CAPTIVE RESOURCES
over the years. Dispelling early, dubious perceptions, they are now more widely known and accepted as a viable and practical captive option for mid-sized companies, and comprise a fast- growing segment of today’s captive industry.
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Steady growth Until recently, an idiom for the evolution and growth of the member- owned group captive sector could have been ‘slow and steady wins the race’. Not to imply there’s a prize to be had (or a race, for that matter)— except perhaps for the thousands of middle-market companies that have reaped the benefits of membership. Rather, it is perhaps a fitting description of the steadily increasing awareness of, and participation in, these structures over the past two to three decades.
The origins of the modern day captive industry can be traced back to the early 1950s, when large parent companies began to establish their captives offshore, through to the late 1970s when Bermuda and the Cayman Islands developed their captive laws. It was only natural that single parent captives were at the forefront of developments, but as the industry matured and the alternative risk transfer market flourished, so too did various group structures such as association and affinity programmes, risk retention groups, rent-a-captives and special purpose captives among others, many with the goal of making captives more accessible to mid-sized companies.
So while group structures have been around for decades, they have not historically elicited the intense interest that we see now. In more recent years, mid-sized companies have joined member-owned group captives at an exceptionally rapid rate, and further dynamic growth is looming on the horizon. An impending hard market is likely only to heighten interest.
Member-owned group captives have always been the sole focus of Captive Resources, LLC (CRI), since 1984 when it formed Raffles Insurance Ltd, the world’s largest heterogeneous, member-owned group captive, and recipient of the 2009 Captive Insurance Companies Association (CICA) Outstanding Captive Award. The pioneering success of Raffles spawned other member-owned group captives, both heterogeneous and homogeneous, groups that utilised the same frequency-driven model. CRI has borne witness to this vigorous growth and its business has grown from that first group of nine Raffles founding members with about $1.5 million in premium, to more than 25 captives, 2500-plus members and nearly $1 billion in premiums.
So what do these member-owned group captives look like today, and what is generating the unprecedented interest in them?
ember-owned group captives are now enjoying the same widespread appeal, garnering similar press interest and eliciting the same intense interest as other captive structures have done
Distinguishing characteristics The defining characteristics of the majority of today’s most successful member-owned group captives make them unique among captive structures.
• The member policyholders are the only owners, with no outside ownership interests. This eliminates any potential conflicts of interest and provides the owners with full control.
• Corporate governance is member-driven, which further supports the central captive purpose of providing the members with control. Each member, regardless of size, has one seat on the board of directors and one vote. The equity this creates across the membership is an attractive feature to members since each one, regardless of premium size, has the same voice. This is an important feature, since there is a wide range of companies of varying size that comprise the middle market.
• A strong committee structure allows for even greater individual participation by members according to their specific interest or expertise. Committees bring their recommendations to the board (for review and discussion by the entire membership), which has sole decision-making authority. This further facilitates the management process for members, especially as a captive grows to have hundreds of members.
• An equitable, easy to understand risk funding formula incorporates risk sharing among the members, and ensures that members’ premiums are truly reflective of their risks. Widely known as the ‘A fund/B fund’ formula, CRI worked with Raffles members on the development of this captive funding formula in the 1980s. The A fund provides for frequency losses, the B fund for severity losses, and there is a provision for assessment should a member’s experience exceed actuarial projections. Reinsurance protects the captive against catastrophic losses exceeding the captive retention, and aggregate excess coverage further protects the captive. (While it has always been an important aspect of a properly structured group captive, in recent years catastrophe protection has taken on greater significance in light of increasingly volatile cat trends.) Basket and clash coverage is typically provided. The formula has become an industry standard for member-owned group captives.
• Support services including policy issuance, reinsurance, actuarial services, claims administration, loss prevention, financial auditing and banking are all provided on an unbundled basis. This is an ideal structure for a mid-sized company which, typically, does not have the resources to dedicate to running a captive. The inherent flexibility allows the captive to change any of its services at any time with minimal, or no, disruption or additional cost.
CICA | Forty years of captive leadership 63
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