While confidence appears to be returning to the captive sector, spurring growth in domiciles across the board, there are regulatory issues making 2010 a year to watch, that among other factors may impact those doing business offshore, according to captive management expert Nancy Gray.

“We saw the fourth quarter of 2008 and into the first quarter of 2009, everything was quiet on the captive front,” noted Ms. Gray, regional director for The Americas at Aon Insurance Managers in Vermont. The reason was a number of companies putting their captive plans on hold.

“There was a hesitation from companies to place capital into a captive company and have to secure letters of credit for their liability in the captive programs,” she said. “What happened is that things eased up and plans that were in place were jump-started.”

Although she believes growth will continue to be steady, “some things are up in the air with President Obama's administration, such as his proposal for the budget plan that would increase the tax burden for insurers that cede business to offshore affiliated companies.”

When campaigning, she recalled President Obama promising to look into this issue. “With health care last year, it took a back burner, but in 2010 we're expecting more discussion or legislation proposed that could potentially impact captives,” she said, adding that this would especially affect an onshore captive ceding to an offshore captive, for example.

“The offshore and onshore domiciles are concerned,” she said. “I understand what they're trying to target, but based on the way it's proposed, it would include captive insurers.” If this becomes the case, she said, the onshore captive would be taxed on the premium income but receive no credit for the reinsurance being ceded.

“That would significantly increase their tax burden,” she said. “So certainly now everyone's keeping an eye on that.”

How is this affecting the offshore market? “Right now everyone is just taking a wait-and-see approach,” Ms. Gray explained. “No one is making quick decisions or irrational decisions in regards to shutting down their captives or re-domesticating them. But they are certainly keeping an eye out and planning for the potential if these policy decisions do go through.”

Should this happen, she anticipated it would trigger re-domestications and possibly some captive closures in the United States and offshore.

She added that Bermuda “is very concerned. We expect quite a bit of lobbying against these proposals–certainly to at least exclude captive programs.”

Another issue to watch, she said, is President Obama's budget plan, which would increase the deductibles as well as remove coverage for domestic acts of terrorism. She pointed out that a number of companies are writing terrorism in their captive, so if an event were to occur they would benefit from the federal backstop, “but [the plan] would restrict some of the coverages that are available.”

A trend she is seeing is more companies in the middle market looking for coverage in a captive rather than relying on the commercial marketplace.

Many smaller companies tend to participate in a group captive, “so we expect group captives to grow and for new group captives to be formed to serve this segment,” Ms. Gray said, adding that group captives can be used for homogeneous or heterogeneous groups, mostly for primary casualty programs, workers' comp, general liability and auto.

Another area that is seeing growth, she said, is customer exposure, “where captives traditionally have been a way for companies to control their total cost of risk.” More owners are looking for ways for their captives to generate revenue, she said, “so in writing customer risks, such as extended warranties, if they are a retail client selling appliances, cell phones or other small items, they can write the extended warranties through their captives.”

Captive owners, Ms. Gray said, are becoming more familiar with captives and looking for more ways to expand their programs. “They are recognizing that [a captive] doesn't need to be just a cost center, that it can be a profit center now as well,” she added.

Special Reports /

Captives Growing, But Challenges Remain

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