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Companies owning captive insurers are increasingly using the alternative risk transfer vehicles to cover third-party risks, according to a Marsh LLC report released Thursday.
In addition, captives continue to grow in Asia-Pacific but are slowing in Europe, said Marsh, which is the world’s largest captive manager with 1,270 captives under management, according to Business Insurance’s most recent ranking.
The analysis of captives managed by Marsh found that 22% of captives included third-party risks, such as coverage for contractors or customers, and that the number of captives covering third-party risks increased 12% over the past year and 62% over the past five years.
Covering third-party risks can enable a captive owner to take tax deductions on premiums. According to the Marsh report, 39% of owners of Marsh-managed captives viewed tax benefits as “a key value driver” in 2018; 46.5% of all U.S. captive owners treat their captives as insurance companies for federal income tax purposes; and 51% of Marsh-managed captives use third-party risks as their primary risk diversification strategy to qualify as an insurer for tax purposes.
Captives continue to grow in Asia-Pacific with a 24% increase in the number of captives over the past five years. In Europe, the Middle East and Africa, however, the number of captives has fallen by 8% over the same period.
Carved out as an individual region, the Middle East saw a 33% growth in captives over the past five years, but the growth rate is “somewhat skewed by the small number of captives in the region,” the report said.
Financial institutions remains the business category with the largest number of Marsh clients owning captives, accounting for 22.6% of captives, followed by health care with 12% and manufacturing with 7.4%.
Microcaptives continue to come under fire from tax authorities as the IRS aggressively audits captive insurers that take advantage of long-standing rules that allow captive owners to reduce their tax bills.