Captivating Metrics: What Makes a Captive Domicile Successful

Traditionally, a standard metric for measuring a captive insurance domicile's success has been the total number of captive insurers registered, but many have argued that this isn't the most accurate way of doing so.

They say there are a host of factors that need to be considered when measuring a captive domicile's success.

"There are a number of quantitative ways to measure the success of a captive domicile, including number of captives licensed, number of active captives, total gross and net premium volume, and total assets, to name a few," said Mike Meehan, principal at Milliman. "Each of these quantitative metrics has some merit.

"Considering the entire portfolio of a domicile, such as business type, captive type (single-parent versus group), and the risks being insured by the captives may also provide some meaningful insight," Mr. Meehan continued. "Other considerations such as year-over-year growth, closures, insolvencies, and domestications both in and out of the domicile can also be helpful in measuring the success of a domicile."

Five key metrics that can be used to gauge how successful a captive domicile is are as follows.

Total Number of Captives

On paper, the number of captives a domicile has is an easy way to compare different domiciles in terms of market share. In practice, it's not that straightforward.

Some domiciles may count captives in different ways, said TJ Scherer, vice president, Spring Consulting Group. For example, a captive count may include only active captives or both active and dormant ones, or cells may be counted individually or as a single entity under one sponsor.

The number of active captives is more representative of a domicile's current state and the number and variety of captives it licenses and regulates, said Brittany Nevins, captive insurance economic development director for the state of Vermont. That number can be compared year-to-year to understand accurate growth and formation trends, she said.

Travis Wegkamp, captive insurance director at the Utah Insurance Department, said that measuring the number of licensed captives is the measure he pays most attention to. That's, in part, he said, because Utah charges an annual license renewal fee rather than collecting premium taxes from its captives.

"Rather than focusing on perhaps just those extremely large captives writing massive amounts of premium volume in their programs, in Utah, every captive of every size is just as important to us, and we've had to create a domicile and legislative environment that appeals to them all," said Mr. Wegkamp. "Our success is truly measured by every captive that chooses Utah and then sticks around because they've realized the benefits of having a captive and having it in Utah."

Ms. Nevins said that while counting captives formed doesn't provide a comprehensive data set, it gives important context in terms of a domicile's success. The larger the number of licensed captives to date, she said, the more experience a domicile has in licensing them.

"Comparing new formations year-to-year helps show the state of the market and interest in captive insurance formation," said Ms. Nevins. "Unfortunately, this data point loses its value when not compared consistently and without the consideration of other data points to provide more context to determine the wherewithal of a captive domicile."

The Type and Quality of Business

The type and quality of business that a domicile attracts is another key indicator of how successful it is. Some may target smaller or larger kinds of captive insurers, which makes them more appropriate for certain companies looking to form one.

"The measurement of a domicile's success should come from the general success of the captives it has licensed, not the number of licenses it has issued," said Sam Komo, captive insurance manager at the Missouri Department of Commerce and Insurance. "If the intent is to gauge the health of the captive industry, we need to understand more than just the number of captives formed."

The number of captives by industry sector is also an indicator of the variety of industries that put their trust in a domicile, said Ms. Nevins. In addition, she said that key aggregate financial data and ratios for all captives, by type and industry, show the financial health of a domicile's captive insurance marketplace.

Total Gross Written Premium

Gross written premium (GWP) tells you how much business a captive insurer writes. It can also be used to determine the strength of a state's captive industry by comparing it to the national average, which can be used to encourage deeper discussion on its ability to support a new captive's needs, said Mr. Komo.

"The best measure may be the amount of gross written premium," said Mr. Wegkamp. "This gives a good measure of the activity and the use of your captives for the reporting year. Many domiciles like this because they collect taxes based on the premiums written, so they'll measure their success based on the total annual tax revenues from their captives."

However, Mr. Scherer argues to the contrary. He said, "Gross written premium can be misleading, particularly because captives may be reinsuring that business. For example, you could have $10 billion worth of GWP that a domicile reports out, but if those captives are reinsuring the majority of that, it may only be $1 billion of net premium that that state is regulating."

Ms. Nevins added that significant GWP growth could come from just one company. Therefore, she said that such data doesn't accurately reflect an increase in captive variety or formations.

Quality of Transactions

"The quality of the transaction is a more appropriate measure than some of the other factors, such as the total number of captives or GWP," said Mr. Scherer.

Mr. Meehan said that quality transactions can be interpreted in different ways. He considers a quality transaction to be one that meets a captive owner's needs, ensuring the captive remains a viable risk financing entity with sound underwriting and pricing.

"In certain cases, these transactions may not result in large amounts of premium, but it would still be considered a quality transaction to the insured, particularly in cases where coverage was otherwise unavailable or cost prohibitive," said Mr. Meehan.

Quality of Regulator

One of the key factors in determining a domicile's success is the regulator's strength. A well-regulated domicile is more likely to win a greater number and quality of captive business.

"The five most meaningful ways of measuring a domicile's success are specialized regulators; a stable political environment; the infrastructure of service providers; an engaged, effective industry association; and proactive laws," said Ms. Nevins. "Above all, it's key to look for a robust team of regulatory staff that specialize in captive insurance and have a long history of regulating captive insurance companies."

To gauge the quality of a regulator, you need to look at its approach, track record, impact on the state's economy, and staff, said Mr. Scherer. The quality of staff indicates its stability, he said.

"A good measurement of a captive domicile's success is the quality of the regulator," said Steve Kinion, captive insurance director at Oklahoma Insurance Department. "Experienced regulators are very difficult to find, particularly those with a background in captive insurance, but they are worth their weight in gold as their knowledge and expertise can help to resolve key issues or problems."

Carter Lawrence, commissioner of the Tennessee Department of Commerce and Insurance, added, "The reputation of a domicile is first and foremost. In Tennessee, we stand on our reputation of combining the best customer service possible with solid and reasonable regulation that helps companies succeed. Our success as a domicile is directly related to the successes of those we regulate."

Lori Gorman, deputy commissioner at the North Carolina Department of Insurance, said, "North Carolina's captive insurance program, with support of Commissioner Mike Causey and industry leaders, offers a combination of consistent regulation in a business-friendly environment with a domicile committed to responsive customer service and strong service provider relationships. With these attributes, we believe attraction of quality transactions and steady growth in formations and premiums will consistently follow and contribute to the continued success of our program."

Mr. Meehan said that the success of a domicile can be more accurately evaluated by taking into consideration its goals. But he added that because each domicile's goals can vary greatly, using a single metric to calculate success may not be appropriate—rather, it may be more meaningful to make the assessment based on a metric that more accurately reflects performance relative to its goals.

Mr. Scherer said that choosing a captive domicile ultimately comes down to personal experience or others' experience of that domicile. Some may be more favorable than others, he said.

"Deciding where you want to place your next captive will ultimately be defined by a number of factors," said Mr. Scherer. "These include how that domicile is staffed, how different programs are viewed, the ability to work together, and what its timeline and turnaround is."