CAPTIVE DIFFERENTIATORS


O


n the occasion of the Captive Insurance Companies Association (CICA’s) 40th anniversary I considered the changes in membership, in the types of captive owners—and, now, their service providers—and how


they have changed and expanded over the years. The changing form of captives represented by the membership has brought different, sometimes diverging, agendas from their owners .


Captives are far from being homogeneous, except in the sometimes incredible statistics emanating from domiciles or managers, who both have a vested interest in showing how many captives they have licensed or manage. CICA’s original band of members all had their captives offshore, mainly in Bermuda. Now, onshore captive owners are a substantial proportion of the membership. Group captives were a rarity for the first decades of the CICA, now there are lots of them in the membership.


AM Best has done a good job of putting the captives it counts into some 20 classes according to what they do, but it counts only the ones it rates, which number fewer than 200. There is more to differentiating between captives, however, as I am going to demonstrate.


Survey of different features among captives Ownership and control Single owner


Multiple owner, group-owned


Small (<$10m annual premium)


If group-owned, not a mutual or risk retention group (RRG)


Owned and governed by the members


Insureds are owners Stand-alone captive For-profit owner


Health care: owners and main lines of insurance


US ownership


Not managed by one of the big three broker-managers


Large (>$25m annual premium) Very large (>$50m)


A true member-owned captive that is a mutual or RRG


Owned and governed by the association, or by an attorney-in-fact


Agent or producer-owned reinsurance companies (PORCs)


A cell


Non-profit owner Not health care


Non-US ownership Managed by Aon, Marsh or Willis


The major differences The differences between captives can often be divided into two categories—eg, single or multiple owner/s. In this instance, I have further divided the differentiating pairs into three main categories. These are:


Ownership and control: Single owner versus multiple owners. Modus operandi: Mainly direct versus reinsurance mode.


Tax position: Predominantly the tax position of the owners, ie, for-profit versus not-for-profit.


What they mean: I ordered the differences (or biases) into three columns. The left-hand column represents ‘standard’, or most often observed features. The middle column represents the ‘other’, sometimes the opposite of the standard feature. I consider most of the ones in the left-hand column higher up the captive ‘best practices scale’ than the ones in the middle column. The right-hand comment column contains clarifiers or just plain comments.


Read from left to right as ‘this versus that’ or ‘this or that’. l


Hugh Rosenbaum is an independent consultant. He can be contacted at: hughro2@yahoo.com


There are a lot more single-owner captives. The multiple-owned ones are usually larger.


Larger captives tend to resemble commercial insurance companies, and are sometimes considered more reliable simply because they are so large. This is a misunderstanding.


There are more group captives that are simple stock companies, even if they operate like mutuals.


Some group captives and reciprocals are owned by or controlled by others for the benefit of members.


PORCs aren’t captives, but are often counted as captives.


Most segregated cells operate like little captives but with very different ownership and control features.


US non-profit owners have tax and operating positions very different from for-profit owners.


Health care captive owners use their captives mainly for long-tail liability business, are not-for- profit, and are heavily influenced by actuaries.


Home-country tax, accounting and consolidation rules influence captives’ modus operandi.


This differentiator is in the ‘ownership and control’ category because these three manage more than a third of all captives.


CICA | Forty years of captive leadership


35


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