Hard Market Could Spur Boom In Captive Growth

In January alone the department saw eight applications, making January "probably the busiest first month we've ever had in our history." So far this year, he said, 13 captives have been licensed and 10 applications are pending.

Since 1981, Vermont has licensed 533 captives, he said. The state has 393 active captives, of which 312 are pure captives, 14 are association captives, 18 are industrial insureds, 39 are risk retention groups, nine are sponsored captives, and one is a branch captive.

Of the 38 new captives licensed in Vermont last year, 37 were pure captives, "which shows you that companies are getting back to the basic captive business," Mr. Crouse noted.

Most of those captives, he explained, are writing general liability, property, workers' compensation and other basic lines of insurance.

Hawaii, the second-largest U.S. domicile, has 87 captives and expects to license at least 15 more this year, according to Craig Watanabe, captive insurance administrator for the State of Hawaii Insurance Division. Mr. Watanabe said Hawaii has had an increased number of inquiries from mid-to-small-size companies and continued interest from Japanese-based organizers.

Georgia reported 16 captives and no pending applications. Two of its new captives were formed by "converting from a group workers' compensation fund," said Glenn Allen, deputy director of media relations in Atlanta.

Clayton Ingram, director of business development for the South Carolina Insurance Department, said inquiries "are coming in every day, which I understand is unusual for January. The programs keep running in and most of them are pretty good."

Meanwhile, South Carolina, which has been operating as a domicile for just over a year, has leapfrogged the competition to become the fourth-largest U.S. domicile. The state so far has licensed 13 captives, and has 10 applications pending. Mr. Ingram predicted that South Carolina would license an additional 40 captives this year.

"I keep hearing that reinsurance is tightening up, but people keep forming captives, so something is happening," Mr. Ingram said. "It's just a different market from what we knew before."

He also noted that the "smaller players" are forming captives. In addition, he reported that several A-rated "small domestic" insurance carriers with excess capacity have entered a select market for fronting.

"In the aggregate, a lot of the smaller ones will rise and fill that niche," he said. While the problem with finding fronts won't be eliminated, it will be "a little less severe," he predicted.

Mr. Crouse said he is seeing the same trend, with mid-sized companies seeking alternative markets to fill their insurance needs. "There are thousands out there that don't have captive insurance companies yet," he explained. "So when the [insurance] market hardens up a little bit, you see more activity."

Existing large, pure captives are looking for additional property insurance because terrorism coverage is an issue, he said, "but a lot of our pure [captives] are putting in some high excess property and taking [the risk] themselves."

Fronting, while available, is becoming more expensive, Mr. Crouse reported. "I think the price is prohibitive and that's the big problem," he said.

Most of the fronting issues, however, come up with group programs "and we're not seeing a lot of group programs," he explained. "It's not as much of an issue with the pure captives," but can be a problem for associations or risk retention groups, he added.

The trend with captives, he said, is "back to basics. We're getting back to where we were 10 years ago–writing traditional property-casualty lines."

With a sputtering economy, he said, some companies, the parents of captives, are having financial trouble. "There have been a lot of Chapter 11′s and I think there will be more," he said. "But that is part of the due diligence–following and monitoring the parent companies of these captives and making sure that the captive insurance company is properly structured and properly funded."

One of his department's challenges, he said, is making sure that those companies have "a good business plan and good intentions. They're not coming here to fix something that can't be fixed."

As far as the spate of new domiciles is concerned, Mr. Crouse said he only hopes "they do it right. Is the business big enough for 50 domiciles? I don't think so. Ten? I don't think so, but what's out there is what's out there," he said.

The danger, he said, is that with the alternative market taking more and more business from the traditional commercial insurance market every year, "there are people out there who don't look 100 percent in favor of alternative markets."

What can happen, he said, is "when something goes wrong you get bad press. If a few things blow up it will give us a black eye."

Despite the specter of new competition, Vermont is doing its best to be supportive of new domiciles, according to Mr. Crouse. "We've talked to them and shared information and given them some tips," he said. "They're all good people."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, March 4, 2002. Copyright 2002 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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