The industry coming up for air
When I try to identify the issues facing the captive industry in 2010, I am reminded of the classic movie Groundhog Day. The film’s central premise is that the main character wakes up every morning to find he is living the same day over and over. Well, 2010 isn’t exactly 2009, but the issues facing the captive industry in 2010 look a lot like the ones the industry faced in 2009: a soft market, uncertainty over regulation, stress on captive parents and low yields in investments.
There are, fortunately, some important differences. In early 2009, it was unclear whether the world economy was going to collapse or just suffer a bad recession. Nor was it clear if the conflagration in the financial industry would sweep up insurance as well as other finance and banking institutions.
The dust seems to be settling now, despite many of the same concerns remaining. No one is going to say that they enjoyed 2009, but the captive industry tightened its belt and made it through. Although some captives have entered into run-off, virtually every US captive domicile reported modest growth in its net number of registered captives during 2009. Considering how soft the market has been, that’s actually a pretty successful year.
So what does 2010 bring? Well, I believe a cautious optimism is warranted. Sure, the market is soft, and there is some angst over whether the federal government will impose laws and regulations on the financial sector that might adversely affect captives, but there’s a growing sense that nothing catastrophic is in the wings on the legislative front. That doesn’t mean there won’t be an ugly surprise or two, but the stability of the onshore domiciles seems assured and, if anything, there are a number of incentives, political and financial, to bring offshore captives back onshore.
Like most people, I thought the market might harden in 2009, but I at least had the good sense to hedge my prediction by allowing that it might not happen until 2010. To be safe, I’m now extending that prediction to 2011!
In the just-released Captive Insurers Companies Association 2010 industry survey, we asked about the biggest challenges facing captive owners. The evolution from 2008 to 2010 is interesting and instructive:
• In 2008, the biggest challenges for captive owners were service concerns (according to 36 percent of respondents), tax concerns (22 percent—the Internal Revenue Service (IRS) had proposed regulating the deductibility of loss reserves, which was subsequently withdrawn), reinsurance (13 percent) and fronting (nine percent)
• In 2009, those challenges changed dramatically. Collateral concerns jumped to the top of the list with 22 percent, followed by expanded utilisation concerns (18 percent), fronting concerns (14 percent), service concerns (14 percent), taxes (12 percent) and reinsurance (eight percent)
• The 2010 survey reflects the times. The biggest challenges are now identified as collateral concerns (27 percent), regulatory issues (16 percent) and policyholder retention/growth (16 percent), with tax, fronting and expanded utilisation trailing at seven percent.
Last year, we were holding our breath. This year, we are taking a deep breath and waiting for that hard market to make captives even more valuable! Welcome to the world of captives.
Dennis P. Harwick, president
Captive Insurance Companies Association