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Hardening Insurance Market Sets the Stage for Captive Insurance Growth

Compass pointing in direction of GROWTH
March 09, 2020

A hardening traditional insurance market has the captive insurance market poised for growth in 2020, according to a recent "State of the Market" analysis of the captive insurance industry.

"We're seeing more interest, more activity than ever. People that may have looked at captives 3 or 4 years ago when it didn't make sense are resurfacing," said Brady Young, president of Strategic Risk Solutions (SRS), during a Web seminar presented by SRS titled "Captive Insurance—The State of the Market."

"Captives are showing their merit and their value in this kind of market," Mr. Young said. "The interest is there, the group captives are growing both on the property-casualty side and the medical stop loss activity," he said.

As traditional market conditions become more challenging, Mr. Young said he sees captive insurance company owners able to use their captives to influence renewals, as well as to fill holes in their programs.

Noting a downturn in the total number of captive insurers worldwide since 2015, Mr. Young said the spike in captive insurance formations in the 5 years that preceded it was probably attributable to a surge in small captive insurance company formations.

"It's a big market, it's a mature market," Mr. Young said. "Even though it's been a slight downtrend, it's not like there's been a huge retraction in the use of captives."

In looking for a captive insurance domicile, prospective captive insurance parents have numerous options, Mr. Young said. "There's a lot of mature domiciles. There's a lot of domiciles that have critical mass," he said. "Indirectly, there's a lot of competition, which is probably a good thing."

Bermuda, the Cayman Islands, and Vermont continued to lead the way in terms of the total captive insurance company count in 2019. Bermuda had 715 captives, Cayman had 646, and Vermont had 559.

In terms of new formations in 2019, Cayman set the pace with 33, followed by Utah with 31, North Carolina with 26, and Vermont and Bermuda with 22 each. Mr. Young noted that several domiciles had 20 or more new formations in 2019, though not as many as in years past.

"If you really step away from the numbers and say, 'What's going on?' ... small captive formations have really dropped off," Mr. Young said. "Most of the shutdowns are probably related to small captives."

But larger captive insurance companies continue to be used for traditional lines like primary liability, workers compensation, and automobile liability, he said. "Because of the harder market, the existing captives are growing, being used more, group captives are growing, premiums are going up," Mr. Young said. "Strong traditional P&C captives, I don't see that tapering off; I see that increasing in 2020 just because of what's happening in the market."

Medical stop loss continues to be one of the hottest areas for captive insurance, Mr. Young said. "We see new groups being formed; we see existing groups growing. I don't think our experience is unique."

He also sees ongoing interest in entrepreneurial captives, including the use of cell facilities and agency captives.

Home state premium tax pressures remain an issue for captive insurance company parents, according to Mr. Young. He said he sees a continuing move among captive insurers to home state domiciling in response to that pressure. Captive owners might be happy with their existing domicile, but that tax pressure is forcing them to consider redomiciling to their home state.

"Many of the new captives we're setting up we're actually setting up in home states," Mr. Young said.

In the United States, the captive insurance market was essentially flat in 2019, with a slight decrease in the number of captives, according to Jonathan Stark, director at SRS Advisers. The 457 new US formations in 2019 were down slightly from the 464 in 2018. Meanwhile, 472 US captive insurers closed in 2019, a slight decline from the 489 that closed in 2018.

"Vermont had a strong year licensing 22 new captives with a net gain of 6," Mr. Stark said. "The feedback from Vermont was this was a status quo year for them."

South Carolina also had a strong year with 17 new formations and a net gain of 8, the largest net gain among US domiciles.

Delaware, North Carolina, and Tennessee saw the largest net declines in 2019, probably reflecting the shakeout in the small captive sector, Mr. Stark said. Those states also showed the highest number of new formations, however, reflecting a move to traditional captives and the domiciles' ability to overcome the small captive shakeout.

Elsewhere in the world, international domiciles experienced a modest decrease in the number of captive insurance companies, according to Richard Daley, managing director, Strategic Risk Solutions (Bermuda) Ltd.

The 93 formations among international domiciles in 2019 were consistent with 2018's 91, but the number of closures in 2019 increased to 146 from 120 a year earlier.

"Closures have been steadily increasing in recent years," Mr. Daley said. He attributed the trend to a number of factors including mergers and acquisitions among captive company parents and an international captive insurance market that is more mature than the onshore market. A small percentage of international captive insurance company closures related to captives redomiciled onshore because of tax pressures, he said.

Bermuda had a strong year with 22 formations and 9 closures, while the Caymans' 33 formations were more than any other domicile tracked by SRS, though the domicile also had 90 closures. The Cayman captive insurance market grew both in terms of premium and assets in 2019, however.

There were marginal decreases in captive insurance company and cell numbers in Europe in 2019, though Mr. Young said the market remains very substantial.

"A lot of captives in Europe are big. They take big retentions and they've got a lot of assets. They're substantial entities," he said. "I think with the market hardening a lot of clients are thinking about expanding the use of the captive to take more risk."

After Internal Revenue Service scrutiny and additional reporting requirements slowed the small captive insurance company market and led to closures, Mr. Young said he believes that market has stabilized. "Those people who decided to shut their captives down have done it," he said.

Looking forward, Mr. Young said he anticipates a solid year for captive insurance in 2020. "I think the industry's healthy and well positioned to grow in 2020," Mr. Young said.

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