Financial Crisis Plus Domicile Layoffs Create Obstacles For Captive Launches

"It's more pronounced with group programs, association programs or any kind of agency programs," he told NU. "Single parents–if it's a big, beautiful single parent–we can still get those done. They used to be 30 days, [but] even those are 45-to-60 days. But group captives, agency captives–anything with any complexity–is three-times longer than it used to be."

While some of the hold-up is due to captive regulators requiring more information, he said, "it's the banks; it's the [fronting] insurance companies; it's the reinsurers. All of those processes are adding time."

He explained that a potential captive owner may be set up with a letter of credit from a certain bank, for example, but the insurer might say: "We can't take [that bank]. We have no problem with the bank, but we've reached our capacity with that bank."

"So this is a whole new thing we've never seen before," he said. "Carriers are saying they put a capacity limit on banks."

As a result, he said his company is now forming relationships with new banks, but that can be tricky as well.

"We've developed relationships with four or five banks we're comfortable with, but occasionally we've got to go beyond that," he said. "And when you go beyond that, there are not many they'll accept, either."

Mr. Osborne added that another aspect is that because collateral requirements are higher now, regulators are asking for more information. While bios and background checks are standard, certified police reports and certified diplomas are new requirements, as well as personal questionnaires for non-owners.

This additional paperwork may take an extra two months or more for a domicile to review–where previously the process took a month–adding to the overall wait time, he noted.

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

For example, he said Arizona has not yet replaced its captive administrator, who left for the private sector, and has also seen layoffs. While he said Arizona is receptive to new formations, "the staffing is not there to do things on a quick basis."

Mr. Osborne added that his firm is up-front with risk managers and brokers looking to launch captives these days, warning them about the lengthy process.

This has not kept interested parties from forming captives, however, he noted. "If they've made the commitment, a lot of them are willing to stick with the process."

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

Captive managers once eager to work with new domiciles looking to do business are now eyeing the established, more stabile domiciles with renewed interest. They have weathered ups and downs in the market and have backup staff and the regulatory backing of the state. Vermont and Hawaii–two of the largest and oldest U.S. domiciles–have become even more popular, he noted.

"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," according to Mr. Osborne.

He said his company is doing more business with Hawaii, which previously had attracted mostly risk managers from the West Coast and Pacific Rim, but added that location isn't as big a factor as in previous years.

While the geography is still "a starting point," he warns clients looking at some of the newer domiciles to "be aware, it may take us longer because they don't have a designated captive person at the moment and they've had layoffs, which could make things slower."

Because Vermont is so well established and has layers of staff, when someone does leave, someone else with years of experience is there to step in. "So the comfort level that they've got a deep bench is a big plus," according to Mr. Osborne.

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

Mr. Osborne said he doesn't see the situation letting up, however, until the economy turns around, "or until financial regulation reform comes through and deals with [the risk of] systemic failure."

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

He speculated that eventually, "somebody is going to break ranks and get a little easier [to do a formation with], and that's when we might see a break in this."

Meanwhile, he observed, "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."