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Unusual tactics back captive success

Bermuda works hard to fight off competition for captives

Captive conference draws 400

Unusual tactics back captive success

Energy company expands covered benefits; automaker builds its brand


Published Oct. 8, 2007

SOUTHAMPTON, Bermuda—A captive that pioneered funding employee benefit risks is taking on more of them.

Seven years ago, Columbia Energy Group broke new ground when the Labor Department approved its proposal to fund long-term disability risks through the Vermont branch of its Bermuda-domiciled insurance subsidiary, Columbia Insurance Group Ltd.

Columbia Energy, then of Herndon, Va., was not the first U.S. employer to fund benefits through a captive. But Labor Department rules—chiefly one that required 50% of a captive's business to be third-party risks—were a near-impermeable barrier to funding benefits through a captive since few employers would want to take on so much third-party business.

While the Labor Department never abandoned its 50% test, it gave employers an alternative way of winning departmental approval to fund benefits through their captives when it approved Columbia Energy's application.

To gain approval, an employer has to use a highly-rated insurer to write the policies, increase benefits for plan participants and use an independent fiduciary to ensure that all Labor Department conditions are met.

The road map that the Labor Department provided in approving Columbia Energy's application has since been used by some of the nation's biggest and best known corporations, including A.J. Heinz Co., Alcoa Inc., Archer Daniels Midland Co., International Paper Co., Sun Microsystems Inc. and Wells Fargo Co., to do the same.

Meanwhile, Columbia Insurance Group Ltd.—now known as NiSource Insurance Co. Ltd., following Columbia Energy Group's acquisition several years ago by energy company NiSource Inc. of Merrillville, Ind.—is putting more benefit business in the captive.

Timothy Bucci, director of risk management and corporate insurance, said that several months ago, NiSource began funding group life insurance risks through NICL, with policies written by Prudential Insurance Co. of America.

Speaking last month at the 3rd annual Bermuda Captive Conference in Southampton, Mr. Bucci said funding benefits through a captive makes so much sense that he is surprised more employers aren't doing it, or at least exploring the captive benefit funding option.

When companies, for example, examine whether to fund long-term disability risks through their captives, many decide against it, reasoning that the commercial insurance market for coverage isn't that bad, said Brady Young, president of Waltham, Mass.-based Strategic Risk Solutions, which manages the NiSource captive.

"Do you really need a captive to better manage the risk? Theoretically, you don't, but the reality is," there is better management, Mr. Young said.

That better management, such as carefully tracking and keeping on top of claims, has helped reduce NiSource's LTD loss frequency and severity since the company began to fund the risk through its captive, Mr. Bucci said.

Still, there are obstacles to funding employee benefits through captives, Mr. Bucci said. For example, he said, it can be difficult to pry detailed claims information from insurers currently writing the risks, which employers need to analyze to decide whether it makes economic sense to fund benefit risks through their captives.

In addition, there may be a political tug of war between the risk management and human resources departments at some companies, with HR fearing it will lose control if the program is funded through a captive, Mr. Bucci said.

While NiSource is well-known for its captive benefit funding program, NICL also funds a wide range of property/casualty programs, including workers compensation, general liability and auto liability.

The benefits of its captive include insulating subsidiaries from volatility in the traditional insurance market by charging stable, actuarial-based premiums, while also assuming previously unfunded risks, Mr. Bucci said.

Other corporations have found unusual ways to use their captives. For example, General Motors Corp. uses its Bermuda-domiciled captive to reinsure insurance policies, such as auto insurance and credit life insurance for customers buying GM products outside the United States.

Max Reid, managing director-international reinsurance with GMAC Insurance in High Wycombe, England, told conference attendees that the captive, which now generates about $118 million in annual premiums, promotes the GM brand with customers and can help to ensure the availability of products that would not be available in the traditional market.

While the captive has been extremely profitable for GM, employers selling consumer products should ask themselves several questions, including their appetite for taking on additional risk and whether they have the skill to manage such a program, before diving in, he said.

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Bermuda works hard to fight off competition for captives


Published Oct. 8, 2007

SOUTHAMPTON, Bermuda—For decades a captive insurance company powerhouse, Bermuda will continue to work to maintain its position as the world’s largest domicile, a top Bermudian official says.

“We would be foolish to rest on our laurels. Complacency is not an option,” said Paula Cox, Bermuda’s deputy premier.

Speaking last month at the third annual Bermuda Captive Conference in Southampton, Bermuda, Ms. Cox laid out some of the reasons why Bermuda continues to be, as she put it, “the domicile of choice” for captive sponsors.

Bermuda, she said, offers a business-friendly environment with “unmatched intellectual capital,” in the captive arena. Additionally, the island is a huge reinsurance center, with a highly developed and experienced network of financial services providers, she said.

The Bermuda captive community wants to be considered as “thought leaders,” Ms. Cox said, and the domicile’s captive regulators want to encourage innovation.

Ms. Cox’s comments come as Bermuda faces intense competition—particularly from domiciles in the United States—to win new captives and to keep current captives.

While Bermuda is still by far the single largest captive domicile, the island’s onshore rivals have made significant progress. In 2005, for the first time, the combined captive count of all U.S. domiciles exceeded that of Bermuda, with the gap now likely wider as several newer U.S. domiciles, such as Arizona, Nevada and South Carolina, are growing rapidly, while older ones, such as Vermont, the largest captive domicile in the United States with about 570 captives, continue to grow steadily.

“Vermont is a tough competitor,” said Gregory Slayton, the U.S. consul general to Bermuda, who also spoke at the conference.

“I guarantee that the competition is only going to get tougher,” Mr. Slayton said, adding that intense competition is the reality of the 21st century.

As captive growth in the United States has surged, Bermuda’s captive count has stagnated in the past few years. In 2005, the last year for which there are official numbers, 869 captives were licensed in Bermuda, down from 879 in 2004, but up a little from 857 in 2003, according to figures presented at the conference by Marcelo Ramella, assistant research director at the Bermuda Monetary Authority.

In 2005, though, Bermuda captives generated $19.4 billion in gross written premiums, which far exceeded any other domicile.

North America, generally the United States, is the primary source of business for Bermuda captives. In 2005, 74% of risks funded through Bermuda captives were based in North America. Additionally, according to Mr. Ramella, 47% of business written through Bermuda captives in 2005 was casualty, 24% was property and 28% was in other categories.

Looking just at casualty lines of coverage written through Bermuda captives in 2005, 38% was workers compensation risks, 24% was general liability, 14% was medical malpractice, 6% each was for auto and product liability risks and 12% was for other casualty risks, Mr. Ramella said.

Numbers aside, companies setting up captives in Bermuda say the domicile’s talent and long history of regulating captives were powerful factors in coming to the island.

“Bermuda’s long experience, proven track record and the quality of people made this the best place to be,” said William Noonan, corporate risk manager for Structure Tone Inc. in New York, a $2.5 billion construction firm, one of whose units recently set up a Bermuda captive.

Mr. Slayton, the U.S. consul general, acknowledges that Bermuda continues to be recognized as the capital of the captive industry.

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Captive conference draws 400


Published Oct. 8, 2007

SOUTHAMPTON, Bermuda—More than 400 people attended the 2007 Bermuda Captive Conference held Sept. 16-19 in Southampton, Bermuda.

Topics covered during the various sessions included the role of captives in the soft market, Internal Revenue Service rulings affecting captives, new roles for captives and how Bermuda intends to keep its dominant position in the captive market.

The 2008 Bermuda Captive Conference will be held June 15-18, also in Southampton. For more information, contact Delma Parfitt, conference coordinator, at 441-295-1596 or by e-mail at

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