The small domiciles with the big appetites

A lingering soft insurance market has dampened captive formations in Europe and is stirring managers to consider ways to generate new business.

Some say growth may be on the horizon in the Far East where emerging economies are ripe for captives. And, Europe's casual approach to promoting captives could use a shot of adrenalin itself to help bring in new blood, some sources note.

Most domiciles saw little growth or decreases in captive numbers in 2006, as traditional market insurers offered affordable property/casualty coverages and, therefore, gave businesses little incentive to fund their exposures.

Among the largest domiciles, Guernsey's net captive numbers fell by three, while in Luxembourg, as many captives left as were formed. Ireland had a quiet year as well, with just seven new captives added there. And in Gibraltar, "there weren't any captives licensed in 2006," said Norman Ritchie, deputy head of insurance supervision in the domicile.

PCCs on top

Protected cell companies, though, do continue to attract new business in fairly robust numbers. In Guernsey, for example, there were four new PCCs and 31 cells created in 2006.

"There certainly hasn't been a huge amount of movement," said Liam Lynch, partner, tax, with KPMG in Dublin. "I suppose on the plus side, contrary to what some people expected, I don't think there's been a downturn ... there aren't that many closing up. And those that do are probably equal to the number of those coming in."

While overall growth has stalled, that doesn't mean all captive managers have experienced a slowdown.

"We're bucking the trend," said Aidan Kelly, director of Willis Management (Isle of Man) Ltd., having put on four new captives in the past 15 months.

"We've been very, very busy in the last six months," added Chris Le Conte, managing director at Aon Insurance Managers (Guernsey) Ltd. "We've formed or moved three captives" in the first five weeks of 2007, he said.

A drag on European captive numbers, however, are mergers and acquisitions among parent companies.

Derek Patience, senior vice president at Marsh Management Services Isle of Man Ltd., said that the Isle of Man, like other mature domiciles, "is suffering from mergers and acquisitions activity where you see captive owners sometimes ending up with three or four captive companies in their group. They do a review and more often than not consolidate into one."

There were only a handful of formations in Isle of Man last year, said David Vick, chief executive of the Isle of Man Insurance and Pensions Authority. Mergers and acquisitions did account for a couple of smaller captives being dropped from the roster," he noted.

"I think the issue for captives moving forward, in Europe, is what's the next interesting angle that can be brought to bear?," asked Stephen Cross, chief executive officer of Aon Captive Services Group in Dublin. "Is there something new?"

In the same way, for example, that Luxembourg is known for its favorable tax treatment of reserves, it's not clear if new distinctions will appear to make European jurisdictions attractive for captive formations.

Soft market

"It was a very quiet year" partly because there were few catastrophes to generate concern that coverage prices might rise, said Mr. Cross. "When something like that happens, we usually get a flurry of activity through our consulting division that tails back into some growth on the captive side. It just didn't happen this year."

Captives already in place are not too interested in expanding their coverages, as long as the soft market lingers, some managers say.

"Many captives perform studies examining new lines of business but we have not seen significant expansion as a result," said Ian Clancy, managing director of Marsh Management Services (Dublin) Ltd. "This is largely a result of prevailing market conditions."

As traditional sources of captive formations remain sluggish, there are indications that new growth could come from the east.

Mr. Patience said there is huge potential for captives to be formed from emerging economies such as those in China and India, and the next growth spurt in European captives is likely to come from those areas.

"There's a lot of interest from the marine sector," said Mr. Kelly, of Willis. "Particularly in the Far East, people are putting new ships on their portfolios and as they are growing, they're looking for insurance solutions."

"The marine market ranks are very thin, it's very hard to play in that arena," said Paul Kiernan, managing director at Willis Management (Isle of Man) Ltd. in Douglas, Isle of Man. "But if you structure it right, you can protect yourself by way of quite complicated reinsurance programs. It can be done."

Aon's Guernsey office has marketed that domicile for some time in Japan, according to Mr. Le Conte. "We see Japan as a good opportunity for us and we've picked up a client or two from there every year for the last few years," he said.

Attracting Japanese parents means that "you have to build relationships and decision-making can take a period of time," said Mr. Le Conte. "But I think with the right expenditure of effort, there are some good possibilities in Japan. There are very few captives out of Japan, yet there is some great rationale for captives in Japan."

While Europe might not seem the most convenient domicile for Japanese companies, there are reasons why places like Guernsey attract them.

"Guernsey is a good choice for a lot of people in the Far East," said Mr. Le Conte. "If they are flying into London to renew their insurance program," or take care of other insurance matters, "it's very easy for them to come to Guernsey," he pointed out.

Peter Niven, chief executive of GuernseyFinance, which markets the island's financial services industry, acknowledged that closer jurisdictions such as Singapore and Hawaii are attractive domiciles for some Japanese parents, but agreed that Guernsey holds an advantage because of its proximity to the London market.

Guernsey needs to tout that advantage, Mr. Niven said, because "the competition is getting harder, there are more players in that space," he said of domiciles courting Asian businesses. Some market sources say they believe it's time for the domiciles, and their regulators, to take a more active marketing role.

"My personal view is that some of them need to get out there and promote themselves more," Mr. Cross said of domiciles and their regulators. "There has to be an element of promoting the location," he said. "I think that Ireland needs to do that; I think that Luxembourg needs to do it."

Unlike the way domiciles in America tout their advantages, those in Europe "just don't do that in a forceful way," Mr. Cross noted. "In the U.S., they absolutely do."

Mr. Vick said managers in the Isle of Man are recognizing "that they need to be selling the benefits of the Isle of Man, they need to be a little bit more active, a little bit more aggressive in putting across the benefits of the island."

Regulators are not generally known as promoters in Europe and some say it wouldnot hurt for them to take a more active role in promotion. "I don't see any conflict in that," said Mr. Cross.

Mr. Clancy of Marsh said: "While we recognize the distinction between their roles as regulator on the one hand and facilitator of inward investment on the other, I do believe more should be done by government to protect and develop the captive industry.

Self promotion

Mr. Vick said regulators historically "were quite involved in marketing and promotion. But in most mature jurisdictions, that's actually changed over the last few years, certainly on this side of the Atlantic."

"I think that increasingly there is the perceived view that regulators need to be a little bit careful about getting involved in direct and specific marketing," he added. "I think you would find that in most mature jurisdictions, that view would be the case. And I think that's another one of the reasons, perhaps, why the market itself realizes it has to be a little bit more active in some respects than it has been."

Some market sources say the current slowdown in formations will eventually turn along with the commercial market.

"This time next year you'll see some red ink from various underwriters," said Charles Scott, managing director of Alternative Risk Management in Guernsey. "You'll see a push for commercial rates to harden."

Some current commercial property' casualty rates "are not sustainable," said Mr. Scott. "Brokers are desktop quoting and beating up the insurers to get the quote."

And the reasons for forming captives remain legitimate, others note.

"We've come in contact with a lot of new prospective clients who haven't necessarily explored the captive option and are keen to do so," said Merise Wheatley, managing director of Heath Lambert Insurance Management (Guernsey) Ltd. and chairman of the Guernsey Insurance Company Management Association. "We're seeing more and more reasons to set up captives, particularly for the long-term liabilities, because it's giving companies a certain amount of stability."