Even with a steadily softening proper-casualty insurance market for most lines and regions, onshore captive growth continues to flourish, with the emphasis remaining on pure captives for a multitude of coverage.

Domestic alternative risk-transfer market business is still showing steady expansion, with the rise faster than in offshore locales. Meanwhile, the race is fierce among competing U.S. domiciles, with changes in regulations and more aggressive marketing slowing formations in some states while prompting a stampede to others, captive experts say.

“There has been more growth of U.S. captives than offshore captives,” said Richard Turner, managing director of sales for Liberty Mutual's Captive Services in Conshohocken, Pa. “One reason is the perception that onshore is safe. There are a lot of flexible venues now and more [domicile] promotion added to the flavor.”

He added the market also has afforded more areas for creativity. For example, newer domiciles seem to be attracting risk retention groups. “There has been a lot of growth in the District of Columbia, Nevada, Arizona and Utah, even though they are still relatively small,” he noted.

In the U.S. market, he observed that a number of states now have captive laws, but the most growth has come with those that are “taking it seriously.” Vermont, he noted, “has made it a real business, South Carolina has made an effort, and D.C. as well.” He added that Delaware is “laying the groundwork for success.”

A challenge for new captive domiciles is weeding out potential problem facilities, he noted, warning that “some individuals may be looking for the domicile with the least scrutiny.”

Steady captive growth illustrates that sophisticated risk managers are realizing how many different products they can use a captive for, he noted.

Although the softening market for commercial insurance might put a damper on traditional captive start-ups, “there are always pockets and niches where a captive can become cleverly used,” he noted.

Another scenario, he said, is the rise of group captives, “so you have smaller accounts that are a homogeneous group, or through an association, or even heterogeneous. This is where the growth has been, since most of the large companies already have some sort of captive.”

Mr. Turner said that a trend for larger captives to move onshore “has somewhat subsided. Bermuda has been quiet in its growth, but it still is very substantial.”

Although the insurance market is softening for the most part, he noted “pockets that are not. One of these areas–residential construction on the West Coast–has been a challenge.” A number of homebuilders have looked at captives as a way to address construction-defect exposures, for example.

“It looks like we have a softening market that is going to be around for awhile,” according to Mr. Turner. “It's hard to say the market is completely soft when you look at all the insurance carriers and what their bottom-line earnings have been. It seems to me there's an awful lot of profit still there that will affect pricing on a lot of products.

Brady Young, president of Strategic Risk Solutions, observed in a recent conference call on the impact of the softening market that there has not been much pressure on single-parent captives. In many cases, he said, they are being used to fund retentions the owner may have had for years.

The good news, according to Mr. Young, is that as the market becomes more competitive, some components get more competitive as well. For example, “people are hungrier to do fronting, and the cost for fronting has dropped,” he said, adding that collateral requirements also can lessen “when people are hungry for business.”

Andrew Berry, a risk management consultant who provides support to Hartford-based SRS, said the market may be pushing mature-captive owners to consider converting to risk retention groups, or they may be setting up RRGs for the liability portion of their business.

He added that RRGs have remained popular in the health care industry, which–though improving–continues to be underserved by the commercial market.

Meanwhile, the number of captive insurers domiciled in the United States is increasing at a growing rate and the trend is likely to continue, with more U.S. companies establishing domestic captives, according to a recent brokerage study.

Vermont dominates in the United States, with more than four times the number of top Global 1500 companies than all the other U.S. domiciles combined, according to Aon's new Global 1500 research.

The report indicates that the gap between captive growth offshore and onshore in the Americas has narrowed. “When you look at the world count of captives (about 4,900), a significant chunk of those (515) relate to the U.S. It's very substantial,” Andrew Tunnicliffe, group managing director for business development at Aon Global Risk Consulting, told National Underwriter.

He added that large U.S. companies are more often establishing captives onshore–with about two-thirds of U.S.-parented captives established in the last five years domiciled in the United States.

“Utilization of captives in the U.S. is significant,” he said. “It's probably explained by the significant amount of foreign-direct investment from U.S. organizations all over the world, and the need to have a captive strategy to satisfy regulation.”

While a number of states have introduced captive regulations, “the catch-up equation is quite difficult to achieve,” he said. The study cited Hawaii as the next most popular U.S. domicile, followed by New York, Arizona and South Carolina.

About 12 percent of Vermont's captives are owned by non-U.S. parented companies, the report found. “That's where foreign-direct investment flow is coming into the U.S. They need to insure their assets and liabilities, and want to do it on a direct basis,” according to Mr. Tunnicliffe. “That is also likely to add to the growth for onshore domiciles in the U.S.”

The study found that while Bermuda remains the domicile of choice for the Global 1500 (with more than a quarter of all G1500 captives), Bermuda's biggest growth as a captive domicile was between 1995 and 2000. Between 2000 and 2005, Bermuda grew by just 21 percent, whereas Vermont grew by 60 percent.

Aon said U.S. companies account for more than one-third of the G1500, and account for nearly half of all captives owned. Of the 10 G1500 companies with five or more captives, seven have their parent companies in the United States.

The research also highlights that contrary to popular belief, the captive market remains underdeveloped, with more than half (53 percent) of the current Global 1500 companies not currently owning a captive.

Sectors that are using captives less include manufacturing and communications, where 55 percent and 62 percent, respectively, do not have captives. Even sectors that have greater take-up still show room for growth, the study found. For example, 44 percent of the largest financial and insurance companies and 39 percent of mining companies still do not use captives.

“The captive market is set to grow further,” Mr. Tunnicliffe said in a statement. “G1500 companies currently have 1,061 captives, and as the benefits of captives become clear, I believe that this figure will rise to at least 1,200 by the year 2010.”

Special Reports /

Onshore Gains Giving Global Captive Domiciles A Run For Their Money

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