Captives: Not Just for Hard Insurance Markets Anymore
Attendees at this year's Vermont Captive Insurance Association conference were buzzing about the creative and innovative ways people are using captives, and how new captives are still forming, even in a soft market.
Captives, once best known for providing mainstream property/casualty insurance coverages such as property, workers' compensation and general liability to noninsurance companies, are being expanded to carry risk for new types of clients, such as a captive owner's customers or subcontractors. Coverages offered have also been expanded to include more hard-to-place risks, such as cyber risk and terrorism. With the approval of the U.S. Department of Labor, captives are also being tapped for employee benefits, such as group life and long-term disability, and just recently, medical benefits for retirees. Life insurers have gotten into the captive market, creating captives to help relieve the burdens of Regulation XXX.
Captives have also been able to loan money back to the parent company, which gives the parent funds to grow while the captive gains an interest-bearing investment.
"Captive managers tell me that if people only knew what a captive could do for them, they would be flooding in," said Rich Smith, president of the VCIA, in an interview. "They often got into the captives because of a hard market when insurance was impossible to find. Then they find they have this instrument that they are able to do amazing things with. They say, 'If we only knew, we’d have done this five years sooner.'"
Consider Nittany Insurance Co., the captive for Pennsylvania State University. Formed in Vermont in 1993, Nittany Insurance includes coverage for hospital professional liability (which is 100% reinsured); general liability; auto liability; property and terrorism insurance; life insurance; and as of July 1, cyber risk insurance. It has $7 million in annual gross premiums written, with $3 million retained, and $6 million in shareholder equity ($2 million of that in the form of a letter of credit.)
"A commercial underwriter would look at our cyber risk -- because we are a university with very open computer programs -- and heads would spin," said Gary W. Langsdale, risk officer for Pennsylvania State University and president of Nittany Insurance. "We have 120 different e-mail servers running eight to 10 types of commercial applications, and that's just e-mail."
The captive's new cyber risk policy offers just $1 million in coverage.
"This isn't going to move the insurance market by establishing this, but it was appropriate. We wanted to have a home for this risk, and we wanted to fund it in a financially sound, solid way," Langsdale said.
About 25 companies to date have won the Department of Labor's blessing to use a captive for group life or disability benefits. Companies who apply for the DoL's approval can "fast track" the application process by referring to two of the other companies that have already received approval. This means they might get an answer in 45 days instead of a year, said Nancy Gray, regional managing director for the Americas for Aon Insurance Managers.
Coca-Cola Co. is the first employer to receive the DoL's permission to fund employee benefits through a captive using assets held in its voluntary employees' beneficiary association, or VEBA, to buy medical stop-loss insurance.
Others have applied for DoL approval, and once a second company wins approval, it will spur even more applications because the fast-track process would become available, Gray said.
"We've seen a lot of interest from captives considering long-term disability and group life because there is a fast-track program available," Gray said in an interview at the conference. "There's a lot of interest in risk managers taking a look at retiree medical, but many are waiting to see if a fast-track process becomes available."
While the industry often talks about captives growing in a hard market, there's still been strong growth in Vermont, even in this soft market.
So far this year, the division has licensed 22 new captives, and there may be a dozen or so waiting in the wings to formally apply, the Vermont Department of Banking, Insurance, Securities and Health Care Administration said (BestWire, Aug. 11, 2010). In 2009, Vermont licensed 39 new captives, the sixth-best year in its 29-year history.
The 22nd captive licensed this year, a special-purpose financial captive for Lincoln Financial Group, is also the 900th captive license issued by the state, which has about 575 active captives.
Lincoln Financial's captive is the fourth special-purpose financial captive launched in Vermont so far this year, and points to another emerging trend, said Sandra A. Bigglestone, director of captive insurance for Vermont's captive insurance division. Special-purpose financial captives are captives often owned by life insurers, which move a block of business to the captive and securitize or collateralize it, often to relieve surplus pressures associated with regulation XXX and AXXX, she said.
Many at the conference said captives are part of a sound long-term risk management strategy, and said they aren't surprised to see new captives forming now.
"If you are forming a captive in the soft market, you are doing it for the right reasons," said David F. Provost, deputy commissioner of the captive insurance division.
Steven R. Bauman, senior vice president and head of captive services for Zurich Global Corporate North America, said it's a myth that captives aren't formed in a soft market.
"When there's a soft market — when coverage is easier to obtain price-wise and time-wise — it frees up time and a little bit of money to do other things with your captive," Bauman said. "You see a lot more creativity with captives in a soft market. It's really up to people's imaginations — and the regulators to allow what they can allow."
(By Meg Green, senior associate editor, BestWeek: [email protected])