U.S. sees big captive growth

When it comes to attracting captive insurance companies, the newest domiciles, largely in the United States, are taking center stage.

Captive growth rates last year in Arizona, Nevada and Utah—states with captive statutes that are just a few years old—approached or exceeded 50%. That dwarfed formation rates in more established domiciles, such as Bermuda and the Cayman Islands, where captive rosters grew only slightly in 2006 as terminations largely offset formations.

"They have good laws and a good location," said Jill Husbands, managing director for Marsh Inc.'s Captive Solutions Group in Bermuda, referring to U.S. captive domiciles in the Southwest.

That isn't to say, though, that captive formations have ground to a halt in the big offshore domiciles. For example, the Cayman Islands' Monetary Authority licensed 56 captives in 2006, just a few less than the 59 captives chartered in 2005. The Cayman Islands' total of 740 captives at year-end 2006 was up from 733 a year earlier.

Both on and offshore, hard conditions in the medical malpractice market drove many captive formations. For example, more than one-third of the Cayman's new captives were related to health care.

"Hospitals remain very interested in the Caymans," a longtime magnet for health care provider captives, said James Swanke, a managing principal with the Tillinghast unit of Towers Perrin in Minneapolis.

In the United States, health care organizations sponsored 19 of the 29 risk retention groups formed last year, according to Risk Retention Reporter, a Pasadena, Calif.-based newsletter that tracks the industry. Of the 19 health care RRGs, 12 provide liability coverage to physicians.

RRGs are a special type of group captive that, under federal law, can do business in any state after meeting the licensing requirements of one state.

"Medical malpractice (insurance) still is a difficult market," said Nancy Gray, executive director-North America for Aon Insurance Managers USA Inc. in Burlington, Vt. "Initially, it was the larger hospital and doctor organizations that were forming captives. Now, captive formation is moving to smaller" health care groups.

Medical malpractice had company in driving captive formations last year. In Vermont, 37 captives were formed in 2006, 13 of which were used to fund property coverage—a reflection of tough conditions in the commercial market, said Derick White, director of captive insurance for the Vermont Department of Banking, Insurance, Securities and Health Care Administration in Montpelier.

Meanwhile, another source of captive sponsorship last year was life insurance companies, which entered the captive arena to form so-called "Triple X" facilities.

Triple X captives, typically several times larger than the average captive, are being used to meet reserving requirements for universal life, whole life and term life insurance, allowing the sponsors to remove hundreds of millions of dollars of reserve liability from their balance sheets.

In Vermont alone, four Triple X captives were licensed last year and four more insurers are discussing formations, Mr. White said.

Captive growth is more than just new facilities being launched. It also involves existing captives taking on new business lines or increasing risk retentions. For example, premiums flowing through Three Rivers Insurance Co., one of Vermont's oldest captive insurance companies, nearly tripled over the past four years, rising to about $94 million in 2006, said Three Rivers President John Wilson in Burlington.

Coverage expansion

Three Rivers, the captive insurance subsidiary of Pittsburgh-based aluminum giant Alcoa Inc., has steadily added business. In 2003, it began funding benefit risks of non-U.S. employees, and in 2005 it began reinsuring group term life insurance coverage of U.S. employees. Last year, Three Rivers began reinsuring certain personal lines policies purchased by employees and retirees from several major commercial insurers.

Mr. Wilson described that last expansion as a win for the captive by bringing to it a line of business that should be profitable and a win for employees, who in many cases are receiving coverage at a lower cost with better terms and conditions compared with what they could obtain on their own.

Group captive executives say their programs are growing despite more competition in the traditional market.

For example, Santa Cruz, Calif.-based Nonprofits' Insurance Alliance of California saw premium volume and membership rise about 10% last year, said Pamela Davis, president of NIAC, which has about 5,500 policyholders and $40 million in premium volume.

"We grew—soft market notwithstanding—rather significantly," said Ms. Davis, who attributed the growth to factors such as broad coverage forms and superior claims handling services.