New research by AM Best shows that the captive market is in fact more significant than previously-published estimates imply. Carol Pierce reviews the latest data on the size of the captive industry.
Credible financial data on individual captives and the captive industry itself has historically been scarce. From time to time, various knowledgeable industry experts have projected industry aggregate estimates based on the limited – and often very belated – information provided by some domiciles. In June 2001, AM Best Co set out to remedy this situation by aggregating its own individual captive company financial data and by surveying the regulators in the top 12 domiciles for captive market volume information. The preliminary results of the latter effort are summarised here.
As we suspected when we began the project, the previous estimates of the size of the captive industry greatly understate its significance to the corporate and insurance sectors. Furthermore, the rate of growth in 2000 continued to significantly outpace the commercial insurance sector in all major markets. In the US alone, net premiums written by the captive sector were four times greater than the commercial market's robust 7.2% increase over 1999.
The drive for greater financial transparency and more effective anti-money laundering systems by the Organisation for Economic Co-operation and Development (OECD) and Financial Action Task Force (FATF) will, AM Best believes, allow for more data in the future. In addition, the level of detail in the data is expected to increase, and the data itself should become more timely in its release by the various domiciles.
The right environment for additional leakage into the alternative market via self-insurance, captives and capital market solutions was evident during the first half of 2001 as commercial insurance rates continued to increase and capacity continued to shrink. The tragic events of September 11 and the resulting uncertainty they have created in the commercial insurance market have only accelerated the migration as risk managers and their advisors react to the situation forced upon them.
Current growth in the captive industry will be both from risk managers making better use of their existing captives and risk managers forming new captives to handle pricing, coverage and capacity disruptions caused by the commercial insurance market. Group captives will see a steady growth in membership as will segregated cell companies, particularly from middle market companies that were heavily impacted by the hardened market.
AM Best expects that 2003 will see the scales tipping in favour of the alternative market, which will comprise 50% of the commercial market.
The collection effort was no easy task. Accounting standards vary among the domiciles. AM Best made a concerted effort to standardise its data request so that the numbers collected would match the companies listed in Best's Captive Directory and could be aggregated with reasonable confidence. This is the reason why there is an absence of complete data from Ireland and Singapore where the regulators did not have the data we requested. In the future, AM Best will work to overcome these situations.
Also, the infrastructure for producing aggregate captive industry financial statistics in some domiciles is newly emerging. Combined with the built-in lag time for company financial reporting in offshore jurisdictions, this made the data flow slowly into AM Best and hindered more timely analysis. Despite the obstacles, complete and final statistics are expected to be available early in 2002.
Of the 12 contacted, two domiciles – Bermuda and Barbados – advised at press time that their numbers were still preliminary as they recheck them for accuracy and add in the last few companies reporting 2000 data. Furthermore, Bermuda cannot break down Class 3 insurers into those that are captives and those that are commercial entities, resulting in somewhat inflated numbers. Based on AM Best's own individual company financial statistics (not reported here), the overstatement in Bermuda's numbers is believed to be offset by the 5% portion of the market not surveyed and the existing gaps in data collected. While the aggregate numbers are accurate, the individual domicile rankings will be distorted until this situation is corrected.
One domicile in the top 12, Turks and Caicos, was unable to provide information at press time. Despite this unfortunate timing situation, all domiciles were extremely co-operative in working with AM Best to provide the data, even those without formal governmental compliance with OECD and FATF initiatives.