Insurer-Sponsored Captives Up

A new trend in captives could offer a solution for coverage ofdifficult risks and fronting problems, according to experts in thecaptive field.

National Union Fire Insurance Company of Vermont, recentlyformed by AIG Insurance Management Services, is the secondsponsored captive formed in Vermont by an insurance company for itsclients.

The first sponsored captive in Vermont, the largest U.S.domicile, was John Hancock, formed nine months ago, said LeonardCrouse, director of captive insurance for the Vermont Department ofBanking, Insurance and Securities.

“It's not that common, but it's going to be,” he said. “It'sgiving an opportunity for some of their clients to participate in acaptive program.”

Organizations that may be too small to establish a captive willbe able to operate as a cell in a sponsored captive, he said.

Mr. Crouse explained that only an established captive inVermont, an insurance company, or a reinsurance company licensed inthe United States can form a sponsored captive.

“Why we did that was so their capital would be in play here,” hesaid. “It's like a rent-a-captive, but we have some big moneybehind our captives.”

Rent-a-captives and sponsored captives are sometimes lumpedtogether because “they both have cells,” he explained. Sponsors,however, are required to pay “$1 million in capitalization rightupfront, and they're fronting [the captives]. Whereas, if you getinto a rental capital offshore, what you're doing is rentingcapital.”

Paul Oblenski, president of AIG Insurance Management Services inNew York, said “it's quite clear that what you're seeing today byinsurance purchasers is a combination of factors, which areincreased costs, increased retentions to insureds, and reducedcoverages.”

He added that “all three of these factors contribute toincreased liability and retention by the client, and balance sheetexposures.”

The captive will cover specific lines of business for AIGclients looking for “a proper cost-effective and disciplinedfunding mechanism for their retentions,” which will be written on acase-by-case basis, he explained.

“This can provide solutions to these companies to enable them toembark upon a more cost-effective basis to address coverageissues,” he said.

Mr. Crouse also reported that hes seen a trend toward theformation of group captive programs in whats been a record firsthalf for captive formations in Vermont.

Of 28 captives licensed so far this year, five are riskretention group captives and the rest are pure captives, hesaid.

In all of 2001, Vermont closed the year with 38 new captives–37pure captives set up by organizations, and one group or sponsoredcaptive–for a total of 527 at year-end, according to thedepartment.

Mr. Crouse attributed the upswing in captive formations to thehardening market, in general, and the plight of the medicalbusiness, doctors and hospitals, in particular.

Vermont also has eight applications “in-house that are pending,and we probably have four or five meetings set up in the next twoor three weeks,” for new captives, he said.

In addition to National Union Fire, companies forming newcaptives in the first half of 2002 included Compass Bank,Electronic Data Systems and Premera Blue Cross.

“These are busy, busy times,” Mr. Crouse said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, July 29, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.