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New transparency laws have helped jack up costs for professional services to a level where they have now become a "material" issue, particularly for smaller firms, captive insurance experts said.

Accountants, consultants and actuaries are having to dig deeper into the financial documents of captives to make sure they comply with the demands of regulators. That's costing money.

For companies operating on thin margins, these so-called "frictional" costs can tarnish the economic sheen of a successful captive operation. Young compared these costs to the load charged by some companies running mutual funds. "As you know, the auditors have turned up the heat," he said. "It's not a negative, but it is a cost and we amortize it over the life of the captive."

Bermuda, always an expensive proposition, has suddenly become very expensive. New reinsurance companies established there at the end of last year have been able to poach from the existing talent pool.

Luring away a $100,000-a-year actuary with a $150,000 salary is not something a big reinsurer thinks too much about, Young said. Smaller companies, left with a thinning bench of talent, are finding it even more difficult to replace key staff.

"If the big Bermuda players want them, they are going to get them," he said. "It's not a material issue to them. But what it does is to drive up prices in the marketplace."

Not that anyone is complaining too loudly, at least for the moment. Recruiting the right people so that a captive insurance company meets minimum standards is a strategy designed to protect shareholders and clients from insolvency in the future. Who can argue with that?

"Tough regulations are a good thing," said Thomas F.X. Hodson, general counsel of AIX Group and NOVA Casualty Co.

No doubt. But the cost of following them can vary greatly from one domicile to the next. Some states, like Arizona, which has 53 captives, charge a flat fee for companies to start a captive there, no matter how much premium flows through the captive. Other states charge a percentage of premium.

"Even with small premiums, captive domiciles charge all sorts of fees," said Hodson.

In other places, said Young, it can seem as if professional services are using captive insurance services as a training ground for young accountants. It's when those young professionals make mistakes that costs can balloon from thousands of dollars into the tens of thousands.

Domiciles tend to be better off when they have strong, active trade associations, the experts agreed, and the offshore domiciles tend to act more quickly than their counterparts in the United States.

Most domiciles commit to turning around an application for a captive in 30 days or less. Sometimes in volatile markets such as property, though, that's not fast enough, said Young. Some captives can be authorized in as little as two weeks.

In the United States, at least two dozen states have captive insurance laws on their books. Vermont leads the nation in the number of captives registered.

April 15, 2006

Copyright 2006© LRP Publications