Milliman
Despite a complicated economic environment, US captives are doing well and state domiciles are vying for new business. CIT talks to Michael Meehan of Milliman to find out more
How fierce is competition between captive insurance domiciles in the US?
There are approximately 30 domiciles now in the US, each of which is trying to claim their share of the captive industry. While I wouldn’t describe the competition as fierce, I do think domiciles may be putting in more of a marketing effort to capture captive business. More and more domiciles are now hosting their own captive conferences and you can often find representatives from different domiciles attending them. Companies forming captives tend to identify and focus on a few potential domiciles early on in the formation process. The domiciles are looking to ensure they make it onto the ‘shortlist’ or else risk never really being in contention for the business.
As a result, I believe that domiciles are now more diligent in making sure that their captive laws are up-to-date to meet the demands of the industry while ensuring that they are not at a competitive disadvantage with other domiciles. In addition, they are stressing ways to differentiate themselves from the competition.
What is the reason for this competition, and how are states differentiating themselves?
I think that given the economy and shortfalls in state budgets, states are looking for ways to increase revenues, create jobs, and so on. The captive industry is a clean industry that has the potential to achieve both of those goals. In addition, states don’t like the idea of having companies that are headquartered in their state setting up shop with a captive in a different state, as it can reflect poorly on them. Having a captive law on the books can help them to keep that business in state and ultimately support their local businesses
As far as differentiating themselves, I would say that the more established domiciles tend to highlight their experience with captives and the infrastructure that they have in place. Newer domiciles seem to be trying to differentiate themselves by focusing on things such as lack of premium taxes, their flexibility and ability to modify their captive law as needed, or the domicile’s focus on a specific type of captive, such as those smaller captives that make the 831(b) election. As is the case with most businesses, the two key factors are price and the quality of the product/service.
How is the US doing with new formations in 2012 and what are the reasons for this?
I haven’t heard too much with regards to the number of formations in 2012. Any information that I have seen suggests that 2012 is going to be a fairly ‘average’ or typical year. It really is tough to say at this point as a large percentage of the formations tend to take place during the last quarter of the year as companies form their captives so as to begin operations on 1 January.
Considering the formations that I have been involved with this year, I would say that there hasn’t been a single consistent theme behind them. Each was attributable to one or more of what might be considered the standard potential benefits of captive insurance, such as companies looking to stabilise the pricing of their insurance costs, insure otherwise uninsurable lines of coverage, or cover gaps in their existing insurance programmes.
How attractive is captive insurance to SMEs in the US, and what sorts of benefits can they get from a micro captive?
Captives can be an attractive option for SMEs. These companies can certainly realise some of the same benefits that the larger companies have through their captives; such as being able to insure otherwise uninsured or uninsurable exposures, stabilising costs, and so on. There is also the potential to realise some of the additional tax benefits that are available to the micro captives. These types of captives are often used as vehicles for estate and tax planning. However, they certainly aren’t for all SMEs. Once the captive is established, the owner(s) are now in the insurance business and they have a company that needs to be managed properly. The risk of a financial loss is real and that may be reason enough for them to seek out alternatives.
