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Recent captive developments:
a growing influence
Alternative risk solutions gain ground in the US and around the world.
April 2007
In Vermont, Wells Fargo was granted
a waiver by the US Department of Labor
to provide life insurance and long-term
disability insurance to its 153,000 employees
through its own private unrated insurance
company in Vermont.
Wells Fargo’s captive will benefit from
improved cash flow, new investment
income and tax breaks estimated at “hundreds of millions of dollars over the next
30 to 40 years”, an industry consultant said.
Two changes to captive insurance laws passed by the Council
of the District of Columbia went into effect on March 14, 2007.
The Captive Insurance Company Amendment Act of 2006 and the
Special Purpose Financial Captive Authorisation Amendment Act of
2006 were passed at the end of 2006.
The former updates and expands the District’s Captive Insurance
Company Act of 2004 on the formation and structure of protected
cell captive insurers, providing greater flexibility to captive owners,
managers and regulators regarding the status and actions of
protected cell companies.
The latter provides securitisation of risk and allows access to
capital markets through special purpose captives, which promise
to make DC’s captive laws more compact and easy to use.
Since 2001, when DC enacted its captive insurance law, its Risk
Finance Bureau has licensed more than 70 companies, including
those owned by such organisations as the American Society of
Association Executives, General Motors, and the Port Authority of
New York and New Jersey.
Garnet Captive Insurance Services, a unit of giant property and
casualty insurer W.R. Berkeley Corp., has started a “green” group
self-insurance programme that targets companies with sustainable
business practices. Garnet Captive, a five-year-old alternative risk
consulting firm and brokerage based in San Francisco, believes
such companies have a better chance of being sustainable
economically as well as environmentally, according to president
Andrew Cavenagh. Included in the target market are organic food
producers, green construction companies, renewable energy and
clean tech companies.
The outlook for captive insurance in Qatar and the Gulf region
is promising, according to Youssef al-Kareh, general manager
of Ensurion, a regional insurance management and insurance
advisory services firm. Speaking in Doha at a conference entitled
“The future of captives in the Middle East”, hosted by the Qatar
Financial Centre Authority (QFCA), al-Kareh said that finance and
insurance professionals are looking for new ways to create value
through more sophisticated methods of deploying capital and it
is becoming increasingly clear that captive insurance is one of a
number of effective methods of reducing insurance costs, as well
as generating long-term returns from investing in a company’s own
risk profile.
Fetooh al-Zayani, managing director, business development,
insurance and reinsurance at QFCA said that Qatar has great
potential to become a leading captive habitat, both regionally and
globally.
An audience of Qatari VIPs and global industry leaders discussed
recent developments in Qatar as well as a range of new opportunities
available to the insurance industry.
The Qatar Financial Centre is in the process of attracting a range
of leading companies in the regional and international insurance
industry to explore ways to do business in Qatar and to support its
growth into a global financial centre. Bahrain-based Ensurion is
the first insurance manager licensed in the Middle East region and
the manager of the recently established Tabreed Captive Insurance
Company.
Jardine Lloyd Thompson Group (JLT) is rebranding its captive
management operations and has formed two new cell companies.
The newly named JLT Insurance Management has set up Isosceles
PCC, a protected cell company in Guernsey, and Isosceles Ltd., a
segregated account insurer in Bermuda. JLT Insurance Management
plans to expand its services into alternative risk transfer vehicles,
including sidecars, transformers and special purpose vehicles.
Separately, JLT has joined with Elmo Insurance Ltd. to launch
a new captive management operation in Malta, JLT Insurance
Management Malta Ltd. Through the use of captive management
services, JLT seeks to enable its clients to manage their risk in
a more financially efficient way, thereby improving their clients’
economic model.
In 2006, JLT identified a growing interest from companies in
establishing captives in an EU domicile. This led to a project that
identified Malta as the domicile of choice and Elmo as a preferred
partner for this new venture.
Malta believes it will prove attractive as a base for captive
management services for many reasons. The island offers a low-tax
and low-cost environment with a skilled workforce. The regulatory
environment in Malta assists greatly in the speed of setting up new
captives. As an EU member state, Malta permits licensed insurance
companies to write direct business in all EU/EEA countries.
JLT’s captive clients operate diverse businesses, including
activities such as agriculture, aviation, banking, brewing, chemicals,
manufacturing, oil exploration, pharmaceuticals, retailing, and
shipping. These companies come to JLT with problems to solve and
seeking help to improve the economic wealth they are creating by
enabling them to finance more effectively the risks their businesses
face.
Elmo’s role in providing local knowledge and infrastructure is
central to JLT’s vision of delivering insurance management services
in Malta. Elmo has roots going back to 1938 and has always had
an international outlook.
The Central Bank of Bahrain (CBB) has won a key award for
its regulatory initiatives in the area of captive insurance. The
Regulators’ Initiative of the Year Award for the CBB was conferred
by Policy magazine during Insurex 2007, a two-day insurance
conference held in Dubai in the spring. The event was held under
the patronage of Dubai deputy ruler and United Arab Emirates’
Minister of Finance and Industry Shaikh Hamdan bin Rashid Al
Maktoum. The award recognises excellence in the formulation or
enforcement of insurance standards in a jurisdiction by a regulator
or supervisor, or by a distinguished year of achievement. It was
conferred on the CBB for its pioneering initiative in providing the
Middle East and North Africa region with the first legal framework
tailored to meet the needs of captive insurers, the first licensed
insurance manager, and the first licensed and operational captive
insurance company.
A study carried out by Marsh’s London office found that “UK
companies increasingly are considering captive formation, driven
by a desire to implement sophisticated risk management regimes
and address the total cost of risk”.
Marsh reported that the number of captives owned by a UK parent
continues to increase. Traditionally, their formation has been in
response to hardening insurance rates, the report said, but captives
are increasingly fulfilling broader strategic risk management aims.
While the majority of FTSE 100 companies already own one or
more captives, there is significant interest growing among FTSE
250 and medium-sized unlisted companies as they realise the
potential benefits, Marsh said. The increasing ability of captives
to write specialist risks, as well as traditional casualty and property
lines, means that captives now have a closer fit with organisations’
unique risk profiles and requirements.
The report also examined the use of captives by industry,
identifying the financial services, manufacturing and service
supply industries as the three sectors owning the greatest number
of captives.The high level of captive use in certain industries is in
part historic, Marsh said. Many financial institutions established
captives to address mortgage indemnity guarantee risks during the1990s, and the majority of utilities at privatisation formed captives
to manage historic liability exposures. Other industries, such as
energy, have made significant utilisation of captives over the past
30 years, given their exposure profile and variations in the capacity
available in the insurance market.
With “firm but flexible” regulation in place, Kentucky Insurance
Commissioner Julie Mix McPeak is to bring a captive manager
on board for the first time. With several large corporate entities
headquartered in Kentucky, including UPS and Papa John’s Pizza,
McPeak foresees real benefits from the captive programme.
The focus on captives indirectly ties into Kentucky’s efforts
regarding workers’ compensation issues and the State’s mining
industry. Mining accidents and accidental deaths in recent years
have fostered volatility, but McPeak is hopeful that the market will
stabilise.
The number of risk retention groups has risen to its highest
ever, totalling 238 as of March 2007, according to Risk Retention
Reporter. Seven new RRGs were added to the listings in the first
quarter of this year, compared to 12 during the corresponding
period last year.
In the first quarter of 2007, four of the seven formations were in
healthcare, with one each formed by nurses, homebuilders and
financial planners.
Leonard Crouse, the Deputy Commissioner for captive insurance
for the State of Vermont, has been honoured for his efforts with
the 2007 distinguished service award, which was presented at
the Captive Insurance Companies Association (CICA) international
annual conference in Tucson, Arizona earlier this year. Created in
2006, the award recognises significant contributions to advancing
the captive insurance industry. Crouse was appointed DeputyCommissioner in May 2003. He is responsible for the administration
and regulation of captive insurance companies and risk retention
groups, and oversees a staff of 28 employees.
Prior to his appointment as Deputy, Crouse had been the Director
of captive insurance since May 1990. He has served on various
committees and working groups representing both Vermont
and Massachusetts at the National Association of Insurance
Commissioners.
The State legislature of South Carolina has been considering a Bill
that would permit captives domiciled in the State to write primary
workers’ compensation coverage. Under current law, captives
may only write workers’ compensation reinsurance or cover the
deductible on high-deductible workers’ compensation plans.
Supporters of the Bill argue that the legislature has done little so
far to ease the burden of high workers’ compensation premiums
that businesses in South Carolina face.
Aon has formed Aon Global Risk Consulting (AGRC), creating one
of the largest dedicated risk consulting, captive management and
risk engineering groups in the world.
AGRC will offer a fully integrated range of risk consulting solutions,
including enterprise risk management, actuarial and analytical
services, risk finance, risk control and engineering, accelerated
claims closure services, and re/insurance company and captive
management.
AGRC combines Aon’s former captives services group (Aon
Insurance Managers), risk consulting and risk engineering
operations. Stephen Cross is the unit’s chief executive officer and
Philip Stamp is its chairman.
Separately, about 55 percent of businesses in South Carolina
that employ fewer than 10 people do not offer health insurance.
Currently, a group of businesses must have a minimum of 1,000
employees before they can pool money and buy insurance for
them. The State chapter of the National Federation of Independent
Business has been lobbying to lower the pooling restrictions to
allow a set of at least 10 small businesses to pool money and buy
group coverage, erasing the requirement for 1,000 employees.
Opponents argue that, if the employee pool were made too small,
single claims could skew the financial performance of the captive
and the administrative burden could be excessive.
The Manx Insurance Managers’ Association held its inaugural Isle
of Man Captive Insurance seminar in April at the Villa Marina. Thepurpose of the seminar was to create awareness of an industry
that continues to play a significant part in the success of the Isle
of Man’s finance sector. There are currently 165 captive insurance
companies under management, many of which are owned by
FTSE 100 and other publicly quoted international corporations.
The captive sector employs around 200 people in the Isle of Man,
with premium income in the region of £1 billion ($1.95 billion) and
funds under management of £6 billion ($11.7 billion).
The number of captives being formed by the US construction
industry has significantly increased in the past two years, especially
in the western States. Large losses on construction defect claims
have reduced the number of insurers. Those that remain offer more
limited and expensive coverage, and higher deductibles.
Elsewhere in the US, hospitals and physician groups remain a
leading source of captive ownership because of ongoing medical
malpractice problems. Insurance companies and real estate owners
have also been active in forming captives.
Real estate owners have been reacting to high premium rates for
property insurance in the commercial market, especially in coastal
areas, where catastrophe rates have been elevated. A growing
number of captives are also being formed to provide employee
health insurance benefits.
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