BERMUDA

In the wake of the financial crisis, the captive industry is running into new stumbling blocks that can triple the time it takes to set up a captive, according to a captive manager here.

Gary Osborne, president of USA Risk Group in Montpelier, Vt., said an agency captive that previously might have been formed in two months' time now is “rarely done in less than six.”

The time delays are “more pronounced with group programs, association programs, or any kind of agency programs,” he told NU during the Bermuda Captive Conference recently. A “single parent–if it's a big, beautiful single parent–we can still get those done. They used to be 30 days; even those are [now] 45 to 60 days,” he said.

“But group captives, agency captives–anything with any complexity–[take] three times longer than [before].”

While some of the hold-ups are due to captive regulators requiring more information, Mr. Osborne said, “It's the banks. It's the insurance companies. It's the reinsurers. All of those processes are adding time.”

A potential captive owner may be set up with a letter of credit from a certain bank, for example, but the insurer may say, “We can't take [that bank]. We have no problem with the bank, but we've reached our capacity with that bank,” according to Mr. Osborne.

“So this is a whole new thing we've never seen before. Carriers are saying they put a capacity limit on banks.”

Another result of the financial crisis is that some domiciles have seen their captive regulatory departments cut. “In many departments, [captives] is not necessarily their only job, [and] quite a few of the captive divisions have been watered down and have other responsibilities,” Mr. Osborne said.

Because some captive departments have been gutted, the process of choosing a domicile has changed as well.

Captive managers once eager to work with new domiciles are now eyeing the established, more stabile domiciles with renewed interest.

Vermont and Hawaii–two of the largest and oldest U.S. domiciles–have become even more popular.

“Now it's not so much speed to market as knowing that you have the expertise and regulatory authority and stability that should ensure the process will go as expected,” Mr. Osborne said.

He added that his firm is up-front with those forming captives, telling them about the lengthy process. This has not kept people from forming captives, however. “If they've made the commitment, a lot of them are willing to stick with the process,” he said.

Mr. Osborne emphasized that the current situation is not the fault of any one aspect of a captive formation but rather “a combination of the whole world's situation, where three or four different processes have been slowed down.”

He said he doesn't see the situation letting up, however, until the economy turns around or until financial regulation reform comes through and truly operates to deal with systemic failure.

The fear for carriers, he said, is that if a large bank goes under, that carrier could be left with a large exposure.

“I don't see it changing until we've got more clarity with the financial situation. The banks, the carriers, people are a little skittish,” he said.

Special Reports /

Group Captive Launches Tougher; New Hurdles Created By Financial Crisis

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