Marsh’s London office has issued a new “global benchmarking report,” which examines the use of captive insurance companies by today’s global firms. The report -”Next Generation Captives – Optimising Opportunities” – found that although annual captive premium income is estimated between $55 to $60 billion, “is the first detailed look at how their use compares by region, by domicile and by industry,” said the bulletin. “The report found that while captives are significantly better capitalized than required by current levels of risk assumption, many are not optimizing their captive structure.”
Other key findings included the following:
– The cumulative number of captives has increased at a steady rate since the early 1980s.
– US companies own 57 percent of the world’s captives and all companies that comprise the Dow Jones 30 own captives.
– UK, French and Swedish companies are, respectively, the second, third and fourth most prolific owners of captives.
– Bermuda is the single favourite domicile for captives, accounting for 29 percent of the total. However, when aggregated together, US states actually account for 30 percent of the total. From a European perspective, Guernsey continues to have the largest number of captives.
– Financial institutions account for 20 percent of all captives, with healthcare companies owning 11 percent and manufacturers 10 percent.
– Captives are used for a variety of risks, with 20 percent of business underwritten being for property damage, 18 percent for general or third party liability and 12 percent employers’ liability and workers’ compensation.
– Almost half of captives are currently achieving a return on capital employed of greater than 10 percent. However, more than one-third have a return of 5 percent or less.
– Globally, almost 60 percent of captives do not use reinsurance. When considered in conjunction with the level of retained profits held by captives, this suggests that most captive business continues to be profitable. There is also evidence that once a company decides to pay premium to a captive, versus the general insurance market, a significant majority of that premium is permanently removed from the market.
Michael Cormier, Chief Executive Officer of Marsh’s Captive Solutions Group, commented: “As the insurance and reinsurance markets have changed over the past 40 years, one of the few constants has been the steady development of captive growth. As their number continues to grow, even through soft insurance cycles, it is clear that captives are here to stay.”
Jonathan Groves, Head of Captive Consulting for Marsh in Europe, the Middle East and Africa, noted: “Locations such as Bermuda, Guernsey and Luxembourg have seen their proportion of new captives fall as a percentage of the total, while US states like South Carolina have increased their share.
“Our experience reflects two primary reasons for this: first, captive formations tend to be in the same region as their owner and, second, with the overall increase in domiciles globally, it is becoming harder for offshore locations to differentiate themselves. While Luxembourg enjoys advantages by being within the EU, it is increasingly facing strong competition from domiciles such as Malta.”