About the Industry
The Captive industry in Bermuda
The captive insurance business played a founding role in the creation and development of the Bermuda market and remains one of its
best-known core activities.
The bulk of Bermuda’s captives are US-owned entities, often used to insure and reinsure retentions on general liability, auto liability,
workers compensation, property and marine programs and to access the reinsurance markets.
Many are single-parent captives, insuring only the risks of their parent and affiliates. Other types are group-owned or association
captives formed by members of a common industry and agency captives, so called because they are owned by insurance agents and
often used in quota-share arrangements to reinsure business written by the agents.
Since the early 1990’s, one of the fastest-growing categories has been that of health-care or medical malpractice captives. The
US-based ownership of these captives is diverse, ranging from groups to single-parent, from tax exempt hospitals to for-profit health
maintenance organizations and physician-controlled entities. Some US health-care providers see the captive vehicle as a means of
offering competitive professional liability coverages, while others use their captives to fund for the capitated risks they assume and for
access to provider excess and HMO stop-loss reinsurance.
The United States is the biggest, single source of captive business for Bermuda, accounting for over 60 percent of the Island’s
insurance formations. But the picture is changing. New source markets are beginning to emerge in Africa, Australia, the Far East,
the Pacific Rim and Latin America as risk managers abandon traditional insurance buying practices and increase their self-insured
retentions.
User applications are changing too. Increasingly, captives are being used by larger corporations to enhance core products. They are
also playing major roles in long-range, strategic planning as more and more companies seek optimum retentions and exert greater,
in-house control over their financial exposures.
Rent-a-Captives and Segregated Account Companies
Rent-a-Captive facilities (RAC's) are captives whose owners form them for
profit to write the business of third party insureds. These facilities are
normally formed by insurance companies, brokers and captive managers who
"rent" the license of the facility to their clients generally for a
fee.
The difference between RAC's and regular insurance companies is that the RAC
exposures are normally fully funded within each cell or contract.
RAC's were developed in the Bermuda market to provide similar benefits of a
captive in situations where full ownership is not desired or where an insurance
program is considered too small to justify the incorporation of a separate
captive insurance company.
Many RAC's are now registered as Segregated Accounts Companies (SAC's).
Previously RAC's provided primarily contractual segregation of exposures
between different insureds in the facility, SAC's provide the statutory legal
division of business to protect the assets of one account from the liabilities
of another. The separate accounts are often referred to as cells and can act
and contract as separate "captives" within the overall SAC structure.
Each cell generally maintains its own income statement and balance sheet and
can assist in corporate retentions and risk identification, much like a regular
captive. Quite often, cell owners once they become comfortable with the captive
concept, will form their own captive and transfer the cell's risk into the new
company.
In addition to their application to captive insurance business, Segregated
Accounts Companies are used for "ring fencing" exposures in mutual
fund companies, life insurers and shipping companies.
The Commercial Market in Bermuda
The presence of commercial insurance and reinsurance companies in Bermuda
allows captive owners and operators to access open-market underwriting capacity
not found in any other captive domicile.
Unique among the captive insurance centers, these well-capitalized commercial
markets are now used by about a third of the owners of captive insurance
companies incorporated in Bermuda.
The non-captive sector of the industry grew out of the US liability insurance
capacity crisis of the mid-1980’s and was started by pioneering excess
liability companies, ACE Limited and XL Capital Ltd.
The reinsurance market started in 1992 when, on the heels of Hurricane Andrew,
Bermuda attracted its first property catastrophe reinsurer, Mid Ocean Re. A
further seven "cats" followed in 1993 and with them came a
$4.5-billion influx of new capital. The market then evolved with companies
becoming multi-line reinsurers and market capabilities were enhanced by the
formation of specialist life companies.
After the devastatiing attack on the World Trade Center in 2001, some $8
billion was raised for the Bermuda market, bolstering the positions of existing
carriers and bringing in seven new, highly capitalized carriers.
Another wave of new capital arrived in 2005, after significant hurricane
activity created substantial damage along US gulf coast and east coast states.
The Class of 2005, together with existing companies brought a further $18
billion in new capital to the Bermuda Insurance Market.
Bermuda is one of three leading reinsurance centers in the world, with over 100
companies having financial strength ratings, many of which are publicly traded
insurance companies. Buyers of commercial insurance and reinsurance coverages
are increasingly placing large parts of their programs in the Bermuda market.
All lines of traditional insurance and reinsurance are written with large
amounts of capacity available. Bermuda has also become a leading center for
insurance securitization transactions and some captives are being used as
transformers to access this capacity.
Bermuda's top specialty carriers are also able to provide large blocks of
capacity in custom built programs for big corporations seeking balance sheet
protection. These carriers are mainly net line underwriters and highly
conservative in their operations on a premium to capital and surplus ratio
basis. |
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