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Current Issues in the CaptiveMarketplace and Trends for the
FuturePresented by
Kate Westover
Vice President, Innovative Captive StrategiesVice President, Innovative Captive Strategies
Barbados International Business Barbados International Business RepresentativeRepresentative
• Continued use even in softening market• Majority of captives insure U.S. source business• Majority still formed offshore• Majority writing casualty, liability risks• Majority single owner but use of “cell” companies
increasing• Up-to-date statistics hard to find!
The Captive Marketplace
Sources of Captive Information
• Captive Insurance Company Reports (CICR)• AM Best web site• Business Insurance annual survey• Captive Review (magazine and directory)• Risk Retention Reporter and RRG/PG
Directory• Captive.com and Captive Guru• Domicile web sites e.g. VCIA• Captive Insurance Company Association
(CICA)
2003 Statistics*
• Released by AM Best in March 2005
– 561 new captives formed
– Record # of liquidations (398)
– No figures for segregated cell companies
• 201 formed onshore (US)
• Total # domiciles: 43**
* Source CICR
** Source BI
Trends in Captive Formations
2003• Vermont 66
• Cayman 44
• South Carolina 36
• BVI 25
• Barbados 24
• Ireland 24
• Hawaii 21
• Bermuda (7)
• World wide total active captives over 5,000• Bermuda remainsthe world leader with 1,150 captives • Does not count cell activations
Why so many formations?
• 2003 Hard market– Insureds control costs by increasing retentions– Group captives access fronting, reinsurance– Coverage focus on traditionally insurable P&C
risks– Some new coverages
• Terrorism • Employee benefits
– Some state tax planning motives
What will happen in a soft market?
2004 Total Licensed Captives*
Bermuda 1,150 - Net change of 0 since 2003
Caymans 694 – Net change of 50
Vermont 524 - Net change of 17
Guernsey 410
BVI 350 – Net change of 47
Barbados 257 – Net change of 9
Luxembourg 219
Dublin 214
Isle of Man 175
Turks & Caicos 164
Hawaii 147
South Carolina 114 – Net change of 47Source: Business Insurance March 2005 – Excludes credit life insurers
Formation Trends 2004
• Increased interest in onshore domiciles
– Leading offshore domiciles suffer from operating cost inflation
– New onshore domiciles actively marketing
• US captive access to federal reinsurance for terrorism
• US jurisdiction required for ERISA risks
• Lingering “Post – Enron” perception issues and desire to be “better” regulated for Sarbanes Oxley compliance
• Fin 46 - Publicly traded companies cautious about use of offshore Variable Interest Entities
2005 - The Spitzer Factor
• Offshore domiciles scrambling to improve their regulatory reputation
• Domestic regulators increase level of responsibility of ceding companies to certify transfer of risk
– “Finite Risk” becomes suspect
– Accountants looking at revising FAS 113
• Investigation of “PORCs” as rebating mechanisms
– The Title Insurance scandal
The Future of Captives
• Soft market has not historically slowed captive growth
• Casualties of soft market – Group captives formed solely for short term price
reduction
– Single owner captives with financially distressed shareholders
• Soft market survivors– Group captives with customized and effective loss
prevention and claims management programs (and insureds with long memories)
– Single owner and segregated cell captives with owners/participants looking to elevate their insurance and risk management strategy
“Elevating” insurance strategy• Expanding horizons beyond traditionally
insurable risks
• Focus on responsibilities of company directors
• Sarbanes-Oxley Act of 2002
• NYSE Requirements
• Organizations need to identify and reduce or stabilize long term cost of risk in order to protect shareholder assets
ERM Focus
• Define current cost of risk• Evaluate the efficiency of current risk strategies• Identify opportunities for reducing cost of risk• Measure potential impact• Determine risk ownership• Catalog current controls• Develop recommendations
This is what a good captive feasibility study does!
Enterprise Wide Risks
• Operational
– Pure risks – natural and manmade perils
– Human resources
• Business
– Regulatory and tax
– Consumer demand
– Technology changes
• Treasury
– Currency, interest rates
Who can/should do this?
Organizations with • No cash flow or capital constraints• Incentive to accelerate tax deduction for incurred
losses• Desire to “eliminate surprises” around financial
results
Focus is risk management• Complete transparency• Not financial statement window dressing• Pre-financing risk is in public interest
How/Where To Do It?
• Pick reputable domicile with appropriate regulatory requirements
– Capital efficiency
• Use of small insurance companies (831(b)) or non controlled foreign corporation (NCFC) segregated cell captives
– Allows for faster accumulation of risk taking capacity
What About the IRS?
• Focus on
– Risk transfer
– Risk distribution
– Standard insurance industry practices
• Revenue Rulings in 2005
– Confirms a source of risk as corporate entity
– Reviewing treatment of cell companies, finite risk programs