1 January 1970USA analysis

US captives bouncing back

“A soft market, uncertainty in regulations, stress on captive parents and low yields on investments...” Sound familiar? That’s what I said last year and the year before when discussing the issues facing the captive industry in the US. Maybe the “stress on captive parents” is easing somewhat, but 2011 will continue to be defined by a soft market, uncertainty in regulatory developments (healthcare, and the impact of Dodd-Frank Act and the Nonadmitted and Reinsurance Reform Act of 2010, among others) and low yields on investments.

Nonetheless, the experience of 2010 provides a basis for cautious optimism in 2011. Virtually all onshore domiciles showed modest growth in the total number of active captives, though several newer domiciles (Utah, Kentucky, Montana and Delaware) showed significant double-digit growth. Some of that growth appears in the number of 831b captives, but it is clear that more and more companies and organisations are seeing strategic reasons to form captives, even in a soft market. Another reason for continued growth is the availability of cell captives and variations such as incorporated cell and serial limited liability company (LLC) captives.

Although there continues to be concern about increased scrutiny for captives at both the federal and state level, specific legislative or regulatory proposals are yet to emerge. Many states are in desperate financial shape, so there are those who fear that states will cast an eye over any available revenue source, including captives. Ironically, increasing numbers of states are seeking to become captive domiciles, with New Jersey officially joining the ranks this year as the latest captive domicile.

And no discussion about the insurance landscape in the US would be complete without speculation on the evolution of healthcare insurance. Until the dust settles, it is doubtful that many companies will jump into the arena, but then again, many see opportunities for captives in this new environment.

In the just-released Captive Insurers Companies Association 2011 industry survey, we asked respondents about the biggest challenges facing captive owners this past year. The evolution of concerns from 2008 to 2011 is interesting and instructive.

• In 2008, the biggest challenges for captive owners were support from service providers and tax concerns (the Internal Revenue Service had proposed regulating the deductibility of loss reserves, which was subsequently withdrawn).

• In 2009, those challenges changed dramatically. Collateral requirements jumped to the top of the list, followed by expanded utilisation, fronting, service, taxes and reinsurance.

• The 2010 survey reflected further change. The biggest challenges were identified as collateral requirements, regulatory issues, and policyholder retention and growth, with tax, fronting and expanded utilisation trailing some way behind.

• The 2011 survey reflects the economic impact of the past few years. Policyholder retention and growth of the captive are now listed as the biggest challenges facing the sector, followed by expanded utilisation and collateral requirements. Regulatory concerns, tax issues and corporate governance are now further down the list.

All in all, captives have held their own and even shown modest growth over the past couple of years, despite economic uncertainty and a soft commercial market—which shows no signs of hardening this year. With this maturity in the captive industry comes an expectation that captives and risk retention groups will face more calls for regulatory scrutiny. But captives seem up to the challenge, and when the inevitable hardening of the commercial market comes, captives will be ready to take on more and more of the risk-financing business. Welcome to the world of captives.

Dennis P. Harwick, president Captive Insurance Companies Association