With 520 captives, Cayman is the second largest captive jurisdiction in the world. It has specialised in heathcare, but provides a wide range of covers. Cayman is second only to Bermuda, which reports 1,564 captives, but includes in the figure virtually all insurance enterprises operated in or from Bermuda, whether captive or not.
Global interest in captives is on the rise, with numbers increasing in all the major jurisdictions. In the past the captive concept had been kept in the back pockets of treasurers and boards while other, more urgent matters took precedence. Rate increases in the January and July season, prior to the events of September 11, moved captive ownership further up the agenda. The ability to reinsure, particularly after September 11, remains an important topic for captives,
Estimates suggest that alternative insurance now comprises 40% of US premiums, with an increase to 50% – half the market – expected within five years. Captive insurance was originally best suited to larger multinational enterprises, but the increasing acceptance of captives and growth in the number of friendly jurisdictions has made the concept available to medium-sized businesses and smaller groups.
The number of US states offering captives protection has risen to 19, although so far only Nevada permits agency captives. Vermont has about 360 registered captives and Hawaii has 100. (Celebrations in Vermont of the “500th” captive this fall refer only to total incorporations. Captives worldwide are formed and expire, by some estimates, on a seven-year cycle.)
States that now allow the formation of captives are: Arizona, Arkansas, Colorado, Delaware, District of Columbia, Florida, Georgia, Hawaii, Illinois, Kansas, Maine, Nevada, New York, Rhode Island, South Carolina, South Dakota, Tennessee, Vermont and Virginia. No more than 60 captives operate in all the states other than Hawaii and Vermont. Of the 17 less dominant jurisdictions, only Colorado and Georgia are in double figures. Four or five have legislation in place, but no captives.
Vermont has led the way in the US. Many of the states adopting captives have borrowed heavily from Vermont's thinking and legislation. States have a balancing act to perform, allowing their captives the necessary freedom and ‘friendly' regulation without offending the national interest.
In a market of this size – the world has some 4,000-plus captives – it is natural that individual jurisdictions would aim for niches. Bermuda has been attracting interest from South America. Hawaii has targeted Japan and incorporated its first Japanese captives. The District of Columbia is reportedly eyeing the 6,000 associations in the District as potential clients. Rhode Island and Nevada have introduced segregated cell legislation.
The European jurisdictions that welcome captives have had varied experience in the past couple of years. The major markets are:
Growth in the European captive market was sluggish in the last two years of the soft market, but a rising tide raises all boats and most of the Europeans have been reporting increased interest in captives this year.
Other Caribbean islands have established captive regimes with varying degrees of success. Barbados has about 220 captives, the British Virgin Islands some 80, and the Bahamas and Curacao about 20 apiece, as many as there are in British Columbia, which briefly enjoyed a vogue in captive formations that has since levelled out.
The role of captives has changed in the past 40 years. What started as ‘naïve' or ‘pure' captive insurance, strictly parent company or group-owned business, has blossomed into many different vehicles to accommodate user needs.
Captives tend to be highly capitalised in relation to the risks they write. As the markets consider their reaction to the events of September 11, it is possible that the excess capital retained in the captive pool may be reallocated towards more efficient use. Direct writers, covering risks farther afield than related companies, have sprung up in Dublin and elsewhere.
On a broader level, captives are being used as a central risk-financing mechanism for international companies. Captive capacity does not shrink in adverse conditions and can provide ‘safe-haven' financing for owners. Captives are used to write third party business as part of a finite insurance deal. Other captives are writing new business from within the group, such as employee benefits or customer risks.
Providing the authorities in the leading jurisdictions remain flexible, continue to update their legislation regularly in consultation with the private sector and pay attention to the needs of the global market, there is no reason for Bermuda, Cayman and Vermont to lose the lead they have established and long protected.