Captive Services May Be Harder To Find

While recent terrorist attacks in the United States might make captives a more attractive option for some risks, commercial buyers looking to self-insure might find it difficult to procure fronting companies, reinsurance and service vendors, experts warn.

“The business of captives has been gravely impacted by this event, and it seems that each new day we understand that impact even more,” said Lisa Ventriss, president of the Vermont Captive Insurance Association. “For a time you couldnt even think about it because the big thing was whats next. But in looking at the service providers to captives, a lot of people who were here with us in August [at VCIA's annual meeting] are not coming back.”

She added that terrorist attacks coupled with a much harder commercial insurance market “have got to spawn a far greater interest in captive formations.”

In Vermont, “weve been looking at a possible addition of 30 captives this year, so it was already higher than average. I think the end of the calendar year will be even more frenetic,” she said.

The aftermath of the terrorist attack, she added, makes the role of the regulator “more difficult because certain assumptions that were in place when those captives were formed have changed.”

She continued that last years trend of reinsurance companies dissolving or merging, creating a scarcity of capacity, is now exacerbated. As a result, she said, captives, “will have to retain more risk.”

Organizations that might not have the resources necessary to be a standalone, single captive “may need to look at other options, such as Vermonts sponsored-captive vehicle,” she added.

Ms. Ventriss was confident that the captive market would find solutions. “Part of the [appeal] about the captive industry is that its very entrepreneurial, and regulators have an open mind when it comes to helping a corporation be self-reliant,” she said. “So I would expect that they have anticipated this eventuality and are prepared to talk about that and trouble shoot.”

Michael Mead, chairman of the Minneapolis-based Captive Insurance Companies Association and president of M.R. Mead and Company in Chicago, agreed. “My short view is that there are going to be a lot more commercial consumers looking at the alternative risk field, particularly captives,” he said. However, he warned that there will be “fewer partners to share the risk with the captive, for fronting and reinsurance.”

What will evolve out of necessity, he speculated, is new insurers. “I say this based on the history of the industry,” he said. “I think that by the time the dust clears were going to need more insurance companies. Im also pretty confident were going to lose some.”

Mr. Mead added that, historically, the insurance industry “is very entrepreneurial. All these companies started somewhere on day one, arising out of a need, and I think there is going to be a need.”

Carl Modecki, president of the Captive Insurance Companies Association and principal of Carl A. Modecki Consulting services in Tallahassee, Fla., agreed that captives will become more popular out of necessity.

Citing estimates on potential losses from the WTC destruction approaching $70 billion, he said, “I think even more people will be going towards a captive situation if that is, in fact, the case, because I think the [insured loss] numbers will become even more overwhelming.”

He also warned that services will most likely become scarce for captives. “I think on the reinsurance side, you can buy anything at a price,” he said. “On fronting, that may or may not be true.”

One possible solution, he said, is for CICA to get “more heavily involved. If the fronting portion of the equation is not available, [CICA could partner with an insurer] to do it on a larger basis.”

Mr. Modecki explained that CICA potentially could endorse and partner with a fronting company, “or do some other type of transaction with a single insurance company so that we would have the volume that would make it worthwhile,” he said. “This is typically what associations have done when theres been difficulty finding coverage.” Mr. Modecki said the topic is up for discussion at CICAs October meeting.

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.

Contact Webmaster

Special Reports /

Captive Services May Be Harder To Find

Related Stories

Recommended For You