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A few bad apples may be harming captives' reputation

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The health of the captive insurance market has been good overall, but one captive manager is concerned that the behaviors of some members could damage the industry's reputation.

In a Feb. 10 webinar presented by Strategic Risk Solutions that reviewed the past year for captives and gave projections for 2016, it was said that many captives are overcapitalized and doing quite well, according to Brady Young, president and CEO of captive manager Strategic Risk Solutions Inc. in Concord, Massachusetts.

But he said some owners are in captives that should never have been formed in the first place, and these few could be seeing trouble ahead.

“There has been too much aggressive selling. While these captives are solvent, the owners have been exposed to tax risks, and a lot of that is coming home to roost,” he said during the webinar for existing and prospective captive owners.

The captive manager reported captive industry growth was strong at 4.8% for 2015, but much lower than the 8.6% for 2014, partly because of IRS scrutiny and the newly minted 831(b) election that changes the way small captives can be structured, he said.

Mr. Young was also concerned about the large risks going into captives for cyber exposures.

“Carriers are writing all this cyber liability insurance for really cheap premiums and chasing the market,” he said, “and at some point the losses are going to come.”

He said he is concerned about the health of the industry when people do things that put the whole industry in a negative spotlight.

“I am hoping there is going to be a shakeout, and the stupid things that are getting done are stopped, and the people who shouldn't be in the business, leave the business,” he said. “Then those who are trying to do things the right way can continue to have opportunities in the future.”

As the soft market continues with no event, it places market pressure on captives as well, he said.

“There just hasn't been big problems in most industries; things that happened 10 or 20 years ago seem like the Stone Ages,” he said, “and I think there will be some pressure on mature captives to stay around.”

He said “it's been so long since we've had a hard market where anyone has felt any pain or volatility” that it is difficult to remember the purpose of a captive.

“At some point the market may harden, and people are going to have to use their captive or come up with another solution because the risk is not getting smaller, it's getting bigger,” he said.

Cell closures were reported in the webinar to be over 75% higher in 2015 than 2014, but the reasons for the closures varied. Some small captives were closed because of concerns from IRS investigations, some were parent company acquisitions, and some were chalked up to soft market conditions.

Redomestication also caused some of the closures, but this led to new captives cropping up in the organization's home state with the prediction that as long as the home state has captive laws and “receptive regulators,” that trend will continue into 2016.