By Martin Eveleigh ACII

An increased rate of growth in the captive insurance sector is likely to be spurred by indications that the insurance market is approaching the bottom of its cycle. Lloyd’s of London is expecting losses and has surely never been disappointed in that expectation. Some reinsurers have left the business (including one that had barely arrived) the reinsurance market continues to consolidate and rates are leveling out. The retrocession market is looking firmer. If there is to be an upturn in the insurance market then the captive sector is surely set for a boom. For those considering forming a captive, the time may be right.

Of course, with the recent growth in the number of captives and the share of commercial premium for which they account, you might be forgiven for thinking that the market was fully mature and that future growth could only be slow. Think again! The truth is that captives have grown in number at a time when commercial insurance rates have never been lower. Last year, according to Tillinghast-Towers Perrin, 305 captives were formed to bring the world total to 4,135, a net increase of 151 companies. The interest in risk management, alternative risk transfer and captives has never been greater.

A captive is like any other insurance company in that its opportunity for the best profit will be in those years when premiums are at their highest. Given the choice, therefore, the best time to form a captive is near the bottom of the cycle (preferably shortly before) when insurers are still happy to front and when a feasibility study, based on existing premium levels, points to a viable captive. Any new insurer would like to time its entry into the market in this way. The captive, by definition, has the advantage that it does not have to worry about carving out a share of the market; its business is "captive".

Part of the growth in the captive sector has been due to smaller companies emulating the practices of those larger companies that formed captives 10 or 20 years ago. They have either used rent-a-captives or formed companies of their own. Companies with lower premium volumes have found it increasingly economically viable to establish captives and are likely to find the trend continuing. With new domiciles keen to attract business and independent insurance managers challenging the old order, there is considerable competition in the market.

The British Virgin Islands provides a good example of a domicile with modern insurance legislation and competitively priced professional services. Overheads are lower than in Bermuda or Cayman and both Government and the local insurance managers are keen to attract business to the Territory. A recent arrival is JCPenney, who, looking for a reputable domicile, recently established a reinsurance company in the BVI after being quoted insurance management fees more than fifty percent lower than indications from Bermuda and Cayman.

Smaller captives can be established in the BVI for under US$10,000 with annual insurance management fees starting at about US$5,000 for compliance only assignments. Minimum capital required for a general insurer is US$100,000 and US$200,000 for a long-term (life) company. At these rates smaller companies, who may previously have looked at the rent-a-captive option, can now realistically consider establishing their own captive. Premium volumes of less than US$1m a year are not only feasible but may have tax advantages for US parents.

The benefits of captive ownership need no longer be enjoyed only by the big players. They are now available to a very much wider market, and a growing number of companies are deciding that the time is right and the price is right.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

This article was previously published at

The author is Insurance Manager at KPMG in the British Virgin Islands, who provide insurance management services through a wholly-owned subsidiary, Belmont Insurance Management Limited.