Kathleen Waslov looks at the impact on buyers and suppliers.
The captive management business has evolved over the last 25 years from a small, specialised group of accountancy businesses in offshore domiciles to an important sector of the alternative insurance market, now representing at least $300 million of annual fees, and dominated by the global insurance brokerage firms.
Captive management emerged in the 1970s in Bermuda and a few other captive domiciles as an unbundling of insurance company functions, often to try to create arm's-length operational distance between the captive owner's parent company and its captive insurance subsidiary. The early players provided basic accounting services like the production of annual reports and filings for the local insurance regulators. Today, captives that use outside managers to operate their companies can choose from a diverse menu of professional services. Captive managers offer introductions to fronting insurers and reinsurers, coordinate actuarial pricing and reserving work, arrange banking and investment transactions, give risk financing advice, and may even perform underwriting and claims adjusting functions.
Recently the landscape of captive management has changed significantly, as four of the top 10 players have been acquired by the other six companies in the top 10. This consolidation trend, while possibly limiting the options for buyers, may broaden the type and quality of services available. Consolidation should produce lower costs for suppliers as the merged companies rationalise their operations and become more efficient, however, we expect that costs savings will not be passed on to consumers. Instead they will be persuaded to move from a basic to a more advanced level of service.
We looked at the 1998 market share statistics for the major players from the 1999 Captive Insurance Company Directory of Tillinghast - Towers Perrin, and compared them to pre-merger 1994 statistics to see how the market has changed. We counted the number of captives under management, not revenues, as reported by managers in the major domiciles. (We expect that if market share were measured by professional fees or premium revenues, the top two managers' market shares would be even larger because they serve a higher proportion of large multinational accounts with large captives which produce higher fees.) The results are displayed in Table 1.
With the acquisition of J&H and Sedgwick, Marsh & McLennan has risen from second place to a commanding share of the captive management business, managing 890 captives, more than twice as many as its closest competitor, Aon, who acquired the business of Alexander. Mutual Risk Management (MRM) doubled its client base with the acquisition of International Advisory Services (IAS) and achieved the third ranking position. Close behind MRM falls Sinser (owned by Skandia), IRMG/ ARM (owned by Swiss Re), and Willis Corroon (now Willis), another global brokerage firm. The top six players, all owned or affiliated with international brokers or insurance companies, now command over 50% of the captive management market.
All players have benefited from a constantly growing captive base, which has increased by about 5% per year for the last four years. Marsh and its acquired companies have actually lost a small portion of market share, dropping to 21.5% from 23.2%, while Aon and Willis Corroon gained over a point each. But after accounting for the acquisitions, the balance of market share remains about the same as it did in 1994, primarily because there is little turnover in the captive management function. The only way to grow organically is to chase the new captive formations. The change in share of the pie is illustrated in Table 2.
Self-managed captives have seen very little growth in numbers - only 2% in four years. These captives tend to be large, mature, single-owner or “pure” captives, and much of the recent growth in new captives has come from group captives, rent-a-captives and agency captives. Self-managed captives are found outside the major captive domiciles where the top six managers do not have a large captive management presence: California, Michigan, Colorado, Wisconsin, Ohio, Tennessee and Illinois in the United States, and Sweden, Denmark, the Netherlands, the United Kingdom and British Colombia.
This survey of the captive management market would not be complete without mention of several captive managers that are dominant in a single domicile. They do not appear in the charts because their global market share falls below 1%, yet they are in one of the top three positions in the regions where they operate. While the top 10 managers have shrunk to be the top six, there has been little change in the distribution of market share across suppliers, at least not yet. The buyer of management services still has a variety of choices: self-management, if the company is large enough to justify the staffing or the owner desires direct control; the Big Broker, who can perform a multitude of risk management and insurance functions; or the specialist, who offers customised services and local knowledge. Captive owners, particularly those not in the largest captive domiciles, would do well to examine all three of these options, and decide if the degree of services provided really add value for the level of costs charged.
Kathleen Waslov is a consultant at Tillinghast - Towers Perrin