 to 61.9, for example. Looking ahead, A.M. Best predicts that in spite of the soft market, the outlook for the captive industry is stable. Captive formations continue even as the commercial market softens and new domiciles have entered the market. A key advantage for captive insurers is also their ability to compete not just on price, but on customized services for their insureds. Check out I.I.I. updates on captives and  other risk  financing options and on medical malpractice.  

 

Captive Market

Captives owned by American firms are the most significant contributors to the overall growth of the global captive insurance market. According to a new benchmarking report from Marsh, approximately 75 percent of captives originate from six countries, with U.S. owned captives representing 53 percent. Whereas Bermuda was once the default choice for North American corporations, Marsh notes that many companies are now selecting onshore U.S. domiciles. Over 25 states have put in place some form of captive legislation. With this in mind it’s no surprise that within the survey sample group there is a significant concentration of risk in the U.S. However, in Europe, Middle East and Africa and Asia Pacific regions over 65 percent of the exposure is written on a European or global basis. Marsh says this divergence perhaps reflects the fact that much of the new captive growth in the U.S. has been driven by firms with domestically focused risk financing issues, e.g. Gulf coast exposed property. Check out further I.I.I. info on captive insurers.  

 

IRS Reprieve for Captive Insurers

A happy development for the domestic captive insurance industry today, with the news that the Internal Revenue Service (IRS) has dropped a proposed regulation that likely would have driven more business offshore. Issued September 28, 2007, the proposed IRS regulation would have eliminated the right of U.S.-sponsored captives to claim reserve deductions against their domestic tax for future claims and losses on consolidated, or related, business (see our November 14, 2007 posting). Apparently the IRS decided to withdraw the planned rule change after considering all the written comments received. The Coalition for Fairness to Captive Insurers has welcomed the move, saying it removes the uncertainty that has hung over the captive industry since the IRS regulation was proposed last fall. Check out National Underwriter’s February 20 online article by Caroline McDonald for more information on the decision. As many of you know, captive insurers are the oldest form of alternative risk transfer vehicle, dating back to the 1950s. Use of captives by corporations has grown exponentially during the last 30 years in the U.S. In 2006, the U.S. was the largest captive domicile – with 1,251 licensed captives – followed by Bermuda with 989. Check out further I.I.I. info on captive insurers.  

 

Captive Groups Coordinate IRS Response

Those of you in the alternative risk transfer business may be interested in today’s item. Two prominent captive insurance associations have teamed up to form a coalition to battle a proposed Internal Revenue Service (IRS) rule change that would significantly alter the landscape for captive insurers in the U.S.   Issued September 28, the proposed IRS regulation would eliminate the right of U.S.-sponsored captives to claim reserve deductions against their domestic tax for future claims and losses on consolidated, or related, business. Instead, they would only be allowed to claim deductions when claims are actually paid. The change would essentially result in treating the transaction as non-insurance for tax purposes. We don’t need to remind you that captive insurers are the oldest form of alternative risk transfer vehicle, dating back to the 1950s. Use of captives by corporations has grown exponentially during the last 30 years in the U.S. In 2006, the U.S. was the largest captive domicile– with 1,251 licensed captives – followed by Bermuda with 989. If the IRS proposal goes ahead, it seems likely that it would drive more business offshore. The Coalition for Fairness to Captive Insurers (CFCI) has been formed by the Captive Insurance Companies Association (CICA) and the Vermont Captive Insurance Association (VCIA). Those interested in joining the coalition should contact either association. Check out further I.I.I. information on captive insurers.

Med Mal Alternatives

Two reports published yesterday by ratings agency A.M. Best on U.S. captives and risk retention groups (RRGs) point to continuing growth in these alternative market mechanisms, even amid soft market conditions. A number of trends are highlighted, but one interesting  nugget is that medical malpractice accounts for a significant portion of business for both captives and risk retention groups. According to the reports, medical malpractice continues to be the dominant line of business for domestic captives (close to 40 percent), while medical malpractice (claims made) accounted for 43 percent of RRG business in 2006. Which leads us to conclude that despite greater stability in the price of medical malpractice insurance and some improvement in the tort environment, doctors are not looking to return to the traditional market in a hurry. Check out I.I.I. updates on captives and alternative risk transfer mechanisms and on medical malpractice online.

Room For Growth

For traditional insurers looking to recapture some of the business lost to the alternative market, specifically the captive market, all bets are off. Or at least the going may be getting tougher. Despite increased competition and soft pricing, growth in captive insurers remains strong, and a new study from Aon indicates there is room for further growth – substantial growth at that. According to Aon, contrary to popular belief, over half (53 percent) of the world’s top 1500 companies (G1500) do not currently own a captive. Regionally there is considerable room for captive growth. Even in a mature market like the U.S., captive ownership by G1500 companies is at just 42 percent. In markets like Asia that traditionally have not been extensive captive users, the percentages are lower. Only 14 percent of Japanese G1500 companies have a captive for example. Captives are the oldest form of alternative risk transfer vehicle, dating back to the 1950s. Direct access to reinsurance markets, tailored coverage, and greater control over claims are just some of the reasons why corporations form captives. Cost or lack of coverage in the traditional market is another. Check out I.I.I. info on captives and alternative risk transfer mechanisms online.

Hall of Famers

We’re delighted to report on the three insurance leaders announced by the International Insurance Society (IIS) as the 2007 winners of the Insurance Hall of Fame awards. Two of the three, Robert Clements and Frederic Reiss (1924-1993), are renowned as pioneers in the alternative risk transfer (ART) field. Mr. Clements, now chairman of insurance broker Integro as well as interim chairman and co-founder of post-Katrina Bermuda start-up Ironshore Insurance Ltd, is considered the father of the Bermuda insurance market where he led the development of ACE and XL. Frederic Reiss, founder of the International Risk Management Group, coined the term “captive insurer” and was the first person to popularize the insurance captive movement. In doing so he helped establish Bermuda as a center for captive domicile companies. Last but certainly not least, the third 2007 Hall of Fame inductee is Josà © Manuel Martà ­nez, chairman and chief executive officer of MAPFRE, Spain’s largest insurance group and now the largest non-life insurer in Latin America. During his tenure, MAPFRE evolved from a local market leader to a large international group. For further info, check out a recent presentation on the world‚ of captive insurance‚ from  I.I.I. president and chief economist Dr. Robert Hartwig. Also, the I.I.I.’s‚  International Fact Book.

ART Info

Alternative Risk Transfer (ART) market mechanisms cover 30 percent of the U.S. commercial insurance market, yet general understanding of them is limited. For anyone grappling with the concept, an I.I.I.-penned chapter in the recently published Handbook of International Insurance hopefully will shed some light. The chapter “An Overview of the Alternative Risk Transfer Market” explains that the concept of ART defies a precise definition in part because the broad range of risk products that can be defined as ART has expanded over time as product innovation continues. The chapter covers the major categories of ART solutions commonly found in the market today, including captives, self-insurance, risk retention groups, finite risk (re)insurance, catastrophe bonds and government programs. I.I.I. also has additional information on captives and other risk-financing options available online.