Estimations of the number of captives that exist globally vary, and a closer look at the numbers reveals some peculiar trends, says Greg Lang of the Reinsurance and Insurance Network.
How many captives are there in the world? AM Best reports the number to be around 7,000—quite an increase from the 1,000-odd there were back in 1980, but it is hard to pin down exactly how accurate this estimate is, for reasons I will explain.
AM Best is a reliable source. Its estimate includes both onshore and offshore companies, and most industry sources agree the top three captive domiciles are Bermuda, Cayman, and Vermont. After that, though, the numbers start to get a little fuzzy.
Multiple sources make their own estimates. Most agree that in the US there are 29 captive domiciles – 28 states plus the District of Columbia, though even here there is disagreement: I found one source listing 39 US domiciles, including places like Puerto Rico and the US Virgin Islands, as well as states like Florida and West Virginia which have captive laws but no active captives.
The world’s third largest captive domicile had a net loss of three active captives in a period in which the overall number of captives has grown by 2,000.
Vermont’s official state website has a downloadable PDF listing all 1,197 captives licensed in the state as of the end of 2020. In January 2021 the state reported it had licensed 38 new captives in 2020, including 11 in Q4 alone. It also closed 34 captives in 2020, bringing its active total to 564, up from 559 in 2019.
If you compare the active number 564 to the licensed number 1,197, more than half of Vermont’s licensed captives are inactive. Vermont confirms it had 567 active captives in 2008, meaning that the world’s third largest captive domicile had a net loss of three active captives in the last 11 years, a period in which the overall number of captives has grown by 2,000. Vermont explains this is largely because much of that growth has come from 831(b) captives, which Vermont does not have many of.
I am not picking on Vermont, which I believe has one of the most professional insurance departments around. The state runs a great conference and is one of the few captive domiciles that is transparent about its numbers. Risk retention groups (RRGs) are also captives: about 80 percent of RRG premiums reside in Vermont. RRG owners are some of the most sophisticated players in the industry so Vermont must be doing something right.
Large companies often use captives to lower their insurance costs, sometimes in offshore tax-advantaged locations. In 2000 less than half of the Fortune 500 and S&P 500 companies had captives. Today 90 percent of them do. Some industry sources believe 50 percent of the property casualty insurance written in the US today is through captives.
Rent-a-captives are special purpose insurers that establish legally segregated cells or underwriting accounts for each insured. The objective is to ensure that the assets of one underwriting account cannot be used to satisfy the liabilities in another.
These rent-a-captives have taken on a life of their own since Bermuda passed the Segregated Accounts Companies Act in 2000. It seems that every carrier in the captive insurance space, and many captive managers, have one. We now have Segregated Portfolio Companies in Cayman, Protected Cell Companies in Vermont and Segregated Cell Captives in many other places. I do not know of any official estimates of the numbers of segregated, protected and portfolio cells, but I am willing to bet the number is in the thousands.
Following every catastrophe and every hardening market, our industry looks to captives for solutions. COVID-19 and the 2020/21 hard market are no exception. I am a huge fan of captives, but the numbers from places like Vermont indicate that only around 50 percent of captives provide a long-term solution for their clients.
Before you form one, look at the numbers.
Greg Lang is the founder of the Reinsurance and Insurance Network. He can be contacted at: email@example.com
Greg Lang, Reinsurance and Insurance Network, RAIN