With the US, Caribbean and Europe offering more than 50 domiciles between them, captive owners, as well as companies contemplating the idea, are certainly spoilt for choice. This is without mentioning the likes of Asia, Australia and Canada, where self insurance is taking off.
With the US, Caribbean and Europe offering more than 50 domiciles between them, captive owners, as well as companies contemplating the idea, are certainly spoilt for choice. This is without mentioning the likes of Asia, Australia and Canada, where self insurance is taking off.
For US states, 2012 was an exciting year for the industry. In July, the State of Oregon opened its doors to captives, allowing pure, association, branch and captive reinsurers to set up shop. In the same month, Florida attempted to lure potential captives with a new law that lowered capital requirements.
This created more competition in the US, with domiciles looking to attract new business and lure captives from rival domiciles. Last year, Vermont lost SBD Insurance and Lumerica Insurance Company to Connecticut and New Jersey, respectively.
“The captive insurance industry is becoming a competitive environment and domiciles are competing with each other for captives,” says Steve Chirico, assistant vice president at ratings agency A.M. Best.
Regulatory strain—from Non-admitted and Reinsurance Reform Act confusion to Solvency II implementation—has affected new formations and performance over the last 12 months.
Malcolm Cutts-Watson, chairman of the Willis global captive practice, says: “There is an interesting dynamic between the new kids on the block, eager to attract new business, and the more established domiciles keen to retain reputation and market share. All are demonstrating creativity in responding to regulatory challenge and the need to innovate.”
The stability of the insurance cycle has also affected domiciles, with the soft state of the market continuing to thwart the captive insurance industry, according to Chirico.
He says: “We have seen some slow down of rate decreases and some minor rate increases depending on the line of business. Workers’ compensation in the US has had a slight improvement as well as property catastrophe reinsurance rates, but by and large we are still in a fairly soft market.”
Candy reign
Despite Vermont losing two captives in the past six months, the state is still home to the most in the US. Captive Insurance Companies Association (CICA) domicile listings show that in 2011 Vermont was home to 590 active captives, more than twice as many as second place Utah with 239.
In 2011, Vermont licensed 41 new captives, but in 2012, the figure dropped to 32. David Provost, deputy commissioner of the captive insurance division in the Vermont Department of Financial Regulation, explains that the drop is not a concern to the state.
He says: “41 new captives was considered an extraordinary year, and 32 is pretty close to our long-term average. Other than 2002 and 2003, which saw 70 and 77 captives formed post-9/11, and 2008 at the depth of the recession, the 2000s have seen formations of between 30 and 40 new companies each year.”
With a steady stream of captives being licensed in Vermont year-on-year, Provost has witnessed a number of popular lines of business and continued trends.
The state has seen a continued growth in the use of captives by healthcare professionals for professional liability, as well as a growth in small captives and interest from the construction industry. It has also seen a spattering of captives being formed for cyber liability alongside existing captives adding the line to their plans.
“But one of our longest running trends is the lack of a trend. In other words, we regularly have a wide variety of business organisations form captives each year—we are not reliant on a particular source,” says Provost.
When it comes to competition, Provost is clear that Vermont will not try to predict the state’s future success.
“[Last year] was a very good year, and I expect 2013 to be very good as well. Six new captives or 60 is irrelevant—we welcome any good programme that fits our statute and environment.”
“We do not set projections or targets for new licences. As a regulator, that would be imprudent. Our entire focus is on quality, not quantity,” explains Provost.
As the third largest domicile in the US, Hawaii is clearly a popular destination, but it is facing challenges from competing jurisdictions, with Delaware’s impressive 2012 figures seeing it close in on its rival.
Despite the current competitive nature of the industry, George Sumner III, captive insurance administrator and deputy commissioner of the Hawaii Insurance Division, is happy with the states 2012 licensing figures.
Sumner says: “Hawaii licensed 12 captives in 2012 with no cells during the year. We [also] added approximately $2 billion in assets so the captives in Hawaii are quite substantial and the parents are well known.”
“We were once again pleased with our results, however, we can always do better. Hawaii is working with the private sector to make prudent changes to improve what we have to offer the existing captives as well as the captives considering Hawaii.”
Sumner also stresses that Hawaii is selective when it comes to the managers and captives that it brings into the state, and also that a location’s success should be attributed to much more than just figures. “[Hawaii] is not interested in just the numbers of captives. We stress quality over quantity, looking at the asset growth is a better measure of the success of a domicile.”
While last year’s figures are scrutinised and compared, Sumner believes that Hawaii is ready for the year ahead. “Hawaii has a good reputation of being a prudent domicile that has an open mind and works well with the industry to make good common sense choices.”
“The captives and managers that domicile their captives in Hawaii are properly screened to protect the reputation of the domicile. This benefits both the managers and captives.”
New licences in South Carolina also grew substantially in 2012.
Jeff Kehler, programme manager of the South Carolina Department of Insurance, says: “[We] had a good year last year in number of new licences and we look forward to an even better year in 2013. We will continue our promotional efforts and actively reach out to the industry to grow our captive business.”
US domiciles’ high growth figures are down to a progression within the jurisdiction as to why companies use and need a captive, according to Chirico.
He says: “I think that we’ve moved beyond having an appetite for captives that’s just based on risk financing. There’s a lot more qualitative aspects now of why companies are forming captives.”
“Captives are continuing to grow in our view because it’s not just a financial transaction anymore, it’s a qualitative enterprise risk management situation and the captive fits very nicely into that.”
Chirico feels that the migration of certain captives from offshore to onshore also helps to explain the US’s significant growth in captive formations.
“What a lot of companies are doing is keeping their offshore captive and having an additional onshore captive. For very large global corporations, having an offshore and an onshore captive gives a lot of flexibility as far as the products they are able to offer their parent companies.”
Tropical tastes
The Cayman Islands and Bermuda are Caribbean alternatives that manage to stand up to the US. According to CICA’s 2011 domicile listings, Bermuda has 300 more captives than Vermont and 600 more than Utah.
Peter MacKay, chairman and CEO of Global Captive Management in the Cayman Islands, says: “[In 2012] the major US domiciles have shown healthy growth too which shows that captives are of interest again. Cayman has always been able to compete with the onshore domiciles, and Bermuda, and continues to attract well capitalised, quality captives.”
“Because of our niche in healthcare and with the changes going on in healthcare in the US, we believe that captives will continue to grow and more healthcare organisations will utilise captives to reduce costs.”
The importance of healthcare captives to Cayman is not to be underestimated, according to MacKay. They represent 45 percent of all the entities that are domiciled on the islands.
Cayman is also seeing more captive structures popping up, with the formation of group captives and segregated portfolio companies emerging to pool their risks.
According to MacKay, 2012 saw the Cayman Islands exceed its expectations, licensing 52 new captives with another 14 applications to be approved this year, marking a significant increase from 2011, and also the most applications since the hard market in 2004.
But MacKay struggles to imagine captives continuing to form at the pace of last year, despite the heightened interest in them. He does see room for significant growth figures if rates begin to firm up in the commercial market as potential interest comes to fruition through the formation of new captives.
Home sweet home
Although US and Caribbean locations dominate the top 10 in CICA’s domicile listings, the small island of Guernsey is flying the flag for the European market, taking fourth place behind Bermuda, Cayman and Vermont.
Last year, Guernsey licensed 97 new international insurers with a net growth of 50 entities, bringing its total number of international insurers up to 737. This number was made up of 242 limited companies, 68 protected cell companies (PCC), 404 PCC cells, five incorporated cell companies and 18 ICC cells.
Despite the growth, Fiona Le Poidevin, chief executive of Guernsey Finance, feels that the island is suffering due to poor market conditions, but perhaps not as much as other established players.
“The general economic downturn might usually have meant that organisations would look for more effective risk management solutions, but the continuing soft market conditions mean that in fact many are not pre-disposed to looking beyond the conventional insurance market for alternatives, such as captive insurance.”
“Figures show that the formation of new captives globally is not particularly strong and that, taking into account surrenders, the number of active captives is relatively stable. In addition, other jurisdictions have not seen such levels of new business as Guernsey. For example, Cayman has been celebrating the approval of 52 new licences last year, which is around half of the number of international insurers licensed in Guernsey during 2012.”
But South Carolina’s Kehler thinks that the EU’s struggling economy may well affect captive growth in Europe.
He says: “The US is the largest captive domicile in the world and that is not likely to change. The EU economy is struggling currently and that may put a damper on captive growth in the European domiciles. Bermuda seems intent to focus on insurance linked securities and cat bond arrangements. Cayman will continue its emphasis on healthcare and group captives. I expect we will see moderate to above average growth in all of the non-European domiciles.”
Guernsey is an old hand at captive insurance and Poidevin says that the island’s experience continues to weigh heavily in companies’ decisions to domicile there.
She says: “Organisations continue to view Guernsey as an attractive captive domicile because of our considerable experience in the field. Over time, we have been able to refine our legislation, hone our proportional regulation and build up a significant pool of captive managers, ranging from some of the most well known names in the industry to local, independent firms.”
“Our strong heritage in captive insurance also means that these providers have accumulated significant expertise in being able to service clients of varying scale and size from all different parts of the globe.”
Asian delight
Outside of the prominent captive regions, Asia is ready to stand up and be counted. Described by Chirico as Asia’s Vermont, Singapore is by far the most established domicile in the area. And despite four new captives that it licensed in 2012 being offset by four de-registrations, Singapore’s captive count of 61 is a testament to an up-and-coming jurisdiction.
Cutts-Watson of Willis says that he is quietly confident about Asia’s growth prospects in 2013 despite the soft market.
He says: “The challenges of a protracted soft insurance market and relatively low awareness on alternative risk transfer mechanisms such as captives have continued to be the main obstacles for growth in the region. While there were new captives set up in 2012, the continuing outflow of Japanese-owned captives has offset the net growth in the market.”
“Asia demonstrates great potential given the emergence of major global organisations from the area that are keen to adopt international best practice with regard to risk financing and captive usage.”
The continued outflow of Japanese-owned captives and new captives predominantly from Singapore and the Asia region, says Cutts-Watson, can only help the region to progress, which is a trend that Chirico has also witnessed.
Chirico says: “[A.M. Best] is fairly impressed that some Japanese industrial companies are looking at Asian options—as opposed to expensive locations where they’ve traditionally had captives such as Hawaii—as alternative captive domiciles that are closer to them and offer a lower cost operating platform.”
Chirico also highlights other up-and-coming Asian destinations such as Labuan, Vanuatu and Micronesia that are beginning to make themselves known in the industry.
“We’ve been engaged to rate a captive in Micronesia which we had never heard of as a captive domicile before. There is an island called Yap in Micronesia, which has eight or 10 captives now so it’s definitely somewhere to watch,” says Chirico.
Although Asia is going in the right direction to becoming a potentially competitive jurisdiction, Cutts-Watson feels that direct comparison so early on in Asia’s risk management and financing evolution is unfair.
He says: “The insurance markets in US and Europe have had a long period of time to become familiar and comfortable with captive participation … a longer term review, say in five years, will provide a more meaningful comparison and identify any regional trends.”
Kehler also agrees jurisdictions such as Asia, the Pacific Rim and South America—which all represent opportunities for substantial growth—need time to evolve accordingly.
He says: “The development of the captive industry in these areas will take time as culture and social changes will have to keep pace with the speed of technological change. That is not something that happens overnight.”
Poidevin feels that Asian captives could benefit from the experience of more established domiciles, rather than opting to stay at home. “Guernsey has been building relationships in Asia and, while captive insurance is a very new concept for the region, it is hoped that our considerable experience and expertise will mean that we might attract this business in the future.”
Asia may not be contending for US business any time soon, but Provost is sure that it will work for Asian businesses and multinational organisations with need for an Eastern presence.
He says: “Each domicile has its advantages, whether you’re talking about any of the more than 30 US domiciles, Bermuda, the Caribbean, or Europe. Each company forming a captive has to evaluate all domiciles and select the right domicile for its particular needs.”
“The US is seeing tremendous growth in the number of captives, in part due to the expansion of the captive concept to smaller companies. I expect that trend to continue, but it’s not limited to US domiciles.”
