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Captive owners explore latest market trends

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BURLINGTON, Vt.—Captive sponsors are making significant changes to their captives, altering everything from the structure of their boards to the types of risks they cover, market observers and captive owners say.

A flurry of activity is taking place as captives have more domicile choices than ever and many organizations are taking the opportunity to move their captive operations onshore, they say (see story, page 4).

Furthermore, captive owners are exploring new ways to use captives to their full potential—using them to cover out-of-the-box risks and some even turning them into profit centers.

Captive trends

One major trend is the growing number of offshore captives that have redomesticated to the United States amid a proliferation of U.S. domiciles, Jason Flaxbeard, senior managing director and head of captive services in Denver for Beecher Carlson Insurance Services L.L.C., told an audience of about 400 attendees of the Vermont Captive Insurance Assn.'s annual conference held in Burlington earlier this month.

Beecher Carlson manages about 100 captives across nine domiciles.

Additionally, some sponsors are moving their captives to the United States due to the high cost of doing business in a distant location, he said.

Robert Flannery, manager of captive operations for New York-based Verizon Communications Inc. who in his role oversees Verizon's one captive in Bermuda and two in Vermont, said that there is not room for all the domiciles in the domestic captive market. "I don't think that 30 (domiciles) is reasonable," said Mr. Flannery.

Another trend, Mr. Flaxbeard said, is as organizations' captives mature, they are increasingly being used as an integral part of the organization's overall risk management strategy.

Walt Disney Co.'s two captives—Buena Vista Insurance Co. and Alameda Insurance Co.—are increasingly being used to fund a variety of risks, said Tim East, director of risk management for Burbank, Calif.-based Disney, who also serves as vp for the captives.

For example, the company uses its captives to provide workers compensation to the cast of The Lion King on Broadway; to insure a fleet of mobile news gathering trucks; and to insure movie stunts and special effects, such as explosions.

Furthermore, "something that's really picking up," is the use of captives for third-party business, Mr. Flaxbeard said.

Verizon's cell phone insurance program—under which cell phone owners, by paying a few dollars a month can get a replacement when their phones are damaged, lost, or stolen—is offered through one of the company's captives, Exchange Indemnity Co., and has become a source of third-party business. EIC is the largest Vermont-domiciled captive.

Disney is turning down third-party business, though. According to Mr. East, engaging in third-party business via the captive does not fit into Disney's "corporate culture," and would be seen as a distraction.

In addition, executive leadership at captives' parent companies has begun taking more interest in their captives' operations, the panelists noted.

According to Mr. Flaxbeard, more and more chief financial officers, treasurers and other in senior positions are beginning to sit on the boards of captive insurance companies.

Additionally, most organizations are not seeking ratings for their captive insurance companies.

"It's just not something that people are really catching on to," said Mr. Flaxbeard, noting that of Beecher Carlson's captive client portfolio, only 3% are rated. For a single parent captive ratings are not necessarily helpful, but perhaps for a risk retention group, they are because a good rating could help secure reinsurance.

Stephen Cross, chief executive officer of Aon Global Risk Consulting in Dublin, Ireland, served as moderator for the session.