April 21, 2003 by Canadian Underwriter
2002 was considered a “banner year” for captives, but in actuality the numbers remained fairly flat, suggests a new report by A.M. Best. In “Sizing up the Captive Market”, the rating agency says the although a record 462 new captives were licensed in 2002, there were 4,526 in total at the end of the year, up by just 5 over 2001.
The reason is that 311 captives went into liquidation, with 6.4% of captives being liquidated, even higher than in 1993 when Bermuda and Cayman liquidated a number of captives that had been dormant for years.
The rise of new captives was a not unexpected turn given the hard market conditions since 2000, which have driven insurance buyers to alternatives. “This is especially true for certain industries and business lines, such as health care and medical malpractice insurance,” A.M. Best reports.
Cayman, known for health care captives, experienced the most growth with 97 new captives, or 21.3% of the total new formations. Bermuda follows with 17.1% of the total, Vermont at 15.2%, Guernsey at 10.6% and the British Virgin Islands at 9.7%. “Clearly most new captive owners are looking to the established domiciles hoping to solve their insurance needs quickly.”
For those in liquidation, some were impacted by the medical malpractice crisis where losses were heavy in both severity and frequency, just as commercial carriers were impacted.
The report also notes that risk managers are looking increasingly to consolidate their captive involvement in one domicile.
Among the issues currently facing the captive industry is the limited fronting capacity, with the number of new captives seeking fronting far outpacing that of the hard markets of the 1970s or 1980s. “Although it is uncertain if the current fronting carriers will be able to absorb the capacity, many within the captive industry are working toward a solution to this dilemma.” Nonetheless, A.M. Best expects the number of active captives to remain flat in the absence of a solution to the fronting capacity crunch.
Another factor holding back captive growth is the inroads being made by segregated-cell companies, which confound the real number of captives. “Until all domiciles hosting this captive form account for the number of cells within them, it will be impossible to understand the true growth the captive industry is experiencing.”