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Rodd Zolkos

Captive domiciles see growth as insurer formation options increase

Some emerging domiciles see significant growth as formations rise

March 16, 2014 - 6:00am



Captive insurer formations continue to grow worldwide, as do the number of captive domiciles. Medical stop-loss coverage is one active area of captive use, while issues facing captive owners range from regulatory and tax concerns (see related story) to the potential of renewing the U.S. Terrorism Risk Insurance Program Reauthorization Act, set to expire at the end of the year.

With all the emerging captive domiciles come concerns about the regulatory wherewithal of some jurisdictions and their long-term commitment to captive insurance.

Worldwide, the number of licensed captive insurers increased to 6,559 in 2013 from 6,125 in 2012, according to a Business Insurance survey of captive domiciles.

The top four captive domiciles in 2013 were Bermuda with 831 captives, the Cayman Islands with 759, Vermont with 588 and Guernsey with 344, retaining their respective rankings from 2012. Meanwhile, two U.S. domiciles moved up the rankings: Utah, with 342 captives, was No. 5 in 2013 vs. No. 6 in 2012; and Delaware, with 298 captives, moved up to No. 6 last year from No. 10 in 2012.

New players entering the captive domicile scene was a noteworthy trend last year.

“As recently as 10 years ago, most captives were located in five domiciles that had sophisticated teams of regulators,” said Phillip England, chair of law firm Anderson Kill P.C.'s captive insurance group in New York.

The initial U.S. domiciles, launched as far back as 1972, replicated what offshore captive pioneers such as Bermuda had done by investing in talent and a strong regulatory system, Mr. England said. As the number of U.S. jurisdictions that have or plan a captive regime nears 40, today “you have a mixed bag, actually,” he said.

“There is a fear among consultants who advise captives that some of these jurisdictions are really Johnny-come-latelies,” he said. “Do they have the staying power? Is it a date or a real romance?”

“It's easy to pass the legislation,” said Les Boughner, executive vice president and managing director of Willis Group Holding's P.L.C.'s North American captive and consulting practice in Burlington, Vt. “The hard part is regulating the captive.”

For example, Mr. Boughner said, states that lack sufficient captive regulatory expertise or staff typically outsource captive examinations to independent accounting firms, which can cost the captive three to five times as much as a state conducting the exam.

Some newer players among captive domiciles are establishing themselves, however.

“Tennessee's getting traction. New Jersey's getting traction. Texas and Oklahoma are getting some; they're in the game,” said Brady Young, president and CEO of captive manager Strategic Risk Solutions Inc. in Concord, Mass.

While agreeing that not all of the new domiciles are going to be long-term players, Michael A. Corbett, director of the Captive Insurance Section of the Tennessee Department of Commerce and Insurance in Nashville, Tenn., said he expects the state, which rewrote its captive law in 2011 to reinvigorate the domicile, to be one that is built to last.

New formations in Tennessee, which had 32 captives in 2013, were “quite active,” Mr. Corbett said. “The captive managers have increasing comfort that not only is my department there for the long term, but the commissioner's commitment is steady, it's consistent, and so is the governor's.”

“I think when we started in 2011, we saw a little bit of everything. Now, after 21/2 years have gone by, there seems to be a consistent focus in the health care arena,” Mr. Corbett said. That is partly driven by the concentration of health care-related companies in the Nashville area, he said.

“I'm not going to count on a lot of redomestications of companies from the Caymans, but we do have a lot of health care companies with captives down there,” Mr. Corbett said.

Utah, which is home to many of the small so-called 831(b) captives — those that earn no more than $1.2 million in annual written premiums and, consequently, are eligible for the Internal Revenue Code's 831(b) election not to be taxed on those premiums — opted early on to focus on smaller, similar captives as it grew a regulatory operation suited for large more complex captives, said Ross C. Elliott, captive insurance director in the Utah Insurance Department in Salt Lake City.

“We had fairly large growth last year in manufacturing and health care industries,” said Mr. Elliott. “We've had a reputation for being the king of the small-captive world. (In 2013) we saw a number of larger companies, household names.”

Utah started its captive operations “small and simple” while building its staff, Mr. Elliott said. “We are very aware of the reputation issues domiciles face. So we wanted to make sure we had the knowledge and the wherewithal.” Now with a staff of nine, “we've been very fortunate to get some very knowledgeable staff here,” he said.

The number of new domiciles may be affecting a long-established domicile such as Vermont, but David F. Provost, deputy commissioner of the Captive Insurance Division in the Vermont Department of Financial Regulation, said he thinks that tends to even out.

“We're not the only game in town anymore,” said Mr. Provost, who is based in Montpelier, Vt. But Vermont is still putting up good numbers, licensing 29 new captives in 2013, so “there appears to be plenty to go around,” he said.

Despite domicile growth onshore, prospective captive parents continue to look offshore as well.

“There are a lot of clients where there are still very good reasons to go offshore. We're setting up new captives in Bermuda and Cayman,” said Mr. Young. “I think generally, clients are going for the well-established offshore domiciles.”

“All of our domiciles are busy,” said Mr. Boughner. “Cayman continues to do a great job for U.S. health care, particularly nonprofit. (In) Bermuda, you're seeing a lot of (insurance-linked securities) activity, which is fundamentally captives. That's replacing a lot of their new formations. They've done a good job of finding a niche opportunity.”

Medical stop-loss coverage also continues as an area of interest. It typically is used by companies with self-insured health plans to pay claims — either of individuals or the group — above a certain threshold.

“We're doing three major feasibility studies right now that involve medical stop-loss,” said Mr. Boughner.

“The use of captives for employee benefits, particularly stop-loss, is becoming more mainstream,” said Mr. Young. “It's not a fad. I think it's a long-term trend.”

Mr. Provost said that while he's seen medical stop-loss programs in Vermont captives, it remains somewhat limited, with a mixed experience among such captives.

“We've done a few,” he said. “Quite a few of our large Fortune 500 captives have done med stop for a number of years. We've seen some groups. Some of them are doing well; some of them are not doing so well. It's a little different business to figure out.”

And with uncertainty about the future of the federal terrorism insurance backstop, “the big thing that a lot of people are thinking about is (the backstop) and terrorism,” said Richard Rabs, vice president of insurance and risk at Veolia Environnement North America in Chicago. “You use your captive for those risks that are difficult to insure or insurance is unavailable.”

And with uncertainty about the future of the federal terrorism insurance backstop, “the big thing that a lot of people are thinking about is (the backstop) and terrorism,” said Richard Rabs, vice president of insurance and risk at Veolia Environnement North America in Chicago. “You use your captive for those risks that are difficult to insure or insurance is unavailable.”

 



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