By DAN REYNOLDS, senior editor of Risk & Insurance®
The fiercely competitive world of captive insurance domiciles, both global and domestic, is in its essence a numbers game. It's just that in the reporting of captive formations, numbers can prove to be such tricky things.
Captive administrators in the United States, for one, know that they have to put their best foot forward in the domestic competition to catch the eye of companies seeking a domicile.
Vermont has such a strong lead in both the numbers of captives and the gross written premium housed therein that you would think the other domestic domiciles would just stop jostling, swallow their pride and get in line.
Rest assured, none of them is in the mood to do anything close to that. Domiciles are finding different specialties to become expert in and brag about, and are also being forward in telling prospects how many new captives they've formed and why companies should set up shop in their state.
It seems that the world of captive formation is too intriguing, and also stands so clearly apart from the insurance market cycles that one might mistakenly think defines it, that it's just too good a game to give up on.
After all, what is this captive game about? It's about creative ways to manage risk and protect bottom lines, and that is a naturally attractive exercise for any self-respecting senior manager or business owner.
Sure, national employment rates in the United States are weak and many mortgage companies, construction companies and real estate companies are struggling to stay alive.
But how do you explain some of the dynamics around captive formation or closure trends? Take the state of Hawaii, which houses its captive administration function in the Division of Insurance of the state's Department of Commerce and Consumer Affairs.
In 2010, there were 12 new captives formed in Hawaii and five captives that closed. Of the 12 new formations, several were in construction and surety, said George Sumner, a deputy commissioner and captive insurance administrator for the division. Of those five that closed, three were in the construction industry. "Hawaii does have some construction projects going on out here so it's not all dead," Sumner said. "Those are really commercial projects that they are working on although some of them can be residential too."
It was the same story, but different, in the state of Utah, according to Ross Elliott, that state's captive division director. Utah had a bang-up year in terms of new captive formation, with 54 new captives formed in 2010. There were also 14 Utah captives that closed in 2010, giving the state a net gain of 40 and leaving it with 188 captives at the end of 2010.
The 54 new captives formed in 2010 is impressive, but you have to keep in mind that the majority were of the smaller variety, classified as 831(B)s under the tax code. These are captives with premium under $1.2 million.
Utah received a rush of captive formations very late in 2010, Elliott said, with 42 of them formed in Utah in the last six weeks of 2010. Just as in Hawaii, some of the 14 Utah captives that closed were in the construction and mortgage industries. And just as in Hawaii, many of the new captives that opened in Utah were in those very same industries. "We had a lot of them in real estate, financial services, professional services and construction," Elliott said.
Utah measures its gross written premium in the hundreds of millions of dollars, not the billions of dollars. That's helpful to keep in mind when we see reports that business-friendly Utah vaulted into the No. 2 spot domestically in 2010 with its 54 new captives.
Well, yes and no: Utah finished 2010 second in terms of the number of captives, but still lagged Hawaii and South Carolina, in terms of gross written premium and assets. By comparison, Hawaii captives had $1.2 billion in gross written premium at the end of 2009 and $7.1 billion in assets, said Sumner.
For all the talk about the economy and the soft insurance market, domestic domiciles were showing net gains almost everywhere we looked.
John Svoboda, chairman-elect of the Captive Insurance Companies Association, said the level of new captive formation has more to do with the long-term goals of the sponsors than with hard and soft rates in the tradition market. "The one thing captives provide is a consistent approach and if you decide to get into it, it is for the long haul in any case, and the benefits over the long term," he said.
South Carolina had nine new captive formations in 2010 and five closures, and captive administrators there think the tepid economy has played a role in tempering the number of new captives formed there in the past couple of years.
"In a word, the economy," said Jeff Kehler, program manager, Alternative Risk Transfer Services for the South Carolina Department of Insurance. "As the economic recovery continues to gain traction and there are fewer fears of a "W" shaped recession, growth in new formations in South Carolina is beginning to escalate."
More new captives are in the pipeline at this time of the year than at any time since 2006, and the number of closures is down as companies aren't under pressure to scramble for capital, Kehler said. "We are looking forward to a very good year in 2011," he said.
South Carolina had 160 captives at the end of 2010, an increase of four over the prior year, and booked $3.745 billion in gross written premium at the end of last year, according to state officials.
"While new formations are down, existing captive owners are maximizing the value of their accumulated capital and surplus by way of additional risk retention, adding new lines of coverage, exercising capital transactions and exploring other solutions," said Robert Johnson, the president of the South Carolina Captive Insurance Association.
Vermont saw a goodly number more captives formed than closed. Vermont booked 33 new captives in 2010 and the closure of 21 for a net gain of 12, said Dan Towle, a director of financial services in the state of Vermont's Department of Economic, Housing and Community Development.
There were 911 licensed captives in the state as of the end of 2010 with 572 of those active. That compares favorably to 2009, in which there were 878 licensed Vermont captives at the end of the year with 560 of those remaining active.
Preliminary figures on gross written premium peg that total for Vermont captives at $17.1 billion in 2010. That's a big number, but perhaps the most striking figures came not from onshore but from offshore.
It's worth noting that although Vermont is home to 42 of the Fortune 100, more than half of Vermont's captives write $5 million or less in premium annually, Towle said in a written response to Risk & Insurance®.
Big companies forming captives in Vermont in 2010 included Proctor & Gamble, NBC Universal Inc. and PricewaterhouseCoopers, Towle said.
The British Virgin Islands, which has traditionally ranked in the top five among global captive domiciles in terms of numbers of captives, saw that ranking pummeled in 2010.
The islands landed 12 new formations, but 82 closures, for a net loss of 70 captives, according to Elton Lettsome, the acting directorofinsurance, Financial Services Commission for the islands.
That pushed the domiciles down to 219 captives in 2010, down from 285 captives in 2009. Granted, these aren't big captives, with the domicile's 219 captives holding $395 million in gross written premium as of the end of 2010.
Lettsome said the extended soft market in insurance has had an effect on captive formation in the British Virgin Islands and on other offshore domiciles. Other factors include the perception that onshore domiciles are perceived as being less regulated than the British Virgin Islands are and therefore easier in which to set up shop.
There is a perception that "onshore is best," Lettsome said in an e-mail to Risk & Insurance®, as onshore regulators allow more captives of different stripes to incorporate.
Bermuda, the biggest global captive domicile, also saw a reduction in raw numbers of captives. The domicile ended 2010 with 845 captives, down from 885 captives in 2009, said Pat Phillip-Bassett, Bermuda's deputy director, corporate governance and communications.
Bermuda has been on a tear. At the end of 2009, the domicile held $31.9 billion in gross premium, up from $19 billion in 2008. Assets held by the domicile's captives were $118 billion in 2009, up from $88 billion in 2008.
Figures for 2010 are not yet available, Phillip-Bassett wrote in an e-mail to Risk & Insurance®.
March 1, 2011
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