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Once just a dot on the insurance market landscape, captive insurers have become a mainstream risk management tool over the past 50 years.
While exact figures are not available, experts say roughly 100 to 200 captives were operating in 1967, the year Business Insurance was launched. Today, about 7,000 captives are licensed in domiciles around the world, according to BI surveys.
“Captives used to be called the alternative risk market. Now, captives are a major part of the commercial insurance marketplace,” said Tom Jones, a partner with McDermott, Will & Emery L.L.P. in Chicago.
The 7,000 captives number understates how many organizations now fund at least a portion of their risks through captive insurers. For example, about 1,600 educational institutions obtain a wide range of casualty coverages through one Vermont-based captive, United Educators Insurance, a Reciprocal Risk Retention Group, whose premium volume soon is expected to hit the $200 million mark, up from $25 million nearly two decades ago.
The captive’s growth, says Janice Abraham, United Educators’ Bethesda, Maryland-based president and CEO, has been fueled by several factors, including “staying true to its mission of providing broad coverage, stable pricing, super claims handling and focusing on risk prevention.”
Several factors, experts say, have played key roles in the continuing surge in the number of captives. A basic one has been the huge expansion in the number of U.S. states that permit their formation.
One of those states — Vermont, whose 1981 law made it the first in the U.S. to effectively compete with popular offshore captive domiciles — has been the world’s third-largest captive domicile for many years, trailing only Bermuda and the Cayman Islands. At the end of 2016, 584 captives were licensed in Vermont.
“Vermont was the first state to pass appropriate captive legislation and then develop a good regulatory structure,” said Art Koritzinsky, captive advisory leader for the Americas with Marsh Captive Solutions in Norwalk, Connecticut.
Roughly 30 U.S. states followed in Vermont’s footsteps and also passed captive measures, while others, such as Tennessee, whose original captive law goes back to the early 1970s, predating Vermont’s, enhanced their statutes.
Those state legislative actions “opened up the captive market to a lot more employers, who believed it would be easier to set up a captive” in a U.S. state than offshore, said Jon Harkavy, vice president and general counsel with captive manager Risk Services L.L.C. in Washington.
“The proliferation of onshore domiciles was a big change. Although seen as a threat initially by some, at the end of the day competition was good for the industry and has raised standards for all domiciles,” said David McManus, president and CEO of captive manager Artex Risk Solutions Inc. in Hamilton, Bermuda.
Soaring premiums and a severe cutback in capacity in the traditional insurance markets, first in the mid-1980s and then in the early 2000s, also were key catalysts.
“One of the biggest factors in captive growth was the crisis in the liability insurance marketplace,” said Bruce Wright, a partner with the law firm Eversheds Sutherland (US) L.L.P. in New York.
“Insurers were dropping out of markets. Employers saw if commercial insurers could not provide coverage, they would have to take new alternative risk transfer approaches, such as forming captives,” said Michael Douglas, director of business development-captive insurance at Aon Global Risk Consulting in Philadelphia.
Congress also spurred captive growth in 1986. Legislators approved a measure expanding a 1981 law that authorized a special type of captive, known as a risk retention group, to write all commercial casualty coverages except workers compensation for member owners nationwide after meeting the licensing requirements of just one state. That eliminated the need and cost for RRGs to have insurers issue policies in states in which they were not licensed.
For example, in Vermont in 1987, the first year after Congress expanded the Risk Retention Act, the state licensed 51 captives, including 16 RRGs. Four years earlier, Vermont licensed just 10 captives.
“The key in 1987 was the hard market combined with changes in the Risk Retention Act,” said David Provost, Vermont’s deputy commissioner of captive insurance in Montpelier.
The easing of certain federal requirements also enabled captives to take on new risks. Since 2000, more than three dozen employers, including Archer-Daniels Midland Co., Google Inc., Microsoft Corp. and United Technologies Corp., have won U.S. Labor Department permission to use their captives to fund employee benefit risks, such as life insurance and long-term disability.
Changes in technology also have made it faster and easier for companies to decide if a captive makes sense. “Today, what would have taken days and days to measure the diversification effect of noncorrelated risks in captives can now be done in a fraction of that time,” said Jim Swanke, director of risk consulting at Willis Towers Watson P.L.C. in Minneapolis.
In October 1967, the Vietnam War was raging, the race to the moon was still being run, the first African-American Supreme Court justice was sworn in, “Hair” premiered in New York’s East Village, Lulu topped the Billboard Hot 100, and actuaries still used slide rules.