The number of captive insurance units being formed continues to rise despite falling insurance rates from standard carriers, and U.S. formations are gaining momentum, according to a report by Marsh.

Released today, the first global benchmarking report, “Next Generation Captives–Optimizing Opportunities,” examines the use of captive insurers by global firms.

Michael Cormier, chief executive officer of Marsh's Captive Solutions Group, told National Underwriter the survey identified some interesting trends.

One trend, he said, is that “if you look at the total amount of commercial property-casualty insurance, close to 20 percent of the premium into that market is going into a captive.”

Mr. Cormier continued, “That's an increase over the last four or five years of as much as 5 percent.”

Regardless of the insurance cycle, he added, the creative use of captives continues and companies are becoming more comfortable using them “in an ever increasing amount of risk management needs. That's a trend I don't think is going to change in the near term.”

While in the past people perceived captives as a “niche risk management strategy, I think it's much more mainstream now,” Mr. Cormier said. “Companies that have been using them a while have seen the benefits and are more comfortable using them in a greater capacity within their organizations.”

With respect to specific captive domiciles, Jonathan Groves, head of captive consulting for Marsh in Europe, the Middle East and Africa, said in a statement, “Locations such as Bermuda, Guernsey and Luxembourg have seen their proportion of new captives fall as a percentage of the total, while U.S. states like South Carolina have increased their share.”

He noted, “Our experience reflects two primary reasons for this: first, captive formations tend to be in the same region as their owner and, second, with the overall increase in domiciles globally, it is becoming harder for offshore locations to differentiate themselves.”

The report found that while annual captive premium income is estimated at $55-to-$60 billion and captives are significantly better capitalized than required by current levels of risk assumption, many are not optimizing their captive structure. Mr. Cormier said this and other information from the report will help the organization better deal with its captive clients.

Other key findings:

o The cumulative number of captives has increased at a steady rate since the early 1980s.

o U.S. companies own 57 percent of the world's captives, and all companies comprising the Dow Jones 30 own captives.

o United Kingdom, French and Swedish companies are, respectively, the second, third and fourth most prolific owners of captives.

o Bermuda is the most popular domicile for captives, accounting for 29 percent of the total. However, altogether, the U.S.-based captive domiciles now account for 30 percent of the total. Among European captive domiciles, Guernsey continues to have the largest number of captives.

o Financial institutions account for 20 percent of all captives, with health care companies owning 11 percent and manufacturers 10 percent.

o Captives are used for a variety of risks, with 20 percent of business underwritten being for property damage, 18 percent for general or third-party liability, and 12 percent employers' liability and workers' compensation.

o Almost half of captives are currently achieving a return on capital employed of greater than 10 percent. More than one-third, however, have a return of 5 percent or less.

o Globally, almost 60 percent of captives do not use reinsurance. When considered with the level of retained profits held by captives, this suggests that most captive business continues to be profitable. There is also evidence that once a company decides to pay premium to a captive versus the general insurance market, a significant majority of that premium is permanently removed from the market.

Special Reports /

Soft Market No Bar To Captive Formation

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