
Captives by the numbers – a new perspective
Greg Lang (pictured), founder of the Reinsurance and Insurance Network (RAIN), provides an update on what’s been happening in the world of captives over the past few years.
Sometimes a new year provides a new perspective. I think it’s time we update our perspective on captives. The International Center for Captive Continuing Education (ICCIE) celebrated its 20th anniversary last year. Much has changed in two decades, and I think what we teach and write about needs to change too.
I first wrote about fuzzy captive numbers in this publication in February 2021 https://www.captiveinternational.com/us-focus/captives-by-numbers. Everyone seems to agree, the number of captives and captive domiciles continues to grow. This growth, however, is not properly reflected in any reported numbers. Some problems are definitional. What is considered a captive? What is considered a captive domicile? Most of it is a lack of reporting, so let me offer a fresh perspective.
Number of domiciles
How many captive domiciles are there? When I do a search using Google or ChatGPT the results are all over the place. Try it. How can this be? There are many lists, some are quite different.
A captive domicile is the state, territory or country that licenses a captive insurance company. It has primary regulatory oversight over that captive. That domicile may have special purpose legislation under which it licenses a captive. What if a domicile has a captive but no special legislation? Is it a captive? Is it a domicile? What if a domicile has legislation but no captives? I’m guessing the answer depends on whom you ask. It’s one reason the numbers vary.
I help teach one of the ICCIE courses. The slides we used in December showed 69 captive domiciles. It’s a good number, but is it accurate? I believe we need a fresh perspective.
Is Bermuda the first domicile? It’s not in my top five. I was always told Fred Reiss formed the first captive in Bermuda in 1962, and I still believe that to be true. How can Bermuda have the first captive but not be the first domicile? What if I told you the first captive is more than 100 years old?
Most of this publication’s readers know the Fred Reiss story and the origin of the term “captive”. He formed the first captive because he was the first person most folks believe used the term “captive”. It relates to the captive mines owned by the mining and steel company Reiss set up the captive for. In 1962, Bermuda didn’t have captive legislation, and the country didn’t complete its first comprehensive captive legislation until 1978.
Lufthansa's Delvag captive, in Germany, celebrated its 100th anniversary last year. Delvag is the captive for Lufthansa Group. The Danish company FLSmidth also set up a captive in the early 1920s. Is its captive older than Delvag? I don’t know. British Petroleum's Tanker, Imperial Chemicals Captive and BAT's Tobacco Insurance Ltd were all formed sometime in the 1920s. They were also formed onshore in the UK. Despite this history, the UK is not considered a captive domicile.
Guernsey had special purpose insurance legislation in 1922. I believe Guernsey to be the first captive domicile. Commercial Insurance Company Limited (CICL) was registered in Guernsey in June 1922.
Based on my online research, the world had 48 captive domiciles in 2004. That is the year ICCIE started. There were 20 in the US, and 28 everywhere else. Today, I counted 82: 40 in the US and 42 everywhere else.
My definition includes any domicile that either has a captive, has special purpose legislation or both. This includes domiciles such as Denmark, Germany and Sweden that have captives but no special legislation. It also includes places such as Florida and West Virginia that have legislation and no captives. I also included Seychelles that passed PCC legislation in 2016 and Belize that passed SPC legislation in 2022. These are two domiciles that don’t show up on most folks' bingo cards. Yet PCCs and SPCs are where much of the new captive growth is. I will explain PCCs and SPCs a little later.
Number of captives
Determining an accurate number of captives is beyond difficult. In 2021, I reported the number of active licensed captives at around 7,000. That number has not changed much in four years. Where is all the growth then? For starters, who’s going to assign a captive number if your domicile doesn’t have captive legislation? The bigger problem is reporting. If one licensed captive has 50 cells, how many captives do you have – one or 51?
The National Association of Insurance Commissioners (NAIC) defines a captive as follows: “In its simplest form, a captive is a wholly owned subsidiary created to provide insurance to its non-insurance parent company (or companies).” I think most of us can agree with this definition. We can also agree it’s missing a few other types of captives.
Group captives come to mind. One group captive promoter has more than 6,000 insureds and $4 billion in premium, flowing through the 48 group captives they manage. What about PORCs and DORCs? Found several thousand of them. How about special purpose Insurers, XXX (triple X) captives, micro captives, rent-a-captives, segregated, and protected cell captives. Not familiar with some of these? Prepare to be amazed!
PORCs and DORCs
A producer-owned reinsurance company (PORC) is a company that reinsures third- party risks for lenders such as banks and credit unions or retailers’ customers such as auto dealers, appliance stores and big box retailers. PORCs are often owned by brokers or managing general agents (MGAs).
A dealer-owned reinsurance company (DORC) allows auto dealers to share in the underwriting profit and investment income for products dealers sell after the customer selects their vehicle. This includes vehicle service contracts, powertrain contracts, GAP insurance, tyre and wheel protection, key replacement and credit life products. This is nothing new. The Turks and Caicos Islands had more than 2,000 licensed credit life companies in 1996. Auto dealers set up DORCs to assume life reinsurance on cars they sold to buyers who financed their purchases. Estimates vary, but I have been told there are more than 3,000 PORCs and DORCs today. Many more reside in other domiciles.
Special purpose insurers (SPI)
Not considered captives as they are short in duration, Special purpose insurers (SPIs) traditionally participate as sidecars or stand-alone property CAT reinsurers. They are typically less regulated than captives and often owned by hedge funds. Bermuda started licensing SPIs in 2009, and the country is believed to be the first. By 2015, Bermuda had 75 to 80 of them. Today, SPIs are being set up in a variety of domiciles and are being used not just for property but for cyber and other special risks as well.
XXX captives
In 2000, the statutory reserve requirements for US term and universal life insurance increased dramatically. The NAIC called the change Regulation XXX and AXXX. The rule change required significant increases in term and universal life loss reserves.
Reinsurance has long been a tool for creating capital capacity for insurance companies. Reserve credit reinsurance did not exist at that time. These life companies created special captives to reinsure the gap created between their statutory reserves and their GAAP reserves.
Triple X "captives" are not really captives, but are licensed as captives by their domiciles. Vermont, Delaware, Arizona and South Carolina host the majority. Their reserve credits exceeded $240 billion in 2024.
Micro-captives (831(b)
Micro captive is the name commonly used to describe captives taking an IRS 831(b) tax election. They are called micro captives because the premium put in them to qualify for special tax status is capped. Section 831(b) was added to the tax code in 1986 with the purpose of aligning the taxation of mutual and stock companies more closely. Companies who qualify could elect to be subject to an alternative tax and underwriting profits are exempt from federal income tax.
Many believe the IRS doesn’t like 831(b)s and wants to shut them all down. If that were true, would the IRS have added a premium inflation clause when they amended the law in 2016? The premium cap for 2025 is $2.85 million – a $500k increase over 2024. Abuse of this law is a different issue. The IRS has been cracking down on abuse.
Rent-a-captives
Introduced in Bermuda in the 1980s, rent-a-captives served businesses unable to capitalise a captive but willing to assume a portion of their own risk and share in the underwriting profits and investment income.
One key issue for a rent-a-captive owner is to ensure the capital base is not at risk from a poor loss ratio of any of its users. This can only be accomplished by ensuring there is no financial risk to the rent-a-captive from any of its users. To achieve this, the captive owner is required to purchase reinsurance as well as provide collateral to bridge the difference between the net premium to the captive and the point at which reinsurance applies.
Protected & segregated cell captives
Protected cell captives (PCCs) are similar to rent-a-captives except that the assets of each user are protected from one another by law. Each user is referred to as a “cell” and the operation of each cell is controlled through a cell user's agreement with the captive. As the supporting capital base of the protected cell captive is still at risk, part of this operating agreement normally requires cell users to collateralise any risk gap (the amount between premiums and the point at which reinsurance attaches) to the captive.
Also known as segregated cell captives (SCCs), cell captives originated in Europe when Guernsey passed a Protected Cell Ordinance in January 1997. Since then, most of the major captive domiciles have introduced legislation to allow PCCs and/or SCCs depending on how they named their legislation.
Conclusion
Given the number of “captive” categories and the significance of some of the numbers in these categories, $240 billion in XXX reserves or 3,000 PORCs and DORCs, does anyone else wonder why no one has any idea how many PCC and SCC captive cells there are? Maybe it’s time for that to change.
In January, the IRS came out with new reporting requirements for micro-captives. Disclosure now requires both the captive manager and actuary to be listed on the filed form. I believe transparency is a good thing. Maybe in 2025 the IRS will publish the number of companies making the 831(b) election. Maybe this type of reporting could catch on and encourage captive domiciles also to be more forthcoming with their numbers.
• Greg Lang can be contacted at: glang@rainllc.com
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