Marsh: Captive Owners Bolstered Capital Positions During Downturn

May 2, 2011

Over the last few years organizations took action to strengthen the financial position of their captive insurance company operations, while those forming new captives were more likely to start up captives in U.S. onshore domiciles.

These are two of the key findings in a new Marsh report — Trends and Performance – 2011 Captive Benchmarking, released at the 2011 Annual Conference of the Risk and Insurance Management Society Inc. — examines the financial performance and other trends of captives from 2007 to 2010, a time of unprecedented economic challenges.

The report found that although the number of active captives remained relatively consistent, aggregate premium levels increased substantially across all geographies and most industry sectors.

Likewise, the level of captive owners’ equity also increased despite lower investment returns, an indication that owners did not deplete capital during the economic downturn.

The report focuses on activities of more than 750 captive insurance company clients of Marsh—primarily single-parent captives—based on figures as of December 2010.

“In a period when the reinsurance and insurance markets continued to soften, and when many organizations struggled to just keep float, captive insurance companies performed exceedingly well,” said Michael Cormier, Global Captive Solutions Practice Leader. “Moreover, the financial stability and claims paying ability of captives generally improved during the four-year period.

“This indicates that rather than using captives as a money-saving vehicle when traditional insurance costs rise, owners are viewing their captives as efficient and effective long-term risk management and risk financing solutions.”

The report also shows that while overall new captive formations are down in most domiciles, the 10 largest U.S. onshore captive domiciles, with the exception of Arizona and Nevada, experienced growth in 2010.

“The growth of U.S. state domiciles highlights the trend of migration from offshore jurisdictions such as the British Virgin Islands, which saw the largest reduction in the number of captives—66—in 2010, to onshore locations,” added Mr Cormier.

Since 2007, captives’ claims reserves have generally increased, but especially in those owned by financial institutions. This appears to reflect the increase in claims arising from the global financial crisis.

Other highlights from the survey include:

  • Financial institutions are the most active users of captive insurance companies, responsible for approximately one-fifth of all captives surveyed, followed by health care and retail/consumer products.
  • Property and general/third party liability represent the two most popular insurance classes for captives.
  • Annual average gross written premiums increased the most for financial institutions and retail/consumer products captives but decreased in the construction and transportation sectors.

Source: Marsh

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