A.M. Best Says Growth in Number of Active Captives Remained Flat in 2002

Captive domiciles have reportedly been touting 2002 as a banner year for new captive formations, with a record 462 new captive insurance companies being licensed, according to the special report, “Sizing Up the Captive Market: Growth in the Number of Active Captives Remained Flat in 2002,” released by A.M. Best Co.

However, a much different picture of the captive market reportedly emerges when the net increase in the number of captives is studied, as the number of captive liquidations continued its upward trend in 2002.

There were 4,526 active captives at year-end 2002, vs. 4,521 at the end of 2001, and 311 captives were liquidated during the year. This significantly outpaced 1993, both in the absolute number and as a percentage of total captives – 6.4 percent vs. 4.7 percent – when both Bermuda and Cayman liquidated a number of captives that had been inactive for years. Thus, growth in the captive sector was flat.

A.M. Best Co. says it is not surprised by the surge in new captive formations. The hard insurance market experienced as early as 2000 has driven many insurance buyers to alternative strategies as coverage and capacity have become scarce. This is especially true for certain industries and business lines, such as health care and medical-malpractice insurance.

Hence, Cayman’s 97 new formations, capturing 21.3 percent of all new captives formed in 2002, is to be expected given its reputation for health-care captives. Rounding out the top domiciles with respect to new formations was: Bermuda (17.1 percent), Vermont (15.2 percent), Guernsey (10.6 percent) and the British Virgin Islands (9.7 percent). Clearly, most new captive owners are looking to the established domiciles hoping to solve their insurance needs quickly.

Risk managers continued their consolidation of risk-management programs during 2002, since supporting numerous captives in multiple domiciles was deemed neither effective nor efficient for their companies.

Captives writing medical-malpractice coverage were negatively impacted by the rapidly escalating loss costs and the rising claim frequency and severity that forced commercial insurance carriers to abandon the business line in 2002. Some have already put themselves in run-off and then liquidation.

The limited fronting capacity is a major issue currently facing the captive industry.

The current volume of new captives seeking fronting far exceeds that of the hard market in the 1970s and 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. However, A.M. Best expects that until such time as a stable fronting source is found, the total number of active captives will remain relatively flat, at around 4,500.

Further impacting the growth in the number of active captives will be the continued inroads being made by segregated-cell companies. Until all domiciles hosting this captive form account for the number of cells within them, it will reportedly be impossible to understand the true growth the captive industry is experiencing.

BestWeek subscribers can download a free printed copy of the full 8-page special report, “Sizing Up the Captive Market: Growth in the Number of Active Captives Remained Flat in 2002,” or a combination of the printed study plus a spreadsheet file of the study data for $25 from our Web site, www.bestweek.com.