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

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

A FREE 12-page special report from Captive.com

The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance explores the challenges presented by today's business and economic upheaval, as well as the hardening insurance market, and what it means for the captive insurance industry.

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Hardening Traditional Market Drives New Captive Insurance Formations

Businesspeople building a structure using multicolored puzzle pieces as blocks
October 01, 2020

Formations of new captive insurance companies are flowing amid hardening conditions in the traditional market, with the growth trend expected to continue in 2021.

Take Vermont, the largest US domicile with 595 licensed captives. Already, 25 new captives have been licensed so far this year, up from just 10 during the same period last year, with the number of new formations expected to hit 30 by the end of the year.

"We have a very active pipeline," said David Provost, Vermont's deputy commissioner of captive insurance in Montpelier.

Tightening market conditions are driving that growth. "From what we hear and see, rates have gone up, and coverage has gone down, and so the value of the commercial market has diminished," Mr. Provost said.

Regulators in other captive domiciles also are expecting more growth ahead. "The hardening market is driving growth in the captive market," said Debbie Walker, senior deputy of the Captive Insurance Companies Division of the North Carolina Department of Insurance in Raleigh, North Carolina.

So far, Ms. Walker notes, North Carolina has licensed 13 new captives in 2020, bringing North Carolina's captive count to 230, with 8 applications pending and "certainly more to come."

In Tennessee, which now has 207 captives, captive formations also are on the rise. So far this year, notes Belinda Fortman, captive insurance section director at the Tennessee Department of Commerce & Insurance in Nashville, Tennessee has licensed 13 new captive insurance companies, up from 8 during the same period last year.

In all, Ms. Fortman expects Tennessee to license 24 new captive insurance companies this year "due to the hardening insurance market, the increased focus on risk and risk management due to COVID, and due to Tennessee's reputation for being business friendly and service oriented, with a highly skilled regulatory team."

Growth is also continuing in other major domiciles. In Hawaii, whose current captive count is 238, 11 captive insurance companies have been licensed in 2020, up from 9 during the same period last year. Hawaii regulators expect a total of about 20 new captives to be licensed by year-end.

And that growth should continue next year. "Based on discussions with members in the industry, it appears the interest in companies forming captives is strong and will continue next year," said Andrew Kurata, deputy commissioner and captive insurance administrator for the Hawaii Department of Consumer Affairs Division in Honolulu.

In some domiciles, there has been significant growth in so-called protected cell captives. In Nevada, which currently has 168 captives, 17 protected cell captives have been licensed this year, up from 12 during the same period in 2019, said Robert Gallegos, program officer for the Captive Program with the Nevada Division of Insurance in Carson City.

To be sure, growth has been modest in some domiciles, but even in those domiciles, regulators are expecting an increase in formations next year.

In South Carolina, which has 172 captives and where 6 captives have been licensed so far this year, "we will return to higher numbers when the coronavirus is resolved," said Greg Delleney, assistant director of captives at the South Carolina Department of Insurance in Columbia. The coronavirus has taken some focus off captive formations, Mr. Delleney added.

In Montana, which so far has licensed 12 captives in 2020, "It has been a very pleasant and somewhat active year," said Tal Redpath, captive insurance examiner in the Office of the Commissioner of Securities and Insurance, Montana State Auditor in Helena.

"The drivers of Montana's new formations in 2020 have been program business, fronted captives, and medical stop-loss captives," said Patrick Hunter, an auditor who also works in the Office of Securities and Insurance. Currently, Montana has 271 captives.

Captive managers report a surge in captive formations. For example, a recent Marsh LLC survey noted that Marsh formed a record 76 new captives in the first 7 months of 2020, a 200 percent increase compared to the same period last year.

And with the hardening market, more growth lies ahead, captive regulators say.

"This is a wonderful chance for captives to shine. Those without captives are now seeing the light and are setting up captives," said Utah Captive Insurance Director Travis Wegkamp in Salt Lake City. So far this year, Utah, which has 393 captives, has licensed 12 new captives with a total of 40 formations expected by year-end, Mr. Wegkamp said.

With rates in the traditional market going up, "The interest in captives has grown," added John Talley, captive program manager with the Missouri Department of Insurance in Jefferson City. Currently, Missouri has 72 captives.

With premium increases and commercial insurers cutting back on their limits, many organizations are expanding their captives, and those without captives are looking to get captive feasibility studies done, said Jim Swanke, head of captive solutions North America for Willis Towers Watson In Minneapolis.

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