Most U.S. Domiciles Bursting With Captive Formations Some U.S. domiciles report they are licensing more captives and risk retention groups than at any point in their history. Others, however, say they have licensed few or none and have none pending.

Though some experts report a “mixed bag” of knowledge about captives by those looking to form them, many insurance buyers are more savvy and seem to be choosing domiciles that offer an array of benefits like staff, services, location and favorable legislation.

Molly Lambert, president and chief operating officer of the Vermont Captive Insurance Association in Burlington, Vt., said that a recent VCIA captive information seminar in Atlanta attracted a record number of attendees, mostly “people who know something about captives.”

Ms. Lambert said: “They are talking to their risk management peers in other companies and discovering this mechanism is available. Then they take a good long time to do the feasibility study and find out whats right for them. One recent captive said it took them a good six-to-nine months in the feasibility [phase] to find out if this was the right move for them.”

Clayton Ingram, manager of business development, alternative risk transfer services, State of South Carolina Department of Insurance in Columbia, S.C., reported “a real mixed bag” and said he is getting calls “from right off the street in rudimentary stages of understanding.” However, he said, “We're also seeing sophisticated buyers coming in on their own and we try to hook them up with managers.”

Leonard D. Crouse, director of captive insurance, Vermont Department of Banking, Insurance and Securities in Montpelier, Vt., said many risk managers he is seeing represent companies “that have thought about doing a captive in the past, but because of the previous soft market conditions, they put it on the shelf. After their renewals they are coming back in and getting it going.”

Mr. Crouse said the first quarter of this year has been “very active.” Compared to last year, “We're right on track.”

Vermont is seeing some medical malpractice activity, “but not as much as at year-end 2002,” he said. “What we're seeing are good, strong pure companies” that are “getting back to the basic lines of [workers] comp[ensation], general liability, automobile liability and nothing out of the ordinary, which is good.”

Ms. Lambert said new captives in 2002 include solid companies like Rubbermaid, Land O Lakes, Applebees and Bank One.

On the other hand, in South Carolina, Mr. Ingram predicted that in 2003, “We'll see the same thing we were seeing toward the end of 2002–more professional liability. The situation doesn't seem to be letting up any,” he said.

With the unavailability of fronting, he added, “there will be a lot more trying to utilize the Risk Retention Act. And with that, there will be more scrutiny to make sure these companies are, in fact, risk retention groups.”

He said he also thinks there will be continuing efforts to expand the federal Risk Retention Act. Mr. Crouse reported, “We did 10 risk retention groups last year, which is probably more than we've done in the previous 10 years.”

Ms. Lambert said, “Apparently there were 10 risk retention groups formed for Pennsylvania alone, seven of those are domiciled in Vermont.” Pennsylvania, she said, “has a tremendous problem with medical malpractice insurance.” She said the insurance commissioner of Pennsylvania “has been thanking the state of Vermont for saving their medical groups from lack of coverage.”

Though the RRGs that have been licensed in Vermont are “good, strong groups, we keep an eye on the RRGs since they are a little more volatile than pures,” Mr. Crouse said. “It's a little more work for us, but that's part of our business,” he said.

Turning his attention to the market generally, he said, “The hard market is still driving formations [of captives], and I think you'll see a continuation of that this year.”

The hard market, he said, won't begin to soften “until the beginning of next year, and then you'll see it in the reinsurance market first and eventually the overall market will soften,” he predicted

Mr. Crouse added that terrorism coverage, or the Terrorism Risk Insurance Act, is being worked out. “There is no opt-in, opt-out now. Everybody is in. Every alternative market is in, like it or not,” he said. “But the terrorism situation will work out, and it'll work out even better if we never have to use it again.”

Ms. Lambert said Vermont is persuing new legislation this session that will bring “some refinements to the captive insurance statute.”

She said: “Were proposing a restructure in the premium tax and were advocating strongly for more personnel in the captive division of the banking and insurance department.”

“Its so important [to be] able to keep up with this growth. Its the integrity and the high level of scrutiny that makes this business thrive.”

South Carolinas Mr. Ingram had similar comments. “It looks like it's going to be another big year, and as this thing grows, our responsibility to maintain the integrity of the industry gets larger,” he said.

“We're taking a good hard look at everything. So everyone who intends to do this probably needs to be more sophisticated than in the past. The market is driving everything in our direction now, so we're having to be extremely careful,” he said.

Representatives of other states, with fewer actual captive formations reported to date, also said they are making preparations for the growth of alternative insurance markets.

John Huth, captive insurance coordinator for the Montana Office of the State Auditor, said Montana is currently working on legislation that will allow workers' compensation, reciprocals and sponsored cell captives. “We're pushing that through and right now it's through the first House. So we'll wait and see what happens,” he said.

New York spokesperson Joanna Rose said, “In 2002, we refocused our efforts on captive formation with a streamlined process, a newly dedicated captive team, and we launched www.captiveny.com. We also introduced legislation to make captives available to even more of New York's businesses.”

Tom Canfield, insurance examiner, captive insurance, for the Nevada Division of Insurance, reported that Nevada has one pure captive, two agency captives, one rental captive and three association captives. The three applications now being considered are for association captives. One proposes liability coverage and the other two plan to provide excess-reinsurance, he said.

In Kansas, “While we have no new applications filed, two application packets have been mailed out recently to individuals showing an interest in forming a captive,” said Mark Owens of the Kansas Insurance Department. If formed, those captives would be used to provide malpractice insurance to medical providers, he said.

Jeffrey VanGilder, director of the financial conditions division of the Department of Insurance in Charleston, W.Va., said the state is “trying to revitalize captives to help alleviate some of the pressure right now in the medical liability market with respect to hospitals and other healthcare providers finding coverage.”

West Virginia, he said, is “trying to create some alternatives” and has a captive insurance bill pending “on the House and Senate side that will allow sponsored captives and is very similar to Vermont's law.”

The state is also “doing some pretty extensive medical liability reforms,” he said. “This is not part of that package,” he said, referring to the captive bill. “But it is part of the remedy to solve the problem,” he said.

Mr. VanGilder said several nursing homes and hospital groups have expressed interest and he expects three to six applications this year. But, he said, no new staff is being added at this time, because “like other states we have budget problems this time around.”

Arizona's new captives were formed for medical malpractice, commercial auto and general lines, and inland marine coverage, according to the Arizona Department of Insurance.

In Georgia, “There has been no change in the statutory requirements relative to capital and surplus, premium to surplus, nor fees or taxes,” said Chris Taylor, property-casualty supervisor for the regulatory services division of the Georgia Department of Insurance.

VCIA's Ms. Lambert cautioned that organizations looking at captives need to carefully consider their decision.

“Its a business,” she said. “Once youre in it, youre in the insurance business. So its not a short-term fix. And there are costs associated,” she said.

Reproduced from National Underwriter Edition, March 10, 2003. Copyright 2003 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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Most U.S. Domiciles Bursting With Captive Formations

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