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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.