1 January 1970Analysis

The US industry: holding its breath

If there was such a thing as 'collective breath holding', that is how I would describe what is going on in the US captive industry this year. Everyone waiting to see what is going to happen about (and this is where you can fill in the blanks):

  • Healthcare reform (the US Supreme Court released its decision upholding the constitutionality of the Affordable Care Act a few days after this was written), 
  • The US presidential election, 
  • The economy in Europe, The hardening of the property and casualty market, 
  • The effect of Solvency II, 
  • The effect of Dodd-Frank legistlation (unless, of course, there is a dramatic change in congress)
  •  The addition of new domiciles such as oregon and Florida...
  •  ... and the list goes on. 

Nature abhors a vacuum and business-- including captive insurance, detests uncertainty. With all the uncertainties above, everyone is waiting for some clarification. Even though it may not affect the day-to-day business of some captives, there are just as many that are waiting to find out what is going to happen on one or more of these fronts.

"The stability of utilising an established captive domicile with seasoned regulators and a critical mass of service providers continues to be a major draw."

Despite the uncertainties of both the US and European economies, there are finally some signs that the insurance market is starting to harden and that, traditionally, means more interest in forming and utilising captives. The number of captives has continued to grow even during the soft market, so there is clearly an expanding understanding an acceptance of the strategic reasons to have a captive, even when pricing is not a compelling reason.

If the market hardens in the coming year, I believe it will sere as a triggering event for a significant expansion of the captive industry. Existing captives will undergo increased utilisation and new captives will be formed.

The question is, where? The choices are expanding. Some 30 US states and territories now have the enabling legislation to host captive insurers, while uncertainties caused by ambiguous language in the Nonadmitted and Reinsurance Reform Act of 2010 has given new, as well as formerly passive, domiciles an argument that companies should domicile their captive in the state where their parent is headquartered, rather than in a more established captive domicile. Nonetheless, the stability of utilising an established captive domicile with seasoned regulators and a critical mass of service providers continues to be a major draw.

The 2012 Captive Insurance Companies Association (CICA) Captive Insurance Market Study yielded several key findings:

  • Utilisation of captives for employee benefits (something only avaliable to onshore captives of US-based employers) significantly increased over prior surveys. To abuse a metaphor about putting employee benefits in captives: 'The storm clouds have been gathering for years. maybe it's finally going to rain.' 
  • All major divisions in the US Department of Labor's Standard Industrial Classification (SIC) table were represented in this year's market study, although two-thirds of the survey participants' captives serve four major industries: manufacturing, healthcare, financial services and all other (non-healthcare) services. 
  • More than 50 percent of the survey participants cited access to the reinsurance market as a major reason for setting up a captive. 

However, one of the major challenges identified by the market study was justifying the benefits of a captive to management at the parent company. And that's where a hardening market comes in. Nothing makes a captive look better than the hardening of rates in the commercial insurance market. Nothing makes forming a cpative sound better than the prospect of premium increases after premium increase in the commercial insurance market.

At a recent captive insurance conference, I had the honour of sitting on the closing panel to address 'hot topics'. As often happens, the panellists (all of whom had much more impressive credentials than I have) met for dinner the night before the session and discussed what the hot topics might be. We concluded that maybe our session should have been called 'warm topics'. No business exists in a world that isn't ful of challengs and uncertainty (see my list above).

However, no-one on the panel could identify an existential threat to the captive insurance industry. We did talk about the challenges that specific segments of the industry might face: Solvency II in Europe, more scrutiny from desperate state taxing authorities, and fallout from healthcare reform-- no matter which way the Supreme Court rules or the presidential election goes.

But one conclusion was shared by all: captives are here to stay. They've shown their staying power in the challenging times of a soft insurance market and, if the market hardens as expected, the wind will be at our back!

Welcome to the world of captives.

Dennis Harwick, president
Captive Insurance Companies Association