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HAMILTON, Bermuda-Rent-a-captive facilities in Bermuda are continuing to attract significant amounts of new business.
Despite the soft liability insurance market, policyholders are still attracted to the prospect of benefiting from their own favorable loss records, captive managers say.
And though workers compensation insurance and other liability lines are unlikely to experience significant rate increases this year either, the outlook for rent-a-captive facilities remains good, they say.
One cloud on the horizon is the U.S. Internal Revenue Service's investigation of Bermuda's largest rent-a-captive, the Insurance Profit Center.
In its 10-K last month, Mutual Risk Management Ltd., the group that owns IPC parent Mutual Indemnity, acknowledged the IRS is investigating MRM's calculation of its clients' related party insurance income for 1993 and 1994.
Rent-a-captive members often claim tax deductions for income related to their parent companies. They may claim deductions if as little as 30% of their income comes from related party business.
In its 10-K, MRM says: "The company believes that its calculation of RPII was materially correct in both years. In addition, any adjustment made by the IRS would affect the company's clients and not the company directly."
All the members of IPC have different characteristics and structures, so it is difficult to determine a broad-brush approach to the taxation liability for IPC members, said Paul D. Watson, president of Mutual Indemnity.
Few of the IPC members join solely for tax reasons, he said.
Outside the IRS audit, IPC had another good year in terms of new business, but decreasing workers comp rates kept premiums from growing, Mr. Watson said.
The number of clients grew to 450 from 398. About half the programs are active, and half are in runoff.
"The new accounts were pretty much from all over the U.S., but we've seen particularly strong growth on the East Coast," Mr. Watson said.
Gross premiums slipped 3% to $161.8 million, largely due to falling workers comp rates, he said.
"A lot of states are putting through rate decreases, so we are writing the same accounts, but we are not getting the same premium," Mr. Watson said.
While traditional workers comp accounts remain the core business of IPC, more varied lines also are being placed into the programs, he said.
For example, more clients are forming programs for combined automobile liability and general liability risks, Mr. Watson said.
And the level of agent and broker program business is also increasing, he said. "They are finding that the market is very competitive, and this is a way for them to maintain their profitability," Mr. Watson said.
Skandia International Risk Management Ltd. saw more interest in its rent-a-captive than it did in single-parent captives in 1996, said President Nicholas S. Dove.
Membership in the facility, SINSER Insurance Ltd., grew to 19 in 1996 from 11 in 1995. Three more members have joined so far this year, he said.
"Smaller companies are suddenly discovering that they can get involved in self-insurance and alternative risk transfer mechanisms," Mr. Dove said.
The new members in 1996 included a religious association and health care associations, and this year added a race horse association, he said.
"Rent-a-captives are particularly attractive to associations, because it is difficult for them to raise the money for their own captive," Mr. Dove said.
Universal Re-Insurance Co. Ltd., managed by Atlantic Security Ltd., added three new members in 1996, bringing the total to 29, but gross premiums remained little changed at about $25 million, said Hal Forkush, president of Universal.
The three new members include two employee leasing companies and one auto dealer, he said. All of them cover workers comp risks.
Gross premiums for Universal International Reinsurance Co. Ltd. increased to $20 million in 1996 from about $15 million in 1995. The facility, which has 15 members, is used for programs that want to be taxed as U.S. corporations.
Hanseatic Insurance Co. saw strong growth, with premiums increasing to $7 million from $5 million, said Colin C. James, president and CEO of Atlantic.
Several of the 12 members of Hanseatic have seen premiums grow as a result of programs used to reinsure letters of credit for U.S. companies involved in foreign trade, he said.
Magna Carta, a conventional rent-a-captive covering risks from the West Coast, saw premiums grow to $2 million from $1.6 million in 1996, Mr. James said.
BF&M Management Ltd. saw no growth at its rent-a-captive, Fortress Insurance Co. Ltd., which maintained its seven members but added no new ones, said Irmgard Viera, vp of Fortress.
A combination of the soft market and the decision by BF&M not to aggressively market the facility caused the stagnation, she said.
Hurst Holme Insurance Co. Ltd. lost one account, bringing the total members down to 15. But gross premiums increased 13.2% in 1996 to $12 million.
Existing members of the rent-a-captive are placing more business into the facility as they become more familiar with the advantages of rent-a-captives, said David Ezekiel, president and managing director of facility manager International Advisory Services Ltd.
Pennsylvania Manufacturer's International added two new programs, bringing the total to eight in 1996, said Peter J.N. Strong, president and director of facility manager Independent Management Group Ltd.
"It's growing slowly but surely, and it seems to be working well for the members," he said.