Modest Captive Growth in 2019 with More Growth Expected in 2020

Silhouettes of people across a pastel background with upward arrows coming from the bottom and 2020 in the foreground

January 20, 2020 |

Silhouettes of people across a pastel background with upward arrows coming from the bottom and 2020 in the foreground

Captive insurance company formations increased only modestly in 2019, but captive regulators and managers, amid escalating premiums and coverage cutbacks in the traditional market, expect more growth this year.

For example, in Vermont, which is the largest US captive domicile and the world's third largest with 585 captives, 22 new captives were licensed in 2019. That is close to the 25 captives that were licensed in the Green Mountain State in 2018 and 24 in 2017.

But captive formations picked up sharply in the last quarter of 2019 when nine captives were licensed. That growth is continuing with four new captives already licensed so far in 2020, said Ian Davis, Vermont's director of financial services in Montpelier.

The traditional market "is definitely hardening. This could be a significant year" for captive formations, said Dave Provost, deputy commissioner of Vermont's captive insurance division in Montpelier.

"We are clearly seeing a hardening of the market. My expectations are that we will see an increase in captive formations, while existing captives will expand coverages," added Richard Smith, president of the Vermont Captive Insurance Association in Burlington.

In South Carolina, where 18 new captives were licensed last year—up from just 8 in 2018 and bringing the state's total captive count to 179—regulators and captives also are expecting more growth this year.

"We expect the captive numbers to continue to grow. People are anticipating a hardening of the market and are exploring alternatives to the traditional market," said Joseph McDonald, licensing coordinator for the South Carolina Department of Insurance in Charleston.

South Carolina had a "pretty good year. The property and casualty market is tightening up and that is good for captive formations," said Ann West, senior vice president with Artex Risk Solutions Inc. in Charleston, South Carolina.

To be sure, while some domiciles licensed a hefty number of new captives last year, some of that growth was offset by captive dissolutions.

For example, Montana licensed 40 new captives, while 32 captives dissolved, bringing the state's captive count to 293 at the end of 2019.

Sometimes, captive parents need more cash flow, said Tal Redpath, captive insurance examiner in the Office of the Commissioner of Securities and Insurance, Montana State Auditor in Helena, in explaining one reason why captives are folded by their parents.

Still, the number of captive formations was "awesome," said Patrick Hunter, an auditor who also works in the Office of the Commissioner of Securities and Insurance.

"We will continue to see more growth," added Steve Matthews, Montana's captive insurance coordinator.

In at least one domicile, Hawaii, the captive count between 2018 and 2019 remained unchanged at 231, with captive dissolutions—11—the same as the number of formations.

In some domiciles, though, the number of captives declined last year because captive closures exceeded new formations.

For example, in Nevada, while 21 captives were licensed in 2019, 26 were closed. That brought the number of captives, including cell captives, to 298 at the end of 2019, down from 302 a year earlier.

Similarly, in the Cayman Islands, while 32 captives were licensed last year, 89 captives closed, bringing the total captive count in 2019 to 646, down from 703 in 2018.

Even in domiciles with little formation growth last year, though, regulators are expecting to license more new captives in 2020.

"The insurance market is hardening," and that could lead to more formations, said John Talley, captive program manager for the Missouri Department of Insurance in Jefferson City, Missouri, which licensed just 1 captive in 2019, bringing to 72 the number of licensed captives in the state.

"Having heard from multiple sources that 2019 was a difficult renewal year for property, we expect greater activity in 2020 than we have seen in the past couple of years," said Michael Corbett, director of business development at the Tennessee Department of Commerce and Insurance in Nashville. In 2019, 12 new captives were licensed in Tennessee, bringing the total number of captives to 140.

"We're off to a good start. We've already licensed two captives, and three" applications are pending, said Debbie Walker, senior deputy commissioner of the Captive Insurance Companies Division of the North Carolina Department of Insurance in Raleigh, North Carolina. In 2019, North Carolina licensed 26 captives, including 7 redomestications, ending the year with 235 captives.

Captive experts agree that growth will pick up this year.

In 2020, "[a] lot of domiciles will get good increases in their captive numbers," said Michael Serricchio, a managing director with Marsh Captive Solutions in Norwalk, Connecticut.

At the same time, a hardening commercial market is triggering greater use of captives.

"With premiums going up and limits being cut back, captives are coming out of the closet and are being used as an insurance tool as intended," said Jim Swanke, senior director—risk consulting services with Willis Towers Watson in Minneapolis.

In addition, increasingly, captives are being expanded to cover new lines of coverages, such as cyber risks and employee benefits, said Adrian Lynch, managing director with Aon Insurance Managers (Cayman) Ltd.

Still, in some domiciles, regulators expect captive growth to be comparable to the last couple of years.

For example, the District of Columbia Department of Insurance, Securities and Banking "expects growth in 2020 to be similar to 2018 and 2019," said Dana Sheppard, acting deputy commissioner for market operations at the Department of Insurance, Securities and Banking. In 2019, 18 captives were licensed in the District of Columbia, bringing the year-end total to 149.

"I think 2020 will be another good year and have formations to be at least comparable" to those of the prior year, said Vincent Gosz, chief captive analyst with the Arizona Department of Insurance in Phoenix. In 2019, Arizona licensed 9 new captives, up from 8 formations in 2018, bringing its total number of captives to 128.

January 20, 2020