Captive formation diminishing, report finds

Falling commercial insurance rate levels and expanding insurance capacity have led to a slowing of new captive insurance company formations, according to a recent study by Advisen, a company that provides data to the insurance industry.
“Right on cue, the growth in captive insurance companies nearly stalled in 2005,” the Advisen report observes. “Within the top 10 domiciles, the number of licensed companies grew less than 4% – from 4,004 to 4,157.”
Despite the stalled formation of captives, regulatory activity continues at a steady pace, the Advisen report notes.
In the United States, nearly 20 states have passed captive legislation, and others are expected to follow suit. In Europe, Ireland is poised to become the first EU state to adopt an important reinsurance directive with significant regulatory implications for reinsurance captives.
The only captive growth reported in 2005 included risk retention groups a segment that has been growing rapidly as a result of the U.S. medical malpractice crisis and health care captives that are largely unaffected by the P & C market cycle, Advisen noted.
“Captives typically are formed in response to rising insurance costs or loss of commercial insurance capacity,” Advisen says in a press release. “With commercial P & C insurance premiums falling in most lines, and with abundant capacity for most coverages, there were few incentives to launch new captive insurance companies in 2005.”
Captives that do form are headed away from Bermuda and the Cayman Islands, the report found, and towards the United States specifically to the U.S. states of Vermont, South Carolina and Hawaii.
“The U.S. has become such a desirable place to form captives that the number of U.S.-domiciled captive insurers and reinsurers (1,098) now exceeds the number of Bermuda-domiciled captives (987),” the report says. “Within the U.S., Vermont is still the largest domicile, but it no longer dominates the domestic captive market to the extent it did only a few years ago.”