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SOUTHAMPTON, Bermuda-A desire to write more third-party business is fueling a surge in the establishment of better-capitalized captives in Bermuda, says the island's insurance regulator.
As captive owners seek tax and commercial advantages from writing third-party business, the number of new captives writing mainly parent company risks is falling, while the number of captives formed to write broader risks is growing, said Kymn Astwood, the Bermuda registrar of companies.
The trend may be one way captive owners could avoid an increase in captive taxation that the Clinton administration has proposed (BI, Feb. 10), a captive manager added.
Bermuda continued to show strong growth, with 97 new captive formations, but many of the new captives registered as Class 3 rather than Class 1, in which most single-parent captives register.
The minimum capital for Class 1 insurers is $120,000; the minimum capital for Class 3 insurers is $1 million. Class 3 insurers also have more stringent reporting requirements.
Despite the more onerous requirements, the number of Class 3 insurers outpaced Class 1 insurers in 1996. Of the 97 new insurers, only 23 were Class 1, compared with 30 Class 3 insurers. Class 2 and Class 3 insurers comprised the other 44 formations.
"This is partly due to companies deciding to obtain Class 3 licenses. . .to write third-party business for some tax advantages," said Mr. Astwood.
The third-party business is often related to the captive parent-for example, insurance coverage for franchisees or extended warranty coverage, said Roger Gillett, senior vp at Johnson & Higgins (Bermuda) Ltd.
This is part of a drive to make captives more profitable, but many captive owners likely will pursue this strategy if the Clinton administration's captive tax proposals are introduced, he said.
Under the proposals, captive owners will be unable to deduct premiums paid to captives if more than 50% of premiums are attributable to the risks of the captive's parent, he said.
"The Clinton bill is a threat to us, but I think we shall come up with solutions," Mr. Gillett said.
As well as writing more third-party business, companies may pool more risks, he said.
The comments were made at a session at the Bermuda Insurance Symposium III, held in Southampton, Bermuda, Feb. 18-21.
More than 400 delegates attended the symposium at the Southampton Princess, and a total of nearly 600 attended, including speakers and guests.
The sessions covered a broad range of insurance topics, many of which related to the Bermuda market. A hot topic was the securitization of insurance risk. Two sessions were dedicated to securitization and accessing the capital markets, and the subject cropped up in many discussions inside and outside the formal sessions.
The symposium also marked the third public performance of Rock 'n Roll Re, a band of reinsurance and insurance executives-cum-rock musicians. This year's gig had the added attraction the Captivettes, a female trio from the Bermuda insurance community who supplied backing vocals and a dance routine.
The next Bermuda Insurance Symposium will be in February 1999. For more information, contact: Suzie McKeegan, Bermuda Insurance Symposium, The Whitfield Building, 61 Front St., Hamilton, Bermuda; 441-292-6386, fax: 441-292-6990.