MARSH
Arthur Koritzinsky of Marsh gives his thoughts on the drivers of recent captive formations, the success of smaller 831b captives and why greater tax clarity will help drive future captive numbers.
How has the appetite for captive formations fared over the last 12 months? Based on those domiciles that have reported their figures and activity here at Marsh, there were more formations in 2011 than in 2010. That said, there was not a huge increase in the number of captives formed in 2011 because there were captive liquidations resulting from consolidations of companies between 2008 and 2010, with parents finally getting around to looking at all the captives they accumulated during the consolidation process. So my guess is that liquidations of redundant captives have muted the increase but, generally, captive development was positive over the past 12 months.
Do you expect positive growth as the commercial market hardens, or is there an increasing disconnect between the commercial and captive insurance markets? No, there’s a connect. During soft or flat markets, companies still form captives. When markets harden, there are more captives formed and there are also more group captives formed. Group captives tend not to be formed unless there are radical reactions in the marketplace and even though rates generally are on the increase, I’m not sure they are increasing fast enough, or coverages have been restricted to such an extent that it will encourage the creation of more captives than usual.
What other factors are encouraging captive formations in the present environment? Because there is so much clarity around the US tax rules for captives, companies that were waiting for that clarity now have it and are proceeding with captive formations as a result. There is increasing interest among middle market companies in smaller captives, otherwise known as 831b captives. There are also, still, many companies that are beginning to understand that US captives are able to access the Terrorism Risk Insurance Programme, which provides coverage for risks that are currently self-insured.
At the same time there are many new domiciles, and frankly when you get new domiciles in your backyard it encourages people to learn more about captive insurance and understand more about risk exposures, with
this heightened interest helping to spur captive growth. Dodd-Frank is, likewise, acting as another driver of home state formations, and while we have seen some liquidations, a not insignificant number of captives have considered moving to new home state domiciles as a result of the act. We saw new captives in jurisdictions that, frankly, had no captives in 2010 and you are going to see new captives formed in the next couple of weeks in a jurisdiction that has had captive laws on the books for a time, but has never had any captives. This is all as a result of Dodd-Frank.
Which forms of captive are attracting the most interest, and why? Captives numbers are being generated by 831bs and it is clear that if you look at jurisdictions that have grown significantly, such as Utah and Kentucky, that is where the growth has been in the last few years. There’s been a constant level of formations for risk retention groups, particularly in healthcare. The US reform of healthcare will encourage larger physician groups to look closely at medical malpractice costs and give thought to how they can retain risk and spend less money in the marketplace. Risk retention groups are an excellent fit for that need.
When advising prospective parents about the right captive fit, how do you look to match their ambitions with the potential of single, association captives and risk retention groups? It’s clear which captive format is going to be a good fit for the parent’s needs. A small, middle market company is going to be thinking about 831bs, because there is going to be more economic advantage from that structure than some of the others. Association captives are going to be right for small companies that are really looking to pool risk, and not necessarily wanting to take on risk themselves, or who are looking to pool with their peers. Risk retention groups make a lot of sense for physicians where there may be very strong affiliations, but there are restrictions on employment which mean that the physicians may face licensing requirements or work independently. Risk retention group formations take away the uncertainty that comes with transacting business in different states and ensure that the transaction will be compliant from a state perspective.
CICA | Forty years of captive leadership 47
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