Bermuda, which remains the world's dominant captive insurance leader, saw 65 incorporations in 2006–the majority of which were third-party insurers and reinsurers, one bullish captive manager reports.
"The vast majority of those new formations–49–were Class-3 business. This is the trend," noted Peter Willitts, president of Liberty Mutual's Bermuda-based captive management operation, referring to a regulatory category that includes rent-a-captives, where nonrelated business can be written.
He added that many of last year's start-ups were niche underwriters.
The growth is not unexpected, coming off a hard market, according to Mr. Willits.
"When the market goes hard, there tends to be a lot of built-up resentment to the insurance industry–people want to form their own captive," he said, adding that when the market is hard, insurers also are "looking for a higher return on their capital. They are looking for a lot of collateral and they're going to be quite expensive about it."
As the market softens, he said, those who are still "annoyed" with the volatility of the traditional market are able to form a captive more easily. "People will write it, and people are prepared to get into deals they wouldn't have touched while the hard market was going on," he said, adding that because there are more fronting companies during the soft market, "programs get written."
He said Bermuda is seeing a wider variety of industries form captives these days–such as mining. Deep mining, or underground mining versus strip mining, he said, is a difficult coverage to place because of both property and liability issues.
Companies attracted to captives are looking to consolidate their coverage. "I was talking to a man who had 49 insurance companies from around the world on his property program," Mr. Willitts said. "He is having to struggle to get his placements–there are big values, high risks and there are losses."
He added that Bermuda's regulator "is trying to expand its presence" by adding staff for on-site reviews and moving toward taking more insurance applications in-house.
Mr. Willitts predicted that 2007 will be much like 2006. "Last year there were 65 [new captives]. I think we'll stay where we are," he said.
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