A HISTORY OF CAPTIVES
“Where once captive insurance was regarded as a financing technique, today it is a matter for the highest echelons of corporate management.”
incorporate their own insurance subsidiaries, he called them captives too, because they wrote insurance exclusively for the operations of captive mines.
Convinced by his experience of the efficacy of the captive insurance model, Reiss wanted to sell it to the world, but in the early stages of his endeavour, the world wasn’t buying. “I’ll be happy to set up the second one of these companies,” Reiss was repeatedly told by executives not willing to blaze the trail.
As the 1960s dawned, Reiss attended a weekend social event outside London. There, he was introduced to Bill Kempe, a Bermuda attorney and ideas man who had brought mutual fund management to Bermuda a few years earlier. Kempe explained to Reiss how much better his proposed captives would work in a tax-free environment without too much red tape, which Reiss grasped instantly. The two men agreed to meet on the Island a couple of weeks later.
By the time Kempe returned home, Reiss had been and gone. Impatient for success after years of rejection, he had met with Conyers Dill & Pearman, a rival law firm of Kempe’s, to start the ball rolling. By the mid-1960s, Reiss had established captives in Bermuda and set up the captive management company International Risk Management Group. The captive insurance industry was off and running.
Mixed success Within a decade, some of the larger Bermuda captives—still a blip on the global capital markets—began to accumulate more capital than they could usefully put to work. Well-managed captives make money consistently: without taxation, a dollar of profit is worth a dollar. Repatriation would mean taxation. It was suggested that third party business would be a sensible use of the capital.
The natural markets to approach were in London and New York. Insurers in both centres were happy to lay off some of their business, but not always their best business. Some unusual risks were written in Bermuda in the mid-1970s. The taxi fleet in Israel, during an especially volatile stage in that country’s development, is always held up as the classic example of early risks taken by some of the inexperienced larger Bermuda captive insurers.
Some fairly substantial losses were incurred and the idea of writing 20 CICA | Forty years of captive leadership
third party business, unsurprisingly, fell out of favour. Other ideas were canvassed. The quest for a meaningful mission for excess capital held by successful captive companies became a theme of the industry’s development.
Not all was bad news, however. By the mid-1970s, captive insurance had taken hold in Bermuda and elsewhere. Colorado was the first US state to embrace the concept, as early as 1972. The idea that Reiss had tried so fervently to sell was now almost selling itself among the larger multinationals. With mid-sized companies beginning to appreciate the advantages of captive insurance, the number of captives passed the 1000 mark by the end of the 1980s.
Not all were pure captives—companies owned by and insuring the risks of a single parent. Different captive models were emerging to satisfy differing needs, a process that continues to this day.
The giants It is tempting to think of captive insurance at this time as a small business, but the largest of the captives were significant entities. In 1966, for example, Guy Carpenter had formed Intercontinental Re, with capital of $23 million (equivalent now to more than $1 billion). Much of the world’s oil supply passed through Bermuda captives at this time.
And then came ACE and XL. These now-giant enterprises were both formed in 1985 as group captives in Cayman, with subsidiaries in Barbados and operations in Bermuda. The driver was a serious global dislocation in the liability markets. ACE and XL both had, as members, dozens of blue-chip companies that had been unable to find satisfactory coverage when the global markets dried up.
ACE and XL had $750 million of seed capital by early 1986. By the end of 2011, their combined capital had grown to almost $35 billion, making them the most successful captive start-ups in history.
Global growth Although Bermuda had established the lead in captive formations, other jurisdictions began to appreciate what captive insurance might bring to their tables. In the US, Vermont and Hawaii had set up captive departments by the time ACE and XL were formed.
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