Captive Insurers Worldwide Top 4,000 Mark

Despite inexpensive, readily available commercial insurance and the proliferation of capital market alternatives, the 18-year upward trend in the growth of the captive insurance industry continued in 1998. The estimated total number of captives now stands at 4,135, the number listed in the 1999 Captive Insurance Company Directory published by Tillinghast-Towers Perrin. New captive formations exceeded liquidations by a wide margin.

A captive insurance company, as defined by Tillinghast, is a closely held insurance company whose insurance business is primarily supplied by and controlled by its owners, in which the original insureds are the principal beneficiaries.

Tillinghast-Towers Perrin estimates 1998 worldwide captive premium at $21.3 billion and total capital and surplus at $54 billion, an increase over last year of some 18% and 20%, respectively. "Captive insurance is undergoing one of its periodic sea changes," said Hugh Rosenbaum, a Tillinghast-Towers Perrin consultant who also is editor of the firm's publication, Captive Insurance Company Reports. "From my perspective, it appears the traditional uses of captives are being replaced by the beginning of what can be called advanced risk financing.

"The basic business of captives—insuring their shareholders' property/casualty risks—has reached a mature, steady state," added Rosenbaum. "What seems to be growing is the addition of unrelated business, the beginning of some employee benefits business, and alternative risk financing techniques."

The increase in the number of captives and in captive financial figures also has been complemented by an increase in the number of conferences on captives and attendance at them, whether in the U.S., Europe, or in offshore domiciles, according to Rosenbaum.

New 1998 captive licenses totaled 305 worldwide in the domiciles tracked by Tillinghast-Towers Perrin. Strong growth was concentrated in only a few domiciles, notably Bermuda, the Cayman Islands and Vermont, followed by Guernsey, the leading European domicile, the British Virgin Islands and Barbados. Of the captives formed in 1998, 64% are domiciled in the Caribbean and Bermuda.

"The number of new formations shows that even with soft market conditions, many entities are still opting to take control of their own risks," said John Lochner, a Tillinghast-Towers Perrin consultant. "These insureds prefer a strategy that permits them to manage their own investment income while avoiding the possibility of future price hikes or coverage loss."

The popularity of rent-a-captives evident in 1997 continued unabated in 1998. A rent-a-captive is a third-party sponsored insurer or reinsurer organized to handle the risks of multiple insurance programs; a participant may opt to "rent" the use of such a facility rather than setting up a stand-alone captive. The 1999 Directory lists 70 rent-a-captives, 17 of them licensed in 1998. Some of these are specialized rent-a-captives designed legally to separate shareholders into individual "cells." These are licensed as PCCs (private cell companies) in Guernsey, or as SPCs (segregated portfolio companies) in the Cayman Islands. They can also be structured in Bermuda through a Private Act of Parliament.

Of the 94 new licenses issued by Bermuda in 1998, about two-thirds are estimated to be operating as "captives." A growing number of Bermuda's insurers fall into a category that includes reinsurers writing third-party business, insurers writing direct policies with third-party individuals, finite reinsurers and rent-a-captives, along with captives writing more than 20% of unrelated business. This class includes both captives and commercial insurers.

Many captives formed in the Cayman Islands are being classified as "alternative financing vehicles" for property catastrophe reinsurance or other kinds of financial deals. "These entities have become a second niche for the Cayman Islands, which is no longer known only as the domicile of choice for health care captives," observed Lochner.

Vermont, the domicile for 334 (or 74%) of the U.S. onshore captives, licensed 12 bank-owned captive companies formed as mortgage insurers. This trend is expected to continue in 1999. Vermont issued 40 new licenses, the second most active year in its history as a captive domicile.

The Directory lists approximately 130 captives that were liquidated in 1998. "Reasons include amalgamations as companies were merged or sold, competition from the continuing soft rates offered by commercial insurers or changes in shareholder priorities," said Lochner.