2017 Brings Moderate Captive Insurer Growth in Major Domiciles

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February 02, 2018 |

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Amid a soft commercial market, the number of captive insurance companies being set up in major domiciles continues to increase at modest levels.

In Vermont, which is the largest captive domicile in the United States with 566 captives at year-end 2017, regulators licensed 24 captives in 2017, down from 26 in 2016 and 37 in 2015.

Other domiciles also report lower growth. For example, in Montana, the 42 new captive formations in 2017 compares to 60 in 2016, while in Nevada, regulators licensed 22 captives last year, down from 30 in 2016. In Utah, 60 captives were licensed in 2017, 5 fewer than in 2016, while in Texas, the Department of Insurance licensed 8 captives last year, down from 13 in 2016.

Still, some large and medium-sized domiciles saw captive formations increase significantly. In Hawaii, regulators licensed 30 captives in 2017, up from 16 in 2016, bringing the Aloha State total to 230, up from 208 in 2016, while in Missouri, 8 captives were licensed in 2017—double the number of 2016 formations—and boosting the state's captive count to 61.

"It was a good year and we think that growth will continue," said John Talley, captive program manager with the Missouri Department of Insurance in Jefferson City.

In addition, while North Carolina captive regulators say 2017 captive formation statistics are not yet available, growth will be "considerable," fueled, says Debra Walker, senior deputy commissioner at the state's Department of Insurance, by "new captive insurer formations" as well as redomestications to the state of captives licensed in other domiciles. At year-end 2016, North Carolina had 190 captives. (Editor's Update: at year-end 2017, North Carolina had 228 captives.)

At the same time, some domiciles report long-term stability in captive formations. In Arizona, for example, annual captive formations have ranged from 7 to 13 since 2010. At year-end 2017, Arizona had 121 captives, up from 113 in 2016.

In other domiciles, while captive growth was modest, captives took on more risk. In Tennessee, where just 9 single-parent captives were licensed in 2017, captive premium volume topped $1 billion for the first time.

"Captive owners are discovering better ways to manage risk through their existing program and are putting more risk, and therefore more premiums, into their captives," said Michael Corbett, Tennessee's director of captive insurance in Nashville.

"It isn't just body count that is important. What also is important is that captives are taking on more business," adds Tom Jones, counsel with McDermott Will & Emery in Chicago.

In some domiciles, though, the number of new captives licensed last year was exceeded by captives surrendering their licenses, as parents with multiple captives decided to merge them or captives moved to new domiciles.

For example, in Montana, the 42 captives licensed in 2017 was topped by the 52 that surrendered their licenses; in the Cayman Islands, the world's second-largest domicile with 696 captives at year-end 2017, 33 captives were licensed last year compared to 48 that turned in their licenses.

In addition, Bermuda, the world's largest domicile, licensed 17 new captives in 2017, up from 13 in 2016, but saw its captive count fall to 739 last year, down from 776 in 2016.

Still, even with the decline, "Bermuda remains the world's leader for captive formations; it's not about the number of captives on the Bermuda register, it's about the quality of the business being conducted here," said Bermuda Monetary Authority CEO Jeremy Cox.

Regulators and others attribute the small—in some cases, negative—growth in captives licensed in numerous domiciles to several factors, especially the highly competitive traditional market and the saturation of captives among large employers.

"It is no longer realistic for us to expect to license 20–30 captives per year given the external factors at plays these days, i.e., the sustained soft market" and "the saturation of the large corporate sector," said Jeff Kehler, captive administrator at the South Carolina Department of Insurance in Columbia. South Carolina licensed 15 captives in 2017, bringing its captive count to 169.

At the same time, corporate mergers have sometimes resulted in employers dropping captives when each firm involved in a merger had one or more captives.

"Companies (that merged) have found they didn't need multiple captives," said Nancy Gray, a regional managing director with Aon Captive & Insurance Management in Burlington, Vermont.

Looking ahead, captive experts are expecting more growth. "More people are coming to see us" to discuss captive formation, said Jim Swanke, director of risk consulting at Willis Towers Watson in Minneapolis, adding that expected rate hikes in the traditional market are helping to fuel that interest.

"We expect steady, solid growth. Companies continue to find value in captives," added Michael Serricchio, managing director of American sales with Marsh's Captive Advisory Group in Norwalk, Connecticut.

"I feel the current optimistic outlook on the U.S. economy, as evidenced by strong GDP growth and record stock market gains, will result in increased interest in captives for companies seeking new and innovative ways to finance their unique and everyday risks," added Travis Wegkamp, director of captive insurance with the Utah Insurance Department in Salt Lake City.

And even if captive growth continues at current modest levels, regulators say they won't be lacking for things to do.

"We have been very busy," said David Provost, Vermont's deputy commissioner of captive insurance in Montpelier.

February 02, 2018