Alternative Arrangements Growing; New Risks Being Assessed for Captive Use
Organizations are more likely to form new captives onshore in the U.S. or European Union, while the use of alternative captive structures is growing, especially among smaller organizations. These are two of the key trends found in Marsh’s 2012 Captive Benchmarking Report, released today at the 2012 Annual Conference of the Risk and Insurance Management Society.
The report, Integral and Mainstream—Captives in 21st Century Risk Management, is based on the activities of more than 1,200 captives insurance companies—primarily single-parent captives with U.S. or European owners. It found that from 1991 to 2000, 65 percent of the captives formed were domiciled in offshore locations including Bermuda, Cayman Islands, Guernsey, and Isle of Man, while 35 percent stayed onshore. Over the last decade, 52 percent of the captives formed from 2001 to 2011 were established onshore, compared to 48 percent offshore.
“The movement to a more balanced overall split between onshore and offshore domiciles is due to many factors, including travel costs, changing insurance regulations, and potential savings on certain premium tax payments for captive placements,” said Michael Cormier, CEO of Marsh Risk Solutions, which encompasses Marsh’s Global Captive Solutions Practice.
The report also shows a greater number of multi-owner captive structures being formed in recent years including rent-a-captives, protected cell companies, and risk retention groups. These vehicles not only formalize risk finance but may also operate at lower cost, and with lower cost of capital requirements, than traditional single-parent captives.
Many organizations, including smaller companies that might not be large enough to justify financially their own captives, are expressing more interest in retaining their own risk,” Mr. Cormier added. “We expect this interest in multi-owner captives to continue to grow in 2012 and beyond.”
Other highlights from Marsh’s report include:
- Over the last four years, the health care sector has seen the largest increase in captive formations, representing 17 percent of Marsh’s captive clients in 2012 versus 11 percent in 2008. Financial institutions remain the largest users of captives with a 21 percent share of total captives, compared to 20 percent in 2008.
- Captive owners in the U.S. are increasingly assessing the viability of assuming employee benefits risk.
- Real estate captive owners inquiring about captive financing for tenant default insurance.
- Cyber insurance is increasingly being considered for captive financing, especially among retail and consumer product companies.