Magazine article Risk Management

Onward & Upward: Trends in Captive Insurance

Magazine article Risk Management

Onward & Upward: Trends in Captive Insurance

Article excerpt

IN THE WORLD OF RISK MANAGMENT, captive insurance have taken on a major role of companies of all size. Their value for insuring difficult-to-place risks and the added control they offer for insurance programs are widely recognized. While formation of captive has traditional peaked after major events, such as Hurricane Katrina in 2005, their growth has continued during both hard and soft market.

"Despite volatility in the financial sector, global economies, and the emergence of new risks, captive continue to thrive, providing affimation of their efficacy, flexibility and stability," Marsh stated in its beanchmarking report The World of Captives: Growth and Opportunities without Borders. "The growth of captives in 2014 was no exception."

As the Captive market has become more mainstrem, differentiating between domiciles is often an excerise in comparing financial data Neverthless, some large trends have emerged that indicate where captives could be headed in the future.


In Vermont, the largest U.S. domicile and third-largest worldwide, 16 new captives were licensed in 2014, comprising 10 pure captives, two sponsored, two special purpose financial insurers, one association and one risk retention group. So far, 2015 is looking even better, with 10 new captives licensed, according to Sandra Bigglestone, director of captive insurance in the captive division of the Vermont Department of Banking, Insurance, Securities & Health Care Administration. "I don't think we were even close this time last year," she said. "We also have a healthy pipeline. We have had conversations and we expect applications to come in this month. It's been a good year so far."

Vermont also saw two redomestications last year, and Bigglestone expects to see this trend continue throughout the market. "In particular, there is chatter about risk retention groups (RRGs) seeking to move," she said. The top reason given is examination costs, which can be "pretty brutal on RRGs."

This is because a number of domiciles use contract examiners, adding another layer of costs as the state captive department then has to supervise the contract firms and the examiners they are using. "Vermont may not be completely unique, but a majority of our staff--25 people--are dedicated to analysis and examinations of our captives, which helps control the costs," Bigglestone explained, adding that examination costs for an RRG can exceed $100,000 every three to five years, depending on state law. "Our average cost for RRGs so far in 2015 is $43,000," she said, noting that the state's three-year average for 43 RRG exams is $37,640.

Another development in the captive market is an increased interest in health care captives, especially by medium-size companies. "Group captives in the health care space are definitely growing," said Gary Osborne, president at captive management firm USA Risk Group. "There are new variations of'skinny' plans and these are being run through captives as well." Skinny plans, or preventative and wellness plans, are mini-medical plans that cover preventive services such as doctor visits and generic drugs.

Construction captives are also seeing a resurgence as the construction industry continues to rebound in the wake of the financial crisis. "Those that weathered the downturn are coming back stronger," said Sanford Saito, deputy commissioner and captive insurance administrator for the state of Hawaii. While business slowed for these firms during the downturn, they continued to use existing captives for coverage needed for ongoing projects. "They slowed down on the construction side, but they already had legacy risks on the books, at least for their captive, and they went into a runoff period," he said. In runoff, the captives continued to pay claims, adjudicate any claims in process and keep the insurance intact.

Saito has also noticed a trend in captives being formed by tech startup companies in Silicon Valley and the San Francisco Bay Area. …

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