Capital flows into captive havens: Caribbean jurisdictions do not necessarily see themselves in competition with Bermuda but with the United States and Europe, where captive markets have been growing apace. U.S. jurisdictions now include 21 states and the District of Columbia

Risk & Insurance, Oct 1, 2004 by Roger Crombie

In the world of captive insurance, a number of jurisdictions use the Bermuda model. Now, as captive insurance again bubbles to the top of the corporate agenda, Bermuda should feel flattered as other players are actively growing their captive franchises. More than 70 national and state jurisdictions now offer captive services or plan to start doing so soon. The Cayman Islands and Vermont models have been added to the mix.

A.M. Best reports that over the five-year period ending Dec. 31, 2003, net premiums written by the captive industry grew by 45 percent and admitted assets by nearly 29 percent. In that time, surplus increased by only 2 percent. Growth in risk underwritten by captives has therefore come at the cost of increasing leverage.

Around the world, Fred Reiss' 1960s notion of companies insuring their parent or group's activities is finding fertile new ground. The shape of the global market is changing as new jurisdictions join the club. A sudden fascination for a special captive called segregated cell companies has further affected the way the pie is sliced.

CHASING BERMUDA

Bermuda continues as the market leader, 40 years after it jumped out to a bead start. About 30 percent of the world's 4,800 captives are domiciled in Bermuda. Growth in the Bermuda captive sector waxes and wanes, as it does everywhere. In 2002, captive formations grew less rapidly, offering the professional service providers some breathing space. Last year, Bermuda was at full tilt again. But this year, for the five months to May 2004, new registrations were 28 percent lower than they had been a year earlier. (These are small numbers, where the timing of a couple of deals can exaggerate underlying trends.) Still, there's no doubt that Bermuda continues to incorporate captives relentlessly.

Beyond simple market supply and demand, the biggest factor in determining Bermuda's fate is the competition. The island's business corps is already doing all it can, all the time. The competition was once from the Cayman Islands and perhaps the Channel island of Jersey, and, although no one ever mentioned it much, Vermont. Now, Bermuda is up against the world.

The most interesting development in the captive sector in the past few years, broadly speaking, has been the spread of activity into almost half the U.S. states, solid growth in the major European centers, the start of a serious captive sector ill the Asia/Pacific region, and new interest in the Gulf.

More immediately for Bermuda is the effort being made in its back yard (more accurately, by its nearest neighbors to the southwest), the Caribbean.

CAYMANS COME ON STRONG

The Cayman Islands are home to about half the captives in the Caribbean, 660 as of June 30, 2004. Last year, they reported annual premiums of $4.9 billion. Where Bermuda is home to some 400 physically present insurance companies, Cayman is a brokered market, more solidly concentrated on captives. In the two and a half years to June 2004, Cayman's captive numbers grew by 22 percent.

Cayman's captive mix is skewed more heavily toward medical malpractice, professional liability coverage for hospitals and nursing homes, and other health care service providers. This sector has been growing at a steady clip for some time, forming captives as solutions for the insurance problems of medical facilities and professionals. That market continues to grow at a steady pace, yielding only to the dictates of the parent's economy.

Segregated account companies have proven enormously popular in Cayman, as they have in Bermuda, and 13 percent of Cayman captives are now operated as segregated account companies. The concept of segregation, an umbrella holding company, appeals to smaller and midsize companies. Companies not yet ready to make the jump to full captive formation can efficiently use a cell within a larger entity as a halfway house.

Elsewhere, the British Virgin Islands are home to about 300 captives, excluding credit life companies. BVI captives are used for a variety of lines, and can be a sensible alternative for smaller companies unwilling to pay the higher prices charged by Bermuda or the Caymans.

The Barbados captive market also represents a fast-growing alternative to the mainstream captive jurisdictions. The insurance sector in Barbados has traditionally been splintered geographically, and lacks the focus that a single center brings. The roads are still pleasant, and the pace of life in Georgetown remains relaxed, but that may change if the insurance and capital markets continue to discover the alternative advantages that Barbados has to offer. More than 400 insurance companies call Barbados home, of which about 60 percent fall into the definition of captives. Growth in the captive sector has been moderate, but consistent, with great interest from Canada.

About 80 captives are registered in the Turks & Caicos Islands. Aruba, the Bahamas, Curacao, Panama, St. Lucia, St. Vincent and the U.S. Virgins are all active captive jurisdictions, although none has many more than 20 incorporations. Belize and Granada have joined the captive business, as has the island of Anguilla.