Taking (or Leaving) Captives

The hard insurance market has made captive insurance companies more attractive than ever before. But a captive may not be the best choice for short-term needs.

Businesses are sick and tired of the hard insurance market, particularly for property and casualty coverage, and they are looking for a way out. For many proactive organizations, the exit signs point toward forming a captive insurance company as part of their long-term risk management strategy. In its most common form, a captive is an insurance company that is created and wholly owned and operated as a subsidiary by a company that is not otherwise in the insurance business. Once formed, the captive insures the risks of the parent company and its other subsidiaries, particularly its property and casualty exposures.

More than 30 jurisdictions around the world have laws that allow organizations to establish captives. In 2002, the global tally of captives was nearly 5,000, according to A.M. Best Co. Inc., the Oldwick, N.J.-based insurance-rating and information agency. However, that number likely has increased significantly since then. "Although captives have always been popular, captive formation has been particularly high over the past two or three years," notes James A. Swanke Jr., Minneapolis-based principal and risk financing practice leader with actuarial and management consulting firm Tillinghast, a division of Towers Perrin.

In the United States, Vermont is one of the largest domicile states. It had 674 domiciled licensed captives in late 2003 after licensing a record 77 captives in that year. They are owned by companies in a broad range of industries, including health care, manufacturing, hospitality, travel, financial services, construction and fast food, as well as by religious organizations and sports teams. Captive insurance companies domiciled in Vermont had total gross written premiums of $8.5 billion in 2003, up from $7 billion in 2002, according to the State of Vermont Department of Banking, Insurance, Securities & Health Care Administration.

Karin Landry, managing partner with insurance and financial services advisory firm Spring Consulting Group LLC in Boston, attributes the surge in captives to "companies looking to control their own destiny." Adds Swanke: "Captives are a very well-accepted risk-financing tool -- and they are not just for large companies."