Top three domestic U.S. captives hold on to their spots in first half of 2003; Vermont is on track to shatter last year's record; South Carolina sees important gains

Risk & Insurance, August, 2003 by Thomas J. Slattery

Driven by a now two-year-old hard insurance market, the leading domiciles on the U.S. captive scene carried their remarkable growth of recent years through the first half of 2003, according to a midyear survey conducted by Risk & Insurance magazine.

The latest domicile review from the Minneapolis-based Captive Insurance Companies Association indicates that U.S. onshore captive operations represent 12 percent of the world market, a figure which may have increased somewhat in light of the considerable growth in the first two quarters of this year.

CICA President Carl Modecki says there has been a continuing interest in captive insurance companies in the first half of the year, at least as much as last year, and likely even more.

The biggest change since 2002, he says, is the new interest of smaller groups in going the captive route, a phenomenon fueled by the hard insurance market. Up to now, Modecki says, captive activity has been restricted for the most part to the top tier of U.S. companies.

Another trend which has developed over the past six months or so, he also says, is the increased competition among the domestic captive domiciles. In fact, players in the U.S. captive market almost seem to multiply daily.

The field is now a crowded one with a slew of jurisdictions, 17 of them in all, crisscrossing the American map from Montana to Maine, from South Dakota to Georgia, from Tennessee to Nevada, from the U.S. Virgin Islands to Guam. Some have been at it, with varying degrees of focus and success, for some time. But at the other end of the spectrum are the newcomers creating the latest buzz, in places like Arizona, the District of Columbia and New York City.

Despite 16 states and the District of Columbia playing host to captive insurance companies, only three markets really matter when you're talking about U.S. captives. Vermont is far and away the market leader. Hawaii places a strong but distant second. South Carolina, the third-place finisher, is moving quickly up the rankings. The rest are smaller players, two of which license a dozen or so captives, the remainder only one or two companies.

Here's a midyear update on the Big Three:

Vermont: Still the Leader

After 22 years in the captive insurance business, Vermont is still the U.S. gold standard. Less than one-third the size of Bermuda, it is still the world's third-largest domicile and it continues to trail the No. 2 market, the Cayman Islands. It is also the oldest, the biggest (by far) and arguably the best of the major U.S. domestic alternative market venues, though Hawaii and South Carolina, are beginning to emulate Vermont's model and challenge its position.

Vermont has been at the captive game since 1981 and a sophisticated and enviable infrastructure of lawyers, bankers, captive formation experts and captive managers has long been in place. That means the state is a user-friendly venue where regulators, legislators and other state officials are readily accessible.

The market, which grew by more than 25 companies a year even in the soft market of the late 1980s and 1990s, had its biggest year in 2002, when the number of licensed captive insurers there jumped by 70 companies--84 percent--over 2001. Even so, to date this year, says Derick White, the state's director of captive insurance, Vermont is "breaking last year's pace." He estimates that Vermont will have added 36 new companies from January to June, bringing the number of active companies in the state to 469. Of that number, close to 100 are health care companies.

White added that the hard market has more and more companies sticking with their captives rather than going into the reinsurance market. Another development this year has been the formation of six new captive companies to take advantage of the new federal terrorism act, while many existing captives have added the coverage as well.

Hawaii "Pearl of the Pacific"

If Vermont is the Gold Standard back East, then Hawaii is the Pearl of the Pacific for the alternative market. Vermont's sway over U.S. captive insurance business stops somewhere beyond the Rocky Mountains. For sure, up and down the West Coast and around the Pacific Basin one fishes in the captive waters of the Aloha State.

Since Hawaii passed its enabling captive legislation in 1986, the state has also become a magnet for captives. It is currently one of the world's top locations for captive insurance companies and the second largest and second oldest, next to Vermont, of the major U.S. captive domiciles. Its high level of regulatory expertise, its veteran service providers and its long-time commitment to the market have made it the premier domicile for the Pacific Rim. It had 100 active insurers and approximately $2 billion in total assets at year-end 2002. As of May 31, 2003, the number of active captives had grown to 109 with assets of more than over $2.8 billion, according to Chuck Watanabe, captive insurance administrator in the insurance division of the Hawaii Department of Commerce and Consumer Affairs.