Marsh Tracks Top Captive Trends

The number of captive insurers continues to increase globally, from 5,000 in 2006 to more than 7,000 in 2016. Once formed primarily by large companies, the captive market has opened up to mid-size and small businesses. The industry is also seeing a trend in companies forming more than one captive, using them for cyber, political risk and other exposures, according to a recent Marsh report, Captives at the Core: The Foundation of a Risk Financing Strategy.

Organizations are seeing disruptions in a number of areas and are relying more on their existing captives, Marsh said. Because of their flexibility, captives are also being used to respond to market cycles and organizational changes such as mergers and acquisitions.

While North America and Europe still dominate in numbers of captives, other regions have shown more interest in the past three years. In Latin America, captive formation increased 11% in 2016, the study found.

Within the United States, there is more competition among domiciles and some of the newer domiciles are experiencing growth. The top-growing U.S. domiciles in 2016 were Texas, Connecticut, Nevada, New Jersey, Tennessee, and New York. Domiciles outside the U.S. seeing the most growth include Sweden, Guernsey, Singapore, Malta, and the Cayman Islands.
As organizations’ exposures increase in number, complexity and severity, shareholder funds generated by captives are becoming more important. According to Marsh:

For many clients, captives are at the core of their risk management strategy, going beyond the financing of traditional property/casualty risks.

Specifically, we are seeing an increase in parent companies using captive shareholder funds to underwrite an influx of new and non-traditional risks, including cyber, supply chain, employee benefits, and terrorism, as well as to develop analytics associated with these risks and fund other risk management initiatives.

Risk management projects funded by captive shareholder funds in 2016 included initiatives to determine capital efficiency and optimal risk retention levels in the form of risk-finance optimization; quantify cyber business-interruption exposures; accelerate the closure of legacy claims; and improve workforce and fleet safety/loss control policies.

For example, Marsh-managed captives used to address cyber liability increased by 19% from 2015 to 2016. Since 2012, in fact, cyber liability programs in captives have skyrocketed 210%.
“We expect to see a continued increase, driven in part by companies that are already strong captive users and by those that may have difficulty insuring their professional liability risks,” Marsh said.

Aon Introduces Single-Parent Captive Cyber Insurance Program


With cyberattack listed as one of their top risks, organizations are looking for ways to mitigate their risk in a market where cyber insurance rates are quickly rising. According to the Center for Strategic and International Studies, the annual cost of cyber crime and economic espionage to the world economy runs as high as $445 billion, or about 1% of global income.

This does not include intangible damage to an organization, however. Companies are purchasing more insurance to cover the risk. In 2014, the report said, the insurance industry took in $2.5 billion in premiums on policies to protect companies from losses resulting from hacks.

As a result, captive insurers are being used more and more for coverage.

Aon said it is addressing shortcomings in traditional cyber coverage with a cyber captive program with capacity of up to $400 million. Companies looking to form a captive would undergo a review to quantify their cyber exposures.

According to Peter Mullen, CEO of Aon Captive and Insurance Management, the program is designed to help clients understand their risk profile. “Once this is understood, they are is in a better position to make decisions about how much risk to retain in their captive and how much risk to transfer to the program,” Mullen said. “The program allows captives to purchase coverage up to $400 million on a reinsurance or excess insurance basis.”

The cyber captive program will be domiciled in Bermuda and is available to single-parent captives. The basis for coverage will be “a very broad form which includes coverage for property damage and business interruption following a cyber event,” he added.

“Building a large tower of limits can be hampered by differing policy terms and conditions and dislocation of rates at different layers in a program,” Mullen said. “Additionally, many organizations facing cyber risks that can result in physical impacts, such as property damage and business interruption, agree that a more comprehensive approach to cyber risk is needed.”

Captives under Scrutiny

A mere decade ago, captive insurers were viewed by most regulators as a small, even exotic part of the insurance industry. Most were assumed to be offshore and aroused little attention. Now, captives have gone mainstream. A sizable, but undetermined, portion of the property casualty coverage is placed through, or issued by, captives. A good guess is 30% to 40%, but no one has been able to establish an accurate number. Thirty-nine states have some form of captive or self-insurance law. Captives are now part of everyday life for regulators and the result is more scrutiny.

The issues now on the agenda for captives are significant:

• XXX and AXXX Reinsurance Captives

According to Superintendent Joseph Torti (Rhode Island), 80% to 85% of life and annuity insurance is ceded to reinsurers. Much of the so-called “excess reserves” required by Rules XXX and AXXX are ceded to captive reinsurers or special purpose vehicles owned by the same licensed life and annuity companies which cede the risk. Because the amount of this risk is so large, any trouble collecting this reinsurance could have a major effect on the industry. Some regulators, even a few who approved these cessions, have criticized these arrangements. In some cases, the collateral for the reserves has been subject to parental guarantees, which tends to undermine the confidence which can be placed in the transaction. The NAIC is continuing its examination and has met some stiff resistance from the industry.

• Multistate Insurers 

The proposal to amend the preamble to the NAIC Accreditation Standards to treat captive reinsurers as “multistate insurers” (with some limited exceptions) was withdrawn at the last NAIC meeting in Louisville. A new proposal should be forthcoming (and may have already been issued by the date of publication of this Newsletter). The premise of this proposed change is that non-domiciliary regulators need to know how insurance issued in another state may affect the citizens of their state. The opposite point of view is that the regulators of the domicile have done their job and should be trusted by their regulator colleagues and that the transaction should not affect third parties, anyway. Some say the risk to the domestic captive industry is existential. If enacted and enforced, the proposed change could, ironically, drive much of the industry offshore and therefore beyond the authority of the regulators promoting it.

• Nonadmitted Risk and Reinsurance Act

Captives have been inadvertently drawn into the regulatory structure imposed by this federal legislation intended to streamline the reporting and payment of surplus lines taxes. It has shined a spotlight on the payment (or non-payment) of state self-procurement taxes, but, ironically, does not in any way alter either the application of them or their payment. While risk retention groups (RRGs) were able to get an exemption from the law during its formative phase, captives, because they are (generally) single state entities and therefore not doing business as a “non-admitted” insurer, did not even attempt to get an exemption. Now there is a group, the Coalition for Captive Insurance Clarity, which is seeking a legislative exemption on Capitol Hill.

• Insurance Company Income Taxation

The Internal Revenue Service is investigating several insurance pooling mechanisms and, in some cases, the captives that have utilized them to establish third party risk—which is essential for an insurer to get the benefit of insurance tax treatment. This investigation is presumably a response to the rapid growth of “micro-captives” as mechanisms to assist with avoidance of taxation in estate planning and wealth transfer. This process is in its early stages, but is likely to produce some dramatic results.

• Federal Home Loan Bank (FHLB)

Who would have thought that the FHLB would have anything to do with captives?  It appears that some captives, and at least one risk retention group, are members of the FHLB, which allows them to obtain federal funds at advantageous rates. The Federal Housing Finance Agency (FHFA), which regulates the twelve FHLBs, has proposed a rule that would exclude all captives from membership by defining “insurance company” to mean an entity which “has as its primary business the underwriting of risk for nonaffiliated persons.”

Why is this happening now? While there are numerous reasons for these kinds of actions, there are two primary motivators. First, regulation is always subject to the problem of “what’s worth doing is worth overdoing.” Reasonable minds can differ on the interpretation of statutes and regulations. Each of the above includes an element of “pushing the envelope,” which can be significant or insignificant issues depending on your point of view. Second, captives have been caught in the vortex of regulatory competition. As we have discussed before in this column, the National Association of Insurance Commissioners (NAIC), the Federal Insurance Office (FIO), and the International Association of Insurance Supervisors (IAIS) are jockeying for position and power. Add to the mix the position of the Organization for Economic Cooperation and Development (OECD) that captives may be used as a device to avoid taxation (“base erosion” in OECD parlance), and you have a tumult of regulatory action which at the same time can be challenging and conflicting in its goals and implementation.

What does this bode for the future of captives? Once you have been seen on the radar, it is hard to drop off. Captives can expect more of the same for the foreseeable future.

This blog was previously published on the Morris, Manning & Martin, LLP website.

Remembering Helen Thomas

You can say what you want about Helen Thomas, who passed away on Saturday, July 21, but she took her job seriously and she will definitely be remembered.

She was White House correspondent for United Press International for 40 years. In 1960, she became the first woman reporter to cover the White House, and was the first female member of the White House Correspondents Association. She was also the first woman admitted to the Gridiron Club in Washington.

Covering 10 presidents from JFK to Obama, she asked the tough questions and held the country’s leaders accountable. And she didn’t wilt or flinch, even when those leaders were visibly uncomfortable with her questions.

Hearing the news of her death reminded me of the time I met Helen, along with a friend who has also passed away.

In 2007 Helen spoke at the opening general session at the Captive Insurance Companies Association’s (CICA) annual conference in Phoenix, which I attended.

The evening before, I was having dinner with fellow journalist Karen Cutts, founder and managing Editor of the Risk Retention Reporter. Karen and I had become friends over the years and we enjoyed the chance to catch up at these events. Unfortunately, Karen passed away, on Feb. 2, 2010.

But that evening during dinner Karen gasped excitedly, “There’s Helen Thomas! Let’s say hello.” I turned around and there she was, sitting by herself in a nearby booth. We went over to say hi and she invited us to chat. She was very pleasant and curious, asking questions about the insurance industry and captive insurance.

The next day as keynote, she talked about her experience covering the White House and the Presidents. I also recall that not all CICA attendees were happy about her appearance. The controversies surrounding her were apparent.

I sent Dennis P. Harwick, president of CICA an email asking about his impressions of Helen at the time.

“It was poignant to see all the press about Helen Thomas’s passing. She remains the CICA keynote speaker with the highest number of very high ratings – and the highest number of very low ratings! Unfortunately, many of those low ratings didn’t stay to hear her whole speech – which pretty much leveled everyone, not just the Republicans like some seemed to think,” Harwick replied.

His assessment pretty much sums up people’s attitudes about Helen in general.

But whatever the consensus, no one can deny she worked hard to bring transparency to Washington politics.

Thomas was quoted by ABC News, regarding a reporter’s role in Washington: “We are the watchdogs. Self-anointed, self-appointed but we’re there and it is very important we be there.

“We are a pain in the neck. We’re there intruding, watching, asking questions, trying to decide who they are, what they are, constantly nit-picking,” she said.