Global Reinsurance recently undertook a survey of captive managers providing services primarily for North American parents.
For the first time, Global Reinsurance has split its captive survey into North American and European domiciles. This first part covers the US captive management industry, taking in US onshore domiciles, Bermuda and the Caribbean jurisdictions. The results point to an industry in growth mode, as corporations continue along the road of increasingly sophisticated risk management techniques, and deal with the currently hardening market conditions.
The increase in premium rates across the board is causing more organisations seriously to consider turning to - or increasing their use of - the captive option, while a severe lack of capacity in certain lines of business is leading to new risk retention groups being formed, both onshore and offshore.
The figures presented here are an amalgamation of all the questionnaires received by Global Reinsurance. We do not separate out any organisation for individual comment or analysis, but instead aim to present an overview of the state of the industry, and its direction going forward.
The jurisdictions covered by this survey are:
British Virgin Islands
Turks & Caicos
US Virgin Islands
These domiciles were chosen as those most appropriate for North American risk managers. The survey results from European jurisdictions, plus various miscellaneous domiciles such as Singapore and Labuan, will be published in the June issue of Global Reinsurance.
In preparing the survey, we tried to cover the general areas of interest for the captive management community. Although the jurisdictions represented in this part of the survey are geographically diverse, they focus on providing services for the North American risk management community.
The survey questions were:
1 How many people are employed within your company in your domicile?
2 What other services does your company offer?
3 What was your company's annual remuneration for management services?
4 Number of captives managed in 2001 and 2000?
- Location of parent companies.
- Breakdown of direct and reinsurance captives under management in 2001.
4a What was the premium volume written by your company in 2000 and 2001?
4b Explain the reasons for any change in premium volumes.
5a Number of active and inactive captives in 2001 and 2000?
5b Explain the reasons for any changes in these numbers.
6a What is the percentage breakdown of types of business written through captives under management?
6b Identify any lines of business which are increasing or decreasing, and explain the change.
7 Which are your competitor domiciles?
8 What are the three most important reasons for clients to establish in your jurisdiction?
9 What impact has merger and acquisition activity at parent company level had on the captives under management?
10 In what way are parent companies changing their use of captives?
11 Any further comments.
On the question of number of employees within the company, this polarised at the extremes of the scale. Almost 40% of respondents employed less than five individuals within their captive management companies, while 28% had more than 25 people working for them. In fact, at the top end of the scale, these figures ranged from 35 to 97 people, averaging just under 50 people per organisation.
The captive management community proved a flexible lot, with a significant number of captive managers providing further services to their clients. Less than 10% of the survey respondents only provided captive management services. The services offered by the majority centred on the re/insurance process, though general company management services and related financial services such as fund management and private banking were on offer from certain offshore domiciles. The extra services on offer from the captive managers surveyed comprised:
Although very willing to disclose the extra services they provide, captive managers were less forthcoming about their remuneration for core management services. Less than one-third of survey respondents answered the question, with fees ranging from $20,000 to $3m in 2000, to between $30,000 and $3.5m in 2001. The average remuneration across all respondents was just over $900,000 in 2000 reaching around $1m in 2001.
Captives under management
Reflecting the diversity in the number of people in each captive management company, the number of captives under management also varies widely. Numbers under management in 2000 range from just one captive to 297, according to the responses received by Global Reinsurance. The average for the year across all managers is 51.5, while the median is 15.
For 2001, the figures varied from one to 315, with an average of 56.1 and a median of 18. The majority of respondents saw an increase in the number of captives they manage, with 20% reporting no change, and 16% reporting a decrease in captive numbers. Overall, the average change was an increase of 4.6%, while the median increase was 2. During 2001, the number of direct captives managed ranged from 0 to 188, with an average of 24.6 and a median of 3. On the reinsurance side, between 0 and 87 captives were under the management of survey respondents, with a corresponding average of 19.7 and a median of 8. These average figures may, however, be slightly skewed by the inclusion of Vermont results; the state does not differentiate between direct and reinsurance captives.
Captive managers responding to the survey reported that in 2000, they managed between 0 and 17 inactive captives (average of 3.1 and a median of 1) compared to between 0 and 228 active captives (average of 34.86 and median of 9). In 2001, the number of inactive captives managed by survey respondents barely increased, with an average change of 0.4 and a median of 0. In fact, several respondents were able to divest themselves of inactive captives over the course of the year.
Active captives managed by survey respondents during the course of 2001 increased significantly. With a range in numbers per manager stretching from 0 to 257, the average for the year was 40 (compared to 34.86 for 2000) and the median was 11 (compared to 9 last year). Although a small number of managers surveyed reported a slight drop in captive numbers, the majority saw a positive increase, with the highest reported coming in at 29 captives added to the manager's roster.
Reasons for these changes in the number of active captives were fairly consistent across managers, irrespective of the size of the captive management company and seemingly little affected by the jurisdiction the captive manager operated in.
Among the reasons given for increases in captives under management were:
Merger and acquisition (M&A) activity at parent company level was noted by a number of the survey's respondents, though for some this led to an increase in captive usage while, others saw active captives being shut down. At the same time, M&A activity within the captive management community - in particular the acquisition of IRMG and Sinser by Aon Insurance Managers - increased the numbers under management for certain respondents. Last year also saw a number of inactive captives being liquidated, reducing the numbers under management for some survey respondents. Somewhat surprisingly, one survey respondent commented that certain captives had been discontinued because they were "not economically viable to remain in business".
Parent company location
As expected, the vast majority of parent companies covered in the survey were based in North America, particularly when looking at managers located in the various US states which have passed captive legislation. Moving to an offshore domicile sector signals steps towards a more international client base, including parents located in:
Certain captive managers were non-specific about the location of parent companies, citing `Central America' and the `Caribbean' as their home base.
Again, captive managers proved a little coy when asked about premium income levels, on both the direct and reinsurance sides. All but two of the survey's respondents reported an increase in direct premium volumes in 2001, compared to 2000. For 2000, the average premium income for direct business was $222.76m, though this covered a range from $1m to $1.98bn, with many managers stacked to the lower end of the scale. This meant that the median figure for the year was $15.6m.
The almost universal increase in premium volumes in 2001 pushed the scale up higher, with the smallest premium volume registering at $2.5m, and the highest at $3.2bn. Average premiums increased to $316.5m, though the median again fell towards the bottom of the scale, at $14.5m.
Captive managers appear particularly bullish about the opportunities presented in 2002. Not one survey respondent expected premium volumes to fall, though one did note that they would stay the same in 2002. The remaining respondents anticipated increases ranging from 10% to 100%, with estimated volumes ranging from $3m to $4.7bn. These volumes take the average premium volume up to $435.6m, and push the median to $18.5m.
Premium volumes for reinsurance business showed a similar trend. Moving from a base in 2000 of an average premium volume of $108m, the equivalent figure in 2001 was $107.8m, and the estimated figure for 2002 is $130.7m.
Reinsurance premium volumes in 2000 ranged from $3.6m to $520m, with a median of $15m; in 2001, this changed slightly to a range of $4.1m to $526.4m, with a median of $16m. Compared to 2000, premium volumes in 2001 fell for three survey respondents.
With widely-accepted hardening market conditions expected to impact 2002 figures, the reinsurance premium volume numbers are substantially higher. Every respondent to the survey anticipated an increase in premium volumes for reinsurance business over the course of the year, with expected volumes ranging from $5m to $550m. This translates to an average premium volume of $130.7m, and a median premium volume of $15.5m.
Combining direct and reinsurance premium volumes, the survey respondents have shown a year-on-year increase in average premiums between 2000 and 2001 of 24%, jumping from $538m to $667m. These figures include totals from certain captive managers which did not supply data broken down into direct and reinsurance. For 2002, the expected increase is slightly more modest, at 17%, with an average anticipated total premium volume of $781m.
Reasons given by survey respondents for the increases reported include:
Breaking the premium volumes by business line showed that casualty business is by far the most prevalent being written through captives, accounting for an average of 65.3% of the total premium income. Several managers reported they manage solely casualty business. For the others, the proportion of casualty business compared to other lines ranged from 12% to 90%.
Property business accounted for 19.4% of the total premium volume, ranging from none written at all to a top figure of 82% for one respondent. Life business, a growing field, still only registered 7.1% of the total premium income volumes, with less than one-third of the survey respondents managing life business. One manager noted that 49% of its total portfolio was life-related, but the others involved in life business said it ranged between 4% and 33% of the total premium volume of the captives under their management.
Less than 10% of premium volume was attributable to classes other than property, casualty and life business. These other classes included warranty and credit business.
Commenting on the change in the balance between various lines of business, captive managers cited:
When asked which jurisdictions the survey respondents saw as presenting the greatest competition, certain names were constantly repeated. From the offshore domicile community, all cited Bermuda and Cayman as the strongest competition. One manager commented, "these are long-established domiciles in the region," while another said of Cayman, "[it has] critical mass, good infrastructure, commitment". The British Virgin Islands was viewed by one captive manager as a "cheaper domicile", while the "developed market" and "number of captives" in Bermuda caught the eye of several of the survey respondents. Barbados was mentioned because of its tax treaty status.
Vermont was the most popular choice as the main competition from the US onshore captive offerings. Reasons included "onshore with consistent business culture to a US parent company," and "mature and established US domicile." Hawaii, Nevada and Washington, DC were all mentioned as having "competitive enabling laws." South Carolina was also noted by captive managers as a competing jurisdiction.
Reasons for clients to establish in the captive manager's domicile included:
Changes in the business environment
Few of the survey respondents saw little change in their business as a result of merger and acquisition activity. There were still some, however, who had seen changes in their business. "Enormous!" stated one respondent, though the remark was left stark rather than explained. "We have lost some business as a result of mergers at the parent company level," commented another, a view agreed upon by several other respondents. One saw the M&A trend reaching the next stage for captive formation: "Up to 2000, many clients merged and then reduced the number of captives they owned.
This activity [is] now overtaken by spin-offs forming captives." Another commented: "Some M&As have resulted in duplicate captives, which in some cases have been amalgamated or rationalised. In other cases, specific business divisions create more effective use of one or more existing captives."
There is little doubt that parent companies have got wise to the captive concept, and are looking at the best way of using their insurance subsidiaries. Comments on their changing attitudes included:
Across the board, there seems little doubt that the North American captive star remains on the ascent.