CAPTIVE GROWTH


“There is a real shortage of qualifi ed regulators. The regulator is extremely important to the success not only of an individual captive but to the domicile itself.”


isolated in a captive, subsidiary companies can have their own separate captive and coverage exclusions can be covered and limits raised.


We now see captives being used to offer coverage that is either not available in the traditional marketplace, or where the cost is prohibitive. The world has shown us that we cannot predict what unusual or unforeseen events can occur causing either large unreserved claims or no coverage response. Captives can be the answer.


As the number of domiciles has increased, and more people become captive managers and consultants, we see greater interest and use by small and medium-sized businesses. This is driven in part by the reduced cost of entry in terms of capital requirements and fees assessed, but also by the growing recognition of the new uses for captives. Where once small percentages translated to big savings, now the ability to enhance the balance sheet and perhaps achieve tax effi ciency widens the audience for captives.


Forty years ago, premium size was an important driver. Today the driver is one’s imagination. Forty years ago the impediment was premium size. Today the impediment is regulation (and regulators). As the number and scope of captives has grown there has been resistance in some quarters, with regulatory hurdles such as the Foreign Account Tax Compliance Act and proposals from the National Association of Insurance Commissioners confronting the industry.


With the growth of captives and domiciles there is a real shortage of qualifi ed regulators. The regulator is extremely important to the success not only of an individual captive but to the domicile itself. State budget woes and lack of training sometimes put people in the job who don’t have the necessary understanding of captives or an attitude of openness to new ideas. This can be a real impediment.


Another perceived barrier is the market cycle. In CICA’s early days the market cycle was entrenched at three years, from hard, to changing, to soft and back again. As the industry has changed, the cycle has changed so that we are fi nishing, perhaps, a 10-year soft cycle. Hard markets usually mean there is increased interest in forming a captive, but some practitioners argue that the soft market is the best time to form your captive as you can obtain better terms from the fronts and reinsurers.


In CICA’s next 40 years we can expect to see continued growth in captives as more and more businesses choose to fi nance their own risks and discover new risks to cover. We will also see more competition among the domiciles, particularly those in the US, to become the domicile of choice. Federal attitudes will drive much of that, as will the creativity of the captive consultants. ●


Mike Mead is president of MR Mead and Company. He can be contacted at: mmead@mmeadandco.com


CICA | Forty years of captive leadership 43


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