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Reinsurers are eying captive insurer business longingly.

Whether entering this market for the first time or focusing on it more seriously, reinsurers clearly are more intensely interested in seeking premium growth from captives in a hotly competitive reinsurance market.

Captive insurers are particularly appealing prospects to reinsurers because risk managers using captive insurers tend to focus more on loss control.

Also, captive owners are potential candidates for cutting-edge reinsurance products, including blended finite risk and risk transfer programs as well as securitized risk products.

"We're finding a lot more people interested in becoming reinsurers for captives," said David Ezekiel, president and managing director of Hamilton, Bermuda-based International Advisory Services Ltd., a captive manager.

These include reinsurers that never have served the captive market as well as those who had exited and now are coming back in, said Mr. Ezekiel.

U.S. reinsurers are more interested in captives, as are previously monoline Bermuda-based catastrophe reinsurers seeking to diversify their books of business, said Mr. Ezekiel.

"I would say that the interest of the existing players remains undiminished, and there do appear to be some newer entrants into the area of reinsuring captives," said Kenneth J. LeStrange, executive vp of Princeton, N.J.-based American Re-Insurance Co. and president of Am-Re Managers Inc. American Re began reinsuring captives more than 20 years ago.

In addition to more activity on the part of Lloyd's, "Really almost all of the significant domestic reinsurers have been active in this area one way or another," said Mr. LeStrange.

Harry Richter, chairman of Stamford, Conn.-based Genesis Insurance Co., a General Reinsurance Corp. unit that focuses on the alternative market, says "The absolute number of markets is pretty static; it's just the intensity with which they're pursuing the business that's been a real change."

David Seifer, an analyst with Donaldson, Lufkin & Jenrette Securities Corp. in New York, suggests that captives are "a replacement for primary business that reinsurers have lost to a combination of primary insurers or clients just self-insuring."

Interest in this market is "high and growing," said Alan Levin, senior vp at rating agency Standard & Poor's Corp. in New York.

"I think a lot of reinsurers recognize that as captives take a greater and greater share of the (primary) business," they need reinsurance support behind them, he said. "And that's the same kind of a business that a reinsurance company had traditionally done with a traditional insurance company," with the difference that the reinsurer markets directly to the captives or the brokers that represent them, he noted.

But the nature of the risk and of the relationship remains the same. "It's the classic risk that they've been underwriting and accepting all along, for many decades," said Mr. Levin. The only difference is "Instead of a primary company writing the first layer of coverage, it'll be a captive."

"Because the reinsurance pie is getting smaller, you can sort of sit on your laurels and say, 'I'm content to take a smaller piece of the reinsurance pie,' or you can look elsewhere," said Dennis Zettervall, chief executive officer of Hartford, Conn.-based Hartford Re Co.

Hartford Re now is exploring captives, said Mr. Zettervall. "We think we have some expertise we can bring to it. We are looking to develop our capabilities more fully" as well as improve marketing so "we can get our message out there," he said.

Hartford Re already has reinsured some captive business, particularly in the public entity area, "But there's a lot more we can and will be doing," said Mr. Zettervall.

Swiss Re America also is interested in becoming more active in this area and has formed an alternative risk transfer department headed by Executive Vp John Gantz, said Heidi Hutter, chairman, president and CEO.

"We think we can bring value and capacity and capabilities" to captives, said Ms. Hutter. Swiss Re America has done business in this area, but never in a "concerted or thoughtful way, and now we're taking a much more coordinated approach to it," she added.

Of the $17.3 million in gross premiums written by Chubb Atlantic Indemnity Ltd., about 30% is reinsurance for captives, said R. Lincoln Trimble, vp-underwriting manager property/casualty at the Bermuda-based insurer.

Captives are attractive to Chubb because they are easily accessible in Bermuda.

In addition, reinsurers are attracted to what they consider the very good business that captive insurers write.

Reinsurers "are looking for quality business, and I think people are beginning to recognize that captive business is generally of good quality," said Mr. Ezekiel.

It is generally better business than conventional reinsurance, said Mr. Trimble.

"When a company sets up a captive, it takes on more risk itself, so there is probably more likelihood that it has greater control of the risk," he said.

Swiss Re's Ms. Hutter also emphasized the quality of the business.

"I think it's appealing because the fundamental premise is the insured or the ultimate risk-bearer is taking a larger share of their own risk," and when this occurs, "it brings about behavioral and structural changes," including higher retentions, and more interest in risk management, Ms. Hutter said.

"I think getting to that level of financial and business involvement is very attractive," she said.

"They know the risk is theirs. They recognize they'd better be paying attention to it, and they invest more in it" in terms of managing the risk before and after a loss occurs, said Swiss Re's Mr. Gantz.

"It's an alignment of interest, where the ultimate buyer is now on the same side of the fence as we are as a risk-taker because they, too, are sharing in the risk," he added.

Captives buying reinsurance will find competitive pricing.

"Generally, reinsurers are willing to take substantial discounts on renewal and also to be very cooperative as regards policy language and coverage issues," said Colin C. James, president and CEO of reinsurance broker Atlantic Security Ltd. in Hamilton, Bermuda.

"A lot of reinsurers are now more willing to provide an occurrence cover, whereas previously they would insure only on a claims-made basis," he said.

It has been suggested, however, that margins may be somewhat less than they would be in traditional business, in part "because you're dealing with a captive or a risk manager that has to show savings or benefits," said Mr. Seifer.

However, American Re's Mr. LeStrange said, "I think it's extremely hard to say" how profitable the business is. "I think it varies considerably."

There are some significant differences between reinsuring captives and traditional insurance companies, reinsurers note.

Craig N. Johnson, president of Stamford, Conn.-based CORE Managers, a unit of CORE Insurance Holdings, pointed out that: "You have the issue of the financial strength of the group captive. You generally don't concern yourself with the financial viability of the insuring entity when insuring a standard insurance entity," he said. "Group captives are generally not as well- capitalized as a standard insurance company writing comparable premium volume."

"In the group captive area in particular, I think you need to exercise a great deal of caution with regard to the financial viability of the captive. That's clearly one of the issues," agreed Genesis' Mr. Richter.

These group captives "tend to be a little bit more homogeneous-that's probably another underwriting consideration-and, in many respects, the management of the captive organization may not be as sophisticated in terms of defining what it is they really want to buy and how they want to structure their problems," Mr. Richter added.

"It seems to me that in many cases the reinsurer has to be much more of a partner to a captive buyer than it might be for, say, a traditional primary insurance company," he said.

Writing for the single-parent captive of a Fortune 500 company can present its own challenges. CORE's Mr. Johnson said a Fortune 500 company often can have many exposures that "get lost in the magnitude of the company."

"That's a typical fear for a casualty underwriter looking at a Fortune 500 company: that there are a bunch of those relatively small exposures that add up to a lot of undesirable exposures in your total."

These may be "incidental to the major account" but still represent a large exposure to the underwriter, said Mr. Johnson.

Meanwhile, there also has been more interest of late in combining finite risk and risk transfer into captive reinsurance programs, though not necessarily more business actually is being written.

Like a year ago, "There's a lot of people talking about those deals, and a lot of wheel-spinning going on compared to the actual completion of deals," said CORE's Mr. Johnson.

"I think a lot of people overestimate the usefulness of that technique, and I think a lot of buyers, after they review the structures, decide that they really want more risk transfer for their dollar," though it is still a valuable tool in many cases, he said.

Atlantic's Mr. James observed that, "Generally now, due to the very competitive conventional prices, (captives) are generally less interested in finite risk because more people are laying off a greater degree of their exposures than previously."

But these programs also can take time, said Graham Pewter, president of Bermuda-based Commercial Risk Reinsurance Co. Ltd. "I think it's fair to say that risk managers are becoming more aware of how non-traditional contracts of reinsurance and non-traditional mechanisms can help them."

However, "In our experience, it would take a corporate buyer two, three years before they are willing to make a strategic change in the way they protect their captives."

The initial approach is to take a more genuine interest in learning more, he said. At the next renewal, the risk manager will come back, "and gradually the comfort level increases to the point where the client feels comfortable and knowledgeable enough to actually make a significant change in the way a captive buys reinsurance."

Some captive owners are showing an interest in securitized reinsurance coverage, said Roger C. Gillett, senior vp at Johnson & Higgins (Bermuda) Ltd.

"They are interested in the whole movement towards securitization even though there is no pressing need," he said.

Captive owners are interested in accessing the capital markets in the event of a hard market, or in the possibility of obtaining coverage for difficult or non-insurable risks, Mr. Gillett said.

Gavin Souter contributed to this report