The Early Days of Captives

Early captives shared risks among shippers on the same voyage and among different owners of different voyages.

Textile mills formed mutuals for rebuilding after fires.

Frederic M. Reiss (1924–1993), often called the "great white father" (because of his shock of white hair) of the captive movement, founded Steel Insurance Company of America, a captive developed for an Ohio steel company, from which the term "captive" was borrowed from "captive" mines sending ore to the company's mills.

100+

Captive Insurance Company Directory is published by Risk Planning Group Annually. There are already 100-plus, but are undocumented.

He was an attorney who helped Fred Reiss with most of the initial wave of captive formations, wrangled with the IRS, and advised offshore domiciles on their captive legislation. In some ways, he should share the limelight as "father" of the modern captive insurance movement.

This organization vets all captive submissions and is the first significant effort to defend the reputation of the domicile by rejecting unsavory applications.

The organization met in Grant Whitney's living room. Only 12–15 large single-parent captives were represented.

Oil Insurance Limited (OIL), a group captive for 17 major energy companies, was initially formed in response to a lack of pollution liability coverage. It started life as a property-only group captive, and devised a 5-year rolling rating plan that ensured substantial repayment of major losses by members. In 2015, it had 50+ members and $2 trillion insured values.

This company lost 55 percent of its captive's capital in the first months of operation. The captive's owners persevered and it grew in value to $12 million over the next 5 years.

This was the start of Cayman as a healthcare captive center. The Harvard medical centers' captive met with "resistance" to licensing in Bermuda because of its need to cover individual physicians, so they switched to Cayman. This induced many other healthcare captives to follow them there. Today, Cayman is the largest offshore domicile for healthcare organizations based in the United States. It is a lesson to any new domicile: attract and license a big-name captive owner, and others will follow.

It designated the number of group captive members needed to achieve tax deductibility of premiums. Applied to OIL at the time (31), other rulings and cases went on to refine it down to about 12. With the right number of owner/insureds, and no one representing a big percentage of the total, deductibility for all was assured.

This is the first specialized and commercially visible rent-a-captive by Mutual Risk Management. Most large insurers had provided captive account facilities for large clients, but this was the first dedicated facility. For a while it grew like Topsy, especially on agent-owned captive accounts, but later expanded into too many questionable businesses including a fronting facility, and went broke.

Still single-parent captives, it took many years before membership numbers grew significantly. During this period, CICA was primarily a meeting place for captive owners.

In Carnation Co. v. Commissioner, 71 T.C. 400 (1978), aff'd, 640 F.2d 1010 (9th Circuit 1981), the taxpayer lost, and the IRS economic family "doctrine" was strengthened. Closeness of captive to its parent and subs was a factor, but also faulty capitalization. Taxpayers lost 7 out of 8 US cases in 1978–85.

This was typical of insurers offering professionally underwritten unrelated business to client captives and similar to the "sidecars" of the 21st century. The MUF lost a lot of money for everyone. The Reiss Organization started something similar, the United Treaties, from which some clients managed to come out whole, but most didn't.

The first of several pooling plans set up to generate unrelated business by exchanging risks with others. First Island didn't really get off the ground, but its successor, Green Island, did in 1998. The significance was that this served as the model or "grandfather" for the pooling plans adopted by micro-captives (831 (b)s in the 21st century).

Pinehurst's Transworld was created to provide unrelated business for its captive clients, as part of Emmet & Chandler, a Bermuda conglomerate, which later became Jardine Risk Management.

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Captive Insurance Company Directory

Adding group-owned captives, it is still run by and for captive owners. Some service providers were invited to meetings (if they were lucky).

Driven by greed and notions of tax defense, risk managers were mistakenly led to believe that, since their own accounts were so profitable, they could underwrite commercial reinsurance and make lots of money. Instead they provided "innocent capacity" that was taken advantage of by professional brokers. Most captives lost a lot of money on commercial reinsurance.

Investment income becomes the main reason to form a captive. It does not last, though, with rates dropping back to "only" 10 percent within a few years. Luckily there was no requirement to "mark to market" or there would have been incredible volatility on captive balance sheets' assets.

1,400

According to CICR

He became the longest-serving insurance regulator in any domicile from 1982–2014. Under Rod, the new captive legislation was enacted, although Electrolux and other Scandinavians had established captives there earlier. Rod took part in defending captives in international supervisors' meetings and pronouncements, and did his best to resist Solvency II in its original manifestation.

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Captive Insurance Company Directory estimated that there were premiums of $6.5 billion, down from previous year.

This was the first "onshore" captive domicile in Europe. The main advantage was the requirement of equalization reserves to be set up that had the result of deferring taxable income indefinitely.

US Virgin Islands (USVI) tried for characterization as onshore for regulatory purposes and offshore for tax purposes. In spite of tax advantages, the domicile never really succeeded due to regulatory and administrative difficulties. This serves as an object lesson for new domiciles today.

Deficit Reduction Act (DEFRA) restricted single-parent captives, not group captives. It extended the definition of Subpart F income (taxed to owner in current year whether remitted or not) to include most non-US income as well as US-source income.

Favored Barbados and eliminated the Federal Excise Tax (FET). It also followed Barbados's cooperation with Granada invasion by United States. Treaty only lasted a few years, though. Bermuda rushed to get the same treatment in 1988, which it did. It, too, didn't last.

It grew to become one of the largest group captives, after energy and nuclear industry mutuals. In 2016, numbering some 300 smaller companies, writing $350 million gross written premium (GWP), Raffles successfully developed self-rated accounts plus a shared-risk layer whose results for each member were mainly affected by their own losses.

This is the first significant reinsurance of US employee benefits to a captive by Pru Re.

Capacity and coverage contraction resulted in geometrically higher deductibles and costs. This motivated many healthcare entities to form captives—a heyday for new ones.