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With captive insurance having become a commonplace risk financing tool and captive formations continuing regardless of traditional market conditions, some suggest that the alternative risk transfer market is no longer alternative. Recently, Nancy Gray, Burlington, Vt.-based executive director of North American operations for Aon Insurance Managers, discussed current trends in the captive insurance market and what she sees in the year ahead.
Q: By all indications, the traditional insurance market is experiencing softening in rates. Would you expect that to have any impact on new captive formations in 2007?
A: Last year for the most part, we did see soft market conditions and we did see more new formations across all industry sectors.
In terms of where we're seeing the growth, it's across all industry sectors. There are some areas where we're seeing particular growth. Health care is one area where we're seeing growth. Another area where we're seeing captive growth is property development. We're seeing a lot of captives formed for securitization purposes for life companies.
There are a lot of captives that were formed in '06 that are writing property (coverage). Vermont in particular is attracting a lot of those captives. They're forming the captives and using them to access reinsurance markets.
Q: A number of U.S. states are now captive domiciles and, while Vermont remains the largest onshore domicile, several states seem to have become quite viable. Have many onshore domiciles succeeded by carving out particular niches for themselves in the captive market?
A: The U.S. domiciles are growing at a greater pace than the offshore domiciles. I think the U.S. domiciles have done a good job of promoting themselves. You don't really need to be in Bermuda. What we've seen in the past is a lot of companies said, 'I have to go visit my reinsurer in Bermuda, so I might as well set up my captive in Bermuda.' But now with a global market, you don't really need to do that.
There are approximately 25 domiciles in the U.S. now. What they've done for the most part is taken Vermont captive law and copied it. So they haven't been able to give themselves a competitive advantage (with their laws). However, they have been able to find certain niches for themselves.
Vermont continues to be the domicile chosen by more of the Fortune 500 companies, so you'll see from their perspective a more diverse spectrum of companies forming in Vermont. In terms of new formations, Vermont licensed 38 new captives in '06. Nevada was second; they attracted 33 new captives. They tend to be operating in the middle-market area for captives. South Carolina was third; they licensed 29 in '06. Their growth is coming from the securitization captives, with some health care.
Q: What is the current state of the reinsurance market for captives? Is reinsurance readily available? Are any lines particularly problematic?
A: For the most part coverage, pricing and capacity is not an issue; it is a soft market condition. But you do have certain perils that are very difficultwindstorm, earthquakes. Captives can be part of the solution to that. They can fill in some of the gaps, but they aren't the entire solution. Captives aren't formed to be writing those kinds of limits. IF