Tectonic challenges
I
’ve been asked to identify the issues that will affect the captive insurance industry in the coming year. It is an uncertain time for economies throughout the world—and captives are an integral part of those economies.
We will face what I call ‘tectonic’ issues, such as Solvency II. Will
the regulatory regime unify the European Community? Or drive parts of it away? The same is true of the US’s own regulatory scheme. The Dodd Frank Financial Reform Act and its progeny, the Nonadmitted and Reinsurance Reform Act and the newly created Federal Insurance Office, will change the landscape of insurance, but no-one knows by just how much or how soon.
Another tectonic issue is whether the commercial insurance market
will start to harden. If that happens, many insurance buyers will take another look at captives. To the surprise of many, the number of captive insurance companies has continued to increase steadily each year despite the soft insurance market of recent times. Numbers are not yet available for 2011, but I expect the number of captives to continue to show an increase. Just imagine what will happen if the commercial market hardens and insurance buyers see captives as both a strategically sound tool and a price effective one.
Other issues in the coming year will fall more in the category of ‘climate change’. Things will be hotter in some locations and cooler in others. Will Bermuda’s decision to seek equivalency with Solvency II drive captives onshore to the US or to Cayman? Will the growing insurance industry in the Middle East attract more European-based captives?
Many believe the largest untapped market for captives will not be
found in large companies. Fortune 1000 companies have had the expertise to transition to captives for their insurance needs for years. Rather, the vast middle market is ripe for the picking—especially if the market hardens.
Within the US, there is a wary eye on the growth in so-called tax code section 831(b) captives (entities that write less than $1.2 million in premium
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