Official figures indicate business passing through some of Bermuda's many captives may be slowing, but there is no diminution in their numbers. On the contrary, the Registrar of Companies Kymn Astwood says that there were approximately 90 new insurers licensed in Bermuda in 1997, of which about half are clearly captives.

The level of capital and surplus of Bermuda's captives also continues to grow.

"Despite the soft market, we are still seeing strong activity. The number of formations is very encouraging," says Mr Astwood.

During the 1996 financial year, results for which were released in January 1998, gross premiums written by all international insurers on the island rose from $23.4 billion to $25.1 billion or 7%. The rise of 8% in net premiums from $18.4 billion to $19.8 billion, however, reflected an enormous jump in long term premiums from certain large transactions that are not expected to recur.

Excluding long term business, net premiums fell 6%. On general business, only class 1 companies, that is single parent captives, reported an overall increase in net premiums. Class 2 companies, that is multi-owner captives and those writing up to 20% third party business, had a material fall.

Class 1 companies are the largest single group and make up 32% of the market by numbers. In 1996, there were 470 registered companies, up from 453 in 1995. They are individually smaller companies than other classes and account for just under 10% of the market's gross premiums and 11% of its total capital and surplus.

Class 2 companies are the next largest group - a total of 434 registered companies, against 406 in 1995. They make up 30% of the market by number, 19% by gross premiums and 27% by capital and surplus.

Class 1 companies did show an increase of $200 million in both gross and net premiums written in 1996, but class 2 companies reported a fall of $1 billion or 17% in their gross written premiums and $800 million in net written premiums.

Class 3 companies, which include finite risk reinsurers, rent-a-captives, agency captives, commercial carriers and larger captives writing a substantial amount of third party risk, make up 20% of the market by number, 45% by gross premium income and 43% by net premium income. As a group in 1996, the 291 companies in this class reported a fall of $200 million in gross premiums or 2% and $500 million or 6% net.

However, all classes including captives showed a rise in capital and surplus, ranging from 2% for class 1 insurers to 30% for class 3 insurers. Assets for the market as a whole increased 5% to $99.9 billion and capital and surplus rose 15% to $42.5 billion.

In 1996, more class 3 licences were issued than any other category, and this trend continued during 1997, according to Mr Astwood. He explains: "A number of class 2 companies have applied to go to class 3. They have made the decision that writing more third party business will help them to achieve their tax objectives."

Mr Astwood praises the island's insurers for maintaining what he says is "pricing integrity" in the face of international rating pressure. Bermuda's insurers have, he says, continued a conservative policy towards the ratio of their underwriting of net premium to capital and surplus. The latest statistics point to an industry wide ratio of 0.47 premium to capital compared to 0.50 in 1995.

"We are pleased that the Bermuda insurance industry can turn in such a strong performance in such a weak market."

Innovations

Bermuda so often is a sort of laboratory for the insurance industry. For example, J&H Marsh & McLennan has set up a new king of reinsurance "exchange" or clearing house for large, single parent captives, called the Green Island Reinsurance Pool. Participation in the pool allows the captives to underwrite unrelated casualty premiums, and so diversify their books, in a cost effective way.

The pool is a two-way mechanism. Captives transfer premiums to Green Island to cede certain lines of insurance. In return, they receive equal premiums from the pool for the unrelated risks which they are helping to reinsure.

To join Green Island, a captive must be able to show both good financial strength on its own account and for its parent. It must have a good record on safety and loss control, acceptable risks and data to support credible loss estimates. The pool is designed for sizeable captives whose parent companies have sustained primary casualty losses of at least $3 million.

At the start of 1998, the pool had 10 members and hopes to expand in a controlled way over the next few years, perhaps adding four or five new participants. Currently $78 million in premiums have been ceded.

Classes which may be ceded to the pool include workers' compensation and employers' liability, general liability, including products and completed operations, and automobile liability.

According to Glenn Weber of J&H Marsh & McLennan global risk financing & consulting group: "One of the key business advantages of this approach is giving captives an efficient way to diversify their underwriting portfolio and spread their risks."

However, in one area, the domicile that is probably Bermuda's closest rival in the captive stakes, the Cayman Islands, has taken the lead, and that is providing facilities for risk securitisation. The Cayman Islands are now home to eight special purpose vehicles (SPVs), reinsurance companies used to set up catastrophe bond issues. Not surprisingly, Bermuda is planning legislation that will enable it, too, to offer the CAT bond promoters the ability to establish zero-capital SPVs.

Bermuda remains the largest captive domicile in the world with over 900 clearly identifiable captives in classes 1 and 2 and about 200 more which fall within class 3. That level of business has its own momentum and new captive formations will continue in Bermuda at a rate that newer and smaller domiciles will regard with envy.

It may be significant that among single parent captives, premium volume grew in 1996, but for class 2, which includes many multi-owner captives, it fell significantly. The sense of control generated by insuring into a 100% owned subsidiary may be diluted where the risks are shared with other organisations to the extent that inexpensive insurance is more attractive. We are likely to have a better idea when the 1997 figures are available.