Onshore Domiciles Attract Captive Formation
Friday, May 6, 2011
Companies are increasingly looking to onshore US domiciles when choosing to form
captive insurance firms, the aggregate premium levels of which have increased
substantially, according to a new report by the insurance broker and
risk adviser Marsh.
Published on May 2, the report, titled "Trends and Performance –
2011 Captive Benchmarking" states that, despite unprecedented economic
challenges, captives have performed well. Conducted annually, this
year's report takes the angle of a retrospective, reviewing the performance
of captives during a decade that contained the September 11 terrorist attacks
and what Marsh calls the "Great Recession of 2008 and 2009". It focuses
on the activities of over 750 of Marsh's captive clients - primarily of the
single-parent variety - and is based on figures as of December, 2010.
In particular, trends from 2007 to 2010 were examined, with the report identifying
a relative consistency in the number of captives being offset by an increase
in aggregate premium levels across all geographies and most industry sectors.
The combined force of the US and Canada ensured these jurisdictions retained
their place at the head of Marsh's geographical break down, although the UK
and Ireland did see a larger proportional increase in the size of their captives'
premiums. The retail and consumer products sector provides the largest annual
average gross written premiums, recording a large leap in these levels, a jump
almost matched by that in the financial institutions sector, which comes
second in the list.
This trend, the report states, is indicative of the desire to determine how
a captive's maximum creativity, efficiency and effectiveness may be established
as companies implement risk management and financing strategies. Moreover, according
to Michael Cormier, Global Captive Solutions Practice Leader, captives have
performed exceedingly well, while the reinsurance and insurance markets have
not necessarily followed suit. Despite lower investment returns, captive owners'
equity is seen to have increased, which Marsh takes as an indication that owners
did not deplete capital during the economic downturn.
Cormier added that: “Moreover, the financial stability and claims-paying ability
of captives generally improved during the four-year period. This indicates that
rather than using captives as a money-saving vehicle when traditional insurance
costs rise, owners are viewing their captives as efficient and effective long-term
risk management and risk financing solutions”.
The report also found that financial institutions account for approximately
one-fifth of all captives surveyed, with property and general/third party liability
representing the two most popular insurance classes for captives.
Perhaps the most important finding is the identification of a trend towards
a preference for onshore US domiciles and a move away from the British Virgin
Islands in particular. Bermuda remains the largest captive domicile, in terms
of sheer numbers, yet it did experience a slight fall in numbers. Hot on its
heels is the Cayman Islands, but it too suffered a similar dip in its volume
of captives. The British Virgin Islands recorded the most dramatic losses, its captive
numbers reducing from 285 to 219 in 2010.
It is notable, however, that Marsh observes that, of its 20 largest domiciles,
11 are now located onshore, with almost all of those in the US experiencing
growth. Vermont sits top of the list, nearing 600 in total. Vermont's
nearest competitor, Utah, lags a considerable distance behind, not quite reaching
the 200 mark. Hawaii, South Carolina, and the District of Colombia round out
the top five US domiciles.