Captives growing in soft market, but may not be optimizing returns

Captives are alive and well generating an estimated annual premium income of between US$55 billion and US$60 billion despite falling rates in the current soft-market cycle, according to a global benchmarking report issued by Marsh.
“As the insurance and reinsurance markets have changed over the past 40 years, one of the few constants has been the steady development of captive growth,” said Michael Cormier, the CEO of Marsh’s captive solutions group. “As their number continues to grow, even through soft insurance cycles, it is clear that captives are here to stay.”
Still, Marsh’s report, Next Generation CaptivesOptimizing Opportunities, found that while captives are significantly better capitalized than required by current levels of risk assumption, many are not optimizing their captive structure.
The report’s other key findings include:
The cumulative number of captives has increased at a steady rate since the early 1980s.
Almost half of captives are currently achieving a return on capital employed of greater than 10%. However, more than one-third have a return of 5% or less.
U.S. companies own 57% of the world’s captives and all companies that comprise the Dow Jones 30 own captives.
United Kingdom, French and Swedish companies are, respectively, the second, third and fourth most prolific owners of captives.
Bermuda is the single favourite domicile for captives, accounting for 29% of the total. However, when aggregated together, U.S. states actually account for 30% of the total.
Financial institutions account for 20% of all captives. Health care companies own 11% and manufacturers 10%.
Captives are used for a variety of risks, with 20% of business underwritten being for property damage, 18% for general or third-party liability and 12% employers’ liability and workers’ compensation.
Globally, almost 60% of captives do not use reinsurance. “When considered in conjunction with the level of retained profits held by captives, this suggests that most captive business continues to be profitable,” the Marsh report notes.