NU Online News Service Aug. 18, 3:42 p.m. EDT
New legislation and structuring for captives in a number of domiciles has made formation of captives–once limited to large global organizations–attractive to smaller companies as well, a captive management company said in its newsletter.
This is especially true in the New York City area, The Towner Management Group (TMG) said.
Tom Stokes, managing principal of TMG (NY) LLC and consulting practice leader of TMG's U.S. operations, explained that middle market and small companies previously assumed they couldn't "realize the same benefits as large, pure captive owners have in the past. But with group captives and protected cell legislation in many domestic and offshore domiciles, smaller companies can find captive insurance solutions that meet their needs."
TMG said that organizations are looking to captive insurance for product liability and directors and officers insurance, which in many instances is prohibitively expensive through commercial insurers.
While a soft market still exists in some lines, markets can and do change quickly, making coverage more unpredictable and expensive, TMG said, adding that while New York-area companies don't need to be reminded of the need for comprehensive terrorism coverage, many find the capacity they need either unaffordable or unavailable.
"With budget deficits common at all levels of government, I expect to see increased tax burdens on all business entities," Mr. Stokes said.
He observed, "Commercial insurance markets will experience turbulence in the near- to mid-term as they pass along these higher costs."
What's more, catastrophic losses, such as the active hurricane season predicted for 2010, "could cause even more uncertainty. This makes insuring risk through your own captive a timely opportunity, allowing you to insulate your exposure to these events and concentrate on your own business," Mr. Stokes said.
For some smaller companies, TMG said, additional opportunities could include group, association or protected cell–or rent-a-captive–solutions.
While each has advantages and drawbacks, with so many options, a solution at minimum cost is likely, TMG said. Single parent captives, for example, offer the most autonomy, but capitalization requirements and operating costs may not be cost-effective for smaller firms.
Mr. Stokes continued, "Group-type captives include multiple companies, helping to spread the risk. While sharing risk with others strikes fear into many, getting into the right group with like-minded businesses can statistically reduce your overall exposure." He added, "You need to do the homework and learn what solution is best for you."
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