Brokers See Big Boost In Captive Interest

Looking to exert more control over rising premium costs, commercial customers are turning to various captive options ranging from setting up their own self-insurance vehicles to joining group captives, brokerage officials say.

While risk managers might not see an immediate decrease in insurance costs when forming their own vehicle, they also enter captive programs to hedge against the possibility of future premium increases and to benefit their bottom line, brokers note.

“When the [commercial insurance] market is hardening, it tends to make more captives, and when it is soft the action slows down a bit,” observed Andrew Carr, managing director of Marshs Captives, based in Bermuda.

Growth and interest in captives is growing worldwide, observed Mr. Carr and Jill Husbands, a senior vice president who manages Marsh's business development team for captives in Bermuda.

“We have seen significant growth in new captives, and current captives are putting more retention into their programs to help them make it through the tough market,” Ms. Husbands said.

While the United States is seeing significant captive growth, markets in London and the rest of Europe are also turning to captives, according to Ms. Husbands.

However, there is a difference in focus. U.S. companies look to captives for casualty coverage, while the rest of the world is looking to these alternatives for their property coverage as the environment there grows more litigious, mirroring the United States, she said.

While no firm figures are available, the Marsh executives said that captive activity has increased within the first six months of this year compared to the past few years. Mr. Carr added that the firm expects to see no “slacking off of interest” as the traditional insurance market continues to harden.

In an interview prior to the terrorist attacks of Sept. 11, Tom Rodell, managing director, risk consultants with Chicago-based Aon, observed that activity in captives had already increased, but there was not the sense of panic that surrounded the hardening market of the 1980s.

However, “the events of Sept. 11 have clearly and significantly impacted the insurance marketplace,” noted Mr. Rodell. “The marketplace is changing daily and is very fluid. I expect with capacity and premium limitations that alternative risk vehicle activity (including captives) will increase significantly.”

Unofficially, before Sept. 11, Mr. Rodell estimated that Aon saw a 30 percent increase in requests for studies into the alternative markets. Most of the domestic activity is in the workers compensation, medical malpractice, and errors and omissions areas, he said.

Many middle-market companies–defined as those without a full-time risk manager that use the services of a broker for both their risk and benefits issues–are turning to group captives for their insurance needs, according to Charles L. Ruoff, senior vice president and chief marketing officer for Acordia, a subsidiary of San Francisco-based Wells Fargo.

In California and Florida, where workers comp has become increasingly difficult to place, buyers, including professionals such as hospitals, nursing homes and other healthcare providers, are turning to captives for coverage, Mr. Ruoff observed.

Acordia's relationship with Wells Fargo offers clients certain advantages, according to Mr. Ruoff, in that the brokerage firm can also provide financial products to assist in a captives creation. That help can include letters of credit, loans, wire transfers and other financial instruments that once required additional parties to be brought into the process, Mr. Ruoff noted.

Another advantage for companies forming captive insurers, if done properly, is a tax break on their premiums, according to Mr. Carr, citing recent court decisions clearing up the issue.

Brokers can also help clients with direct access to the reinsurance market through captives, Mr. Carr said. By cutting out the primary insurance company, savings can be realized, he added. This access also gives clients the ability to place a larger portion of risk with their captive, Mr. Carr said.

An added advantage is that premiums are priced at their worth and are not subject to the whims of capacity, added Mr. Carr.

When dealing with Marsh, Mr. Carr said customers gain access to a broad spectrum of risk management and actuarial professionals. He said they also have the advantage of placing premiums through Marshs investment arm, Putnam.

Marsh has so far managed its upsurge in captive business through the help of technology. Mr. Carr said the increase has not been monumental and that computers have helped to make the entire process more efficient.

“One constant has been to improve the process and improve the efficiency [of doing business],” said Mr. Carr. “We have stopped at nothing to improve that part of the process.”

Despite the changing landscape of the insurance market, there is no flood of clients running to form captives, said J. Patrick Gallagher, president and chief executive officer of Arthur J. Gallagher, headquartered in Itasca, Ill.

The movement has been a gradual change that more and more companies are exploring, especially those that never entertained the thought of starting up a captive insurer.

“Clients who have never looked at these alternative markets before have become very interested in hearing about them,” Mr. Gallagher said.

In its assessment of insurance plans, Gallagher evaluates both the standard and captive markets to give clients a clear picture of which program is in the clients best interest.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 1, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Brokers See Big Boost In Captive Interest

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