Captive use expected to rise in 2002

Risk & Insurance, Feb, 2002 by Michael Capozzi

Captives and alternative risk financing will increase in 2002, as the hard insurance market causes companies to reevaluate their risk management programs and consider financing property/casualty risks outside the commercial market.

In addition to the hard market, there are a number of other factors influencing the increased popularity of captives and alternative risk financing. The reasons include a cooperative regulatory environment, increased use of risk retention groups, the creation of new offshore commercial insurance ventures, and the ability to incorporate employee benefits into captives.

Many domestic and offshore captive domiciles are competing for new business, which has led to them considering applications on short notice and fast-tracking the application review process, says Jim Swanke, leader of Tillinghast-Towers Perrin's North American Strategic Risk Financing practice in Parsippany, N.J.

But, due to the hard market and the insured losses resulting from the September 11 terrorist attacks, fewer insurers are willing to offer fronting services to those companies seeking to establish a captive--or will do so only at a significant cost increase. This phenomenon is forcing companies to consider risk retention groups or purchasing groups in order to save money, adds Swanke.

While large brokers and insurers have been bringing new capacity to the market, captive owners have not been starting new ventures. This perplexes D. Hugh Rosenbaum, a Tillinghast expert. "The absence of do-it-yourself group solutions to the current fronting and capacity crisis is curious because, in previous insurance crises, the buyers got together to create offshore insurers and pooling mechanisms in order to avoid being caught by surprise," says Rosenbaum.

Companies are taking the initiative, however, in terms of looking for ways--including captive solutions--to reduce employee health coverage costs, which are predicted to rise more than 10 percent again in 2002. "The use of a captive in a benefits funding system holds the possibility of reducing overall funding costs 10 percent to 20 percent over the long term, and freeing up working capital too," says Mitchell Cole, a Towers Penn principal.