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The US:
a growing acceptance
of captives
Dennis P. Harwick expects growth in the captive
market to continue in 2007.
April 2007
2007 looks likely to be a year of steady growth for captives in US domiciles. Traditionally, one would
expect that growth in the number of captives would flatten out, or that captive numbers would even
drop, during the soft pricing environment that we are currently in. But that has not happened this
past year, nor do we expect it to happen this coming year.
Rather, captive formations in US domiciles
continue to grow. Captive formations are
up modestly in some domiciles and up
significantly in others. Total US captive
numbers increased by about 15 percent
last year, growing from approximately 1,100
captives in 2005 to 1,250 captives in 2006
Seven US domiciles—Arizona, District of Columbia, Kentucky,
Montana, Nevada, New York, South Carolina and Utah—recorded
double-digit increases, ranging from 20 percent increases in DC,
New York and South Carolina, to a whopping 100 percent increase
in Utah—one of our newest domiciles. Arizona, Kentucky, Montana
and Nevada all had increases in the 50 to 60 percent range. And
the traditional domicile powerhouses of Vermont and Hawaii—which
continue to rank first and second respectively in terms of number of
captives—both showed modest but steady growth.
So what does this mean for the coming year? Probably, more of the
same. I believe risk managers will continue to use captives to address
a variety of risk management needs, including the growing use of
captives in areas such as employee benefits and life reinsurance.
The traditional reasons for forming a captive, other than price, such
as covering unusual or hard-to-place risk, gaining control of loss
prevention, and utilising income from underwriting decisions and
investments, will continue to appeal to an ever-more sophisticated
group of risk managers.
The increased sophistication of risk managers will contribute to
the growth in captives in other ways too. Risk managers now see
captives as one of many tools for doing their job, not just a last option
to obtain necessary coverages. And risk managers are less likely to
be swayed solely by pricing in an industry they know will change in a
never-ending cycle of hard and soft markets.
All one has to do to get excited about the future of captives is
attend some of the captive conferences throughout the US, where
you will see the energy of a young but maturing industry. The
Captive Insurance Companies Association (CICA) recently held
its largest International Conference ever in Tucson, Arizona, with
representatives from dozens of countries and approximately 40
of the 50 US States. CICA is the oldest captive trade association
and is the only domicile-neutral captive association, so it effectively
serves as the common ground for the captive industry to gather. Not
surprisingly, US domiciles were out in force at the CICA Conference,
together with regulators, exhibiters and captive owners.
Vibrant captive domicile associations exist in many US States,
including the newly created Montana Captive Insurance Association
and the Utah Captive Insurance Association, which join long-standing
captive associations in Vermont, South Carolina, Hawaii, DC, Arizona
and Nevada.
One of the highlights of my position is that, each year, I get to visit
many of these captive conferences, where I meet both newcomers
to the industry, including those all-important “we’re just thinking about forming a captive and came to see what it is all about” people
and the ‘usual suspects’ of the captive support industry: regulators,
accountants, actuaries, lawyers, captive managers, reinsurers,
fronting representatives, asset managers and bankers. Many have
become friends and advisors.
Some have worried about the “proliferation of domiciles”, but the
growth in the number of States actively encouraging the formation
of captives has provided diversity and critical mass to the industry.
Forming a captive no longer seems like an exotic or risky strategy
when there are domicile regulators and support services in either
your home State or an adjoining State.
Although collecting statistics on captive domiciles is like trying to
herd cats, the number of States that have the enabling legislation
and resident captives has grown to more than 20. At the risk of
leaving someone out, here goes:
Arizona, Arkansas, Colorado (the original US State with captive
legislation), Delaware, District of Columbia (not technically a State,
but close enough), Georgia, Hawaii, Illinois, Kansas, Kentucky,
Maine, Montana, Nevada, New York, Oklahoma, Rhode Island,
South Carolina, South Dakota, Tennessee, Utah, Vermont
And at the risk of getting into the “what is onshore and what is
offshore” debate (Hawaii springs to mind as an interesting example),
we cannot overlook the US Virgin Islands, Guam and Puerto Rico as
other US-affiliated jurisdictions that double as captive domiciles.
So take your pick. There’s a lot to choose from!
Welcome to the world of captives.
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“All one has to do to get excited
about the future of captives
is attend some of the captive
conferences throughout the US,
where you will see the energy of
a young but maturing industry.” |
