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Marsh Report: Innovation in Captives is Critical
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As businesses worldwide strive to navigate the challenging economy, those firms with captive insurance companies are examining a full range of opportunities to put surplus capital to work within their organizations.  At the same time, they are continuing to comply with local regulations governing the capitalization of these companies as well as insurance company collateral requirements.

A new report from Marsh, Single Parent Captive Benchmarking: Capital and Collateral, released today at the 2010 Annual Conference of the Risk and Insurance Management Society, Inc. (RIMS), examines how owners of captive insurance companies in all parts of the world are tapping into surplus funds while continuing to comply with local regulations governing the capitalization of their captives. The report focuses on activities in the past year of more than 750 businesses that own captive insurance companies. 

Regardless of geography, intercompany transactions continue to be the most common use of captive investment assets, as captive owners strive to find efficient methods of returning excess funds to the parent company. 

According to Marsh's report, related party investments that could include intercompany loans, the purchase of parent company commercial paper, or accounts receivable factoring are the most common use of funds, regardless of where a captive is located. These approaches are most widely used by captives based in the U.S., with nearly 70 percent of their assets invested in these transactions.

"Not surprisingly, intercompany transactions have become increasingly popular in the current economic environment," said Scott Gemmell, a senior vice president in Marsh's Global Captive Solutions Practice and author of the report. "Many parent companies can get a much better return by reinvesting this capital in their own operations than from pursuing outside investment strategies."

Generally, Marsh's report finds that captives tend to be capitalized in excess of the statutory minimums regardless of where they are domiciled. In meeting these requirements, offshore captives tend to have higher premium-to-capital ratios than those domiciled onshore in the United States or the European Union. 

"One reason for the higher ratios is that intercompany loans are slightly less common in the offshore domiciles," said Mr. Gemmell, "As a result, captives in these locations may be more likely to return excess capital to the parent company by way of dividends than those in the U.S. or EU domiciles."

He added that in the Cayman Islands, a large number of captives operate with only the minimum capital of $120,000, reflecting the fact that many of these captives have retrospectively rated insurance programs. These programs provide for automatic adjustments in premium based on a captive's loss experience.

Among captives, letters of credit (LOCs) remain the most common method of providing collateral to fronting insurance companies, representing more than half of all collateral instruments, followed jointly by trusts and escrow accounts. Typically secured with cash and certain allowable investments from the captive, an LOC is provided by banks for a fee and guarantees the ability of the captive to meet its obligations to the insurer.

Property insurance was the most popular form of coverage provided by captives, followed by general liability, workers’ compensation or employers’ liability, professional indemnity, and auto liability.

Meanwhile, casualty coverages accounted for nearly 70 percent of the insurance policies for which the captives provide collateral. Of those, almost 45 percent are for workers' compensation/employers' liability and auto liability. Property insurance, written by almost 35 percent of the captives, is less likely to have any collateral requirements.


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Marsh is a global leader in insurance broking and risk management. Marsh helps clients succeed by defining, designing, and delivering innovative industry-specific solutions that help them effectively manage risk. Marsh’s approximately 27,000 colleagues work together to serve clients in more than 130 countries. Marsh is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy, and people. With 57,000 colleagues worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; Mercer, a global leader in talent, health, retirement, and investment consulting; and Oliver Wyman, a global leader in management consulting. Follow Marsh on Twitter @MarshGlobal, or on LinkedIn, Facebook, and YouTube.