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The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

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Group Captives Will Continue To Survive and Thrive, Rosenbaum Believes

Captives Thrive
June 01, 2016

Editor's Note: Below, Hugh Rosenbaum, editor emeritus of Captive Insurance Company Reports, published by International Risk Management Institute, Inc., provides a different perspective in response to coeditor John Foehl's recent analysis, "Group Captives—Signs May Point to End of Era." 
How many times in the last 40 years of captives' "heyday" have I heard the same prediction? "Captives are dead" in the '80s. "Captives won't survive" in the '90s, and, since 2009, "Captives are no longer needed." So now John Foehl is narrowing the prediction focus to the end of an era for group captives.

hugh-rosenbaum-responseI disagree. Group captives are mainly a North American phenomenon, although there are some existing and some new ones developing in the United Kingdom, Australia, and even mainland China. How many of them are there, and are they declining in number? The answer to that question is that the information isn't readily available, and even if it were it would be unreliable. It's the same problem with general captive insurance statistics that purport to report on overall or global numbers of captives. All of them, without exception, are faulty. One has only to listen to the arguments about whether or not cells or business units in limited liability companies are to be counted to recognize the fundamental differences in what is counted.

There is one group captive statistic that is reliable that is worth mentioning: the count of the number of risk retention groups (RRGs) and their reported premium volume. They are all group captives. Their number in 2008 was 262, and at the end of 2015 it was 236. That looks like a decline of 10 percent in numbers. While total premium volume had been growing year on year, in 2015 that reported figure, too, declined by some 12 percent from the previous year, according to the Risk Retention Reporter. But RRGs are only a small part of total group captives. For the estimated 1,000 or so other entities that fit in the category of group captives—including municipal pools, medmal structures, and a number of mutuals, we don't have any such count.

Putting aside the unfounded statement about the "end of an era," let me address some of the points Mr. Foehl makes.

Investment Income
This source of group captive income has indeed dried up in the current low return environment, but in my experience those whose portfolios are of sufficient size and who have active investment managers still manage to eke out returns that are enough to pay for the captive's expenses with 2–3 percent on invested assets left over. I have heard no reports from captive finance committee members that low investment rates are a principal reason for closing it down.

Insurance Competition
This is the best argument that captives (not just group captives) are no longer worth it. For those group captive members who look only for the lowest price, the cyclical insurance market will be a reason to leave the group captive. They should have done so by now, since the soft market has been with us for a number of years. But serious group captives exist for solider reasons than price alone. The control of their own information and the services they enjoy and specialize in are more important reasons. I know of a number of professional liability group captives whose prices are 10–20 percent higher than what appears to be offered by commercial competition, but they stay with the group captive program because of the specialized underwriting, risk mitigation, and claims services.

Capital Markets
Is the appearance of alternative reinsurance in the form of cat bonds and insurance-linked securities a reason for the decline of group captives? I don't think so. First of all, according to Bob Golden of Allianz Risk Transfer A.G., speaking at the World Captive Forum in February, these markets "are not for captives." Their minimum premium size and short-term duration make them undesirable, to say the least. And then—talk about the decline and death of reinsurance has been the subject of every single presenter at insurance conferences since the onset of the soft market. The same sorts of reasons are raised about the decline of reinsurance that Mr. Foehl puts forward to predict the decline of group captives. We've heard it before….

Technology and Information
Again, I disagree with Mr. Foehl that commercial insurers and big brokers will use their command of and access to "Big Data" as a reason to predict the decline of group captives. Every single sophisticated captive owner I have encountered is confident that their data, information, and analytics add value to the overall risk management service offering to their insureds and that what they can expect from their insurers isn't enough. That includes group captives. Will the insurers' and brokers' offerings prove superior? Not yet, as far as I can see.

Hugh's Views
As readers of my published pronouncements will remember, one of my favorite observations about captives is, "All captives are group captives." That includes all single-shareholder ones. So a report about their decline is, in my view, premature.

(Mr. Rosenbaum is pictured above, right.)
What are your views on this topic? Are the signs pointing to the end of an era for group captives, as Mr. Foehl has posited, or will they survive and even thrive as they have for the past 40 years, as Mr. Rosenbaum maintains? Contact us with your opinions.

You can learn more from Mr. Rosenbaum's captive insurance thought leadership by viewing his Captive Thought Leader Videos.

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