Mike Serricchio, a managing director within Marsh Captive Solutions, notes that from 2019 to 2020 and then 2020 to 2021, the US saw “incredible growth”. He says that from 2019 to 2020 there was a record number of captives formed globally, with a good majority of those in the US, and even more were formed in 2021.
He says the hard market is driving new captive formations, primarily cell captives but also single-parent captives, risk retention groups and even special purpose vehicles for insurance-linked securities and collaterised deals. “Large domiciles like Hawaii, Texas, Vermont, Delaware and South Carolina grew but so too did smaller state domiciles like Connecticut, which nearly doubled its number of captives. So it is all industries, public and private, not-for-profit, looking to form captives,” he explains.
But it is not just about new captives being formed. Captives are being resurrected or expanded and, according to Serricchio, premium volume for very large captives has grown, with captives traditionally writing $10-$20m of premium now writing more than $20m, even $30m or $40m.
And while much of the growth is focused on core property and casualty lines, which have been hit by the dramatic increase in rates in the last couple of years, captives (particularly cell captives) are increasingly being formed to write D&O, cyber and other lines. Delaware recently enacted a bill that permits captives to write Side-A D&O liability insurance.
“We had a very large increase last year in D&O cells, and the Delaware law is very timely,” says Serricchio. We also had cyber growing, with more cyber premium put by companies into their captives, maybe as a quota share or a retention, or filling a layer. Similarly with property – big quota shares, fronted reinsurance so that you can have globally admitted paper and certificates.”
He also points to emerging risks like cannabis and crypto, which are growing, together with managing general agency business.
Other captive managers confirm that the sector is booming. Paul Macey, president, captive management operations, USA Risk, says there has been a considerable growth of new captives in the US.
“This is about new captives, although expanding the use of existing captives always follows a hard market as clients are faced with higher retentions, price increases and in some cases non-renewals. For the most part this is focused on traditional risks, but obviously the industry sector of the client will dictate to some extent how a captive will be used. This partly depends on whether you would term cyber liability and D&O as traditional P&C risks – we are having more discussion about these lines of business,” he says.
Matt Atkinson, senior vice-president – business development, Artex, says it has seen a rise in both new captive formations and the expansion of existing captives due to current market conditions. “While we saw growth in traditional industries impacted by the hardening market like healthcare and transportation, we also saw growth in new markets for us, such as higher education and delivery-based businesses,” he says.
“2021 was definitely a very busy year,” says Patrick Theriault, managing director, Strategic Risk Solutions (SRS) east operations. “Especially for organisations looking into whether a captive could help them manage their rising insurance budget. Some organisations were actually forced into some form of captive arrangement due to commercial carriers exiting the market or reducing capacity.” He says SRS reported its highest number of feasibility studies/consulting projects in its 25-plus years of existence in 2021.
He says that with the hard market, captives are still very much focused on the core lines, with bigger retentions, and SRS is seeing more activity with property-type risks as well as increased participation in excess layers to manage cost or fill in capacity needs. “Risks like D&O and cyber are definitely coming up a lot more around captives but while usage is increasing, there are complexities that often make a captive not viable or the best solution,” he notes.
He adds: “We have also seen enquiries around pandemic-related risk exposures and increased usage of difference-in-conditions coverage. Larger organisations are also evaluating newer ways to manage risk such as parametric insurance or increasing participation in things like cat bonds to address capacity.”
Serricchio says clients are testing the waters with underwriters in the market, testing rates and exclusions, and making an informed decision. “A lot of companies have been very comfortable with using data and analytics to drive their decisions during the last ten years. So now they are in a position to know their history, know where they should be and know where the market should be putting them. And if the market is not going to put them where they need to be, they now have leverage and some tools to share some of the retention or the layer, giving them much more flexibility and optionality.”
For many years, there has been talk of captives writing employee benefits in the US, but with the exception of medical stop loss, which is seeing considerable activity, it has been relatively slow going, although captive managers point to growing interest in voluntary benefits.
“The promise of using a captive for employee benefits has been percolating in the captive insurance world for many years now,” says Rich Smith, former Vermont Captive Insurance Association (VCIA) president. “Once the domain for large international businesses, employee benefits has grown during the years. The Affordable Care Act incentivised many employers to transition from being fully insured to self-insuring. Many companies initially set up their captives to retain commercial P&C risks, then added medical stop loss to the captive to complement the longer-tail risk of other P&C lines. Companies that have added medical stop-loss coverage to their captives also write other risks such as voluntary benefits, and life and disability business.”
Brittany Nevins, captive insurance economic development director, Vermont Department of Economic Development, notes: “Captives are utilised for employee benefits but the business is not as robust as traditional P&C lines. Employee benefits can be complicated and there are many rules to consider.”
Theriault explains: “With the Department of Labor halting the EXPRO process, there has been very little activity around captives insuring things like long-term disability and group life. However, on the employee medical front, the use of captives to provide medical stop-loss protection and access reinsurance has been very active, especially for mid-sized employers joining various group captive programmes. We expect this trend to continue. We are also seeing increased interest around voluntary benefits.”
Serricchio says that Marsh saw medical stop-loss insurance grow by 81% in 2021, whereas ERISA benefits are not really growing and have been slow since 2001. “Multinational pooling of employee benefits is starting to come back as companies are looking to find savings wherever they can,” he says. “Voluntary employee benefits, such as critical illness, hospital indemnity, pet insurance, home warranty and so on, are getting a lot of buzz – we are seeing a decent amount of it but it is not exploding.”
Atkinson says Artex “is experiencing tremendous growth in our employee [benefits] strategy, with more and more companies looking for alternatives to the traditional market”, adding: “Over the last several years, we have seen our traditional casualty group captives expand to include a medical stop-loss option to its current members; new single-parent captives formed by large corporates and agents aggregate their books of business to form a new benefits group captive.”
IRS interest in captives
Last year, so-called micro-captives, a type of 831(b) captive insurance company in the US, appeared on the Internal Revenue Service’s (IRS) ‘dirty dozen’ list of tax scams. In fact, they have been on the list for five or six years, with the single exception of 2020. And while micro-captives bear little resemblance to the captive insurance market for corporations, the continued focus of the IRS on these captives does not help the wider captive sector in its dealings with regulators and tax authorities globally.
So to what extent has the IRS focus on micro-captives hurt the reputation of captives in the US? And is there concern that captives more generally could be targeted by the IRS?
Theriault says it’s an interesting question. “I am not sure that the IRS focus on micro-captives has hurt the reputation per se, but it has certainly made existing and prospective captive users more aware of the requirements to be an insurance company for tax purposes. The number of sophisticated risk focus organisations is increasing and these organisations will continue to evaluate using captives where it makes sense.”
In fact, Theriault believes that overall, the increased focus by the IRS has been a positive for the industry, with more and more organisations and their advisers being more knowledgeable about the captive concept and the requirements. He says there is no doubt that the IRS focus has resulted in captive programmes closing down and a reduction in the formation of new micro-captives.
“The challenge for the industry is in the fact that the IRS appears to take a broad-brush approach that all micro-captives (and perhaps captives in general) do not meet the requirements, and there appears to be little interest on the part of the IRS to provide further guidance on what is a ‘good’ structure. Unfortunately, it may require a bit more court activity to get things back to a bit more of an equilibrium, at least as it relates to micro-captives,” he says.
Macey notes that the IRS focus on micro-captives has certainly had an impact at the smaller end of the scale. “We are not seeing many new captives that willingly want to make the election to be taxed as a small captive. I don’t think this has deterred anyone from moving forward if they have a good programme structure,” he says.
The Business Insurance 2022 Captive Managers and Domiciles Rankings + Directory reveals that US domiciles account for more than 50% of all global captives, and North American offshore domiciles account for a third.
The rankings show that the majority of US domiciles showed solid growth in terms of the number of captive licences at year-end 2021, including Texas, which had 54 captives, up from 41 in 2020; and Connecticut, which grew from 22 in 2020 to 44 last year.
According to Serricchio, “it is neutral as to where a captive is domiciled because most US companies, if they do go offshore, the vast majority will make an election that makes their captive a US taxpayer”. He says that Barbados, Cayman, Bermuda are still doing a lot of captive business, and growing steadily, but they are not growing at the “massive rate” that Vermont, Delaware, DC, South Carolina and Hawaii are.
Vermont, the leading US domicile, had a good year in 2021. Indeed, former VCIA president Smith points out that 2021 was Vermont’s fourth-highest year of growth in its 40-year history, with new captives licensed in 17 different industries. “In speaking with the VCIA’s service provider members, they report that many of their current clients are seeking more uses and strategies to write more risk in their captives as well. With an active pipeline of prospective new captive insurance companies already underway for 2022, the state expects continued growth in the coming year,” he says.
Nevins says her department has been busy with new formations and with requests for plan changes to add lines of business or increase retentions on existing lines of business in captives, all due to the hard insurance market. “The usage is primarily focused on traditional P&C lines of business, due to the hard commercial market cycle; however, many are focused on certain specialised risks like cyber liability and D&O coverage,” she says.
“Vermont has formed captives for cyber-only business and for single-parent-type situations where cyber capacity in the marketplace is difficult. Insurers are also forming captives to manage cyber risks and there is increased activity among agency-owned captives and MGAs/MGUs that specialise in cyber,” says Smith.
He also points to captives being utilised for risks in new business models and technology, like drones and cannabis, with additional lines such as D&O coverage. He explains that John Deere’s Vermont-domiciled captive, which mainly covered extended warranty risks, started covering the company’s trade credit risks last year.
“Another interesting growth area is catastrophic exposures, which are increasingly being covered through captives, and owners with favourable loss experiences are diverting more liability premiums into captives. We have seen increased interest in offsetting high health insurance exposures with stop-loss captives, especially among small to mid-sized enterprises, as part of group captives,” Smith says. He adds that captive owners now structure their captive coverage in other ways, such as providing a layer of excess coverage or using quota shares to take a percentage of a layer of their risk tower.
It has been a good two or three years for the captive market, with US domiciles and US corporations at the heart of the growth. With the hard market moderating but not expected to soften for some time, continued expansion is predicted. As Marsh’s Serricchio concludes: “It is a remarkable market right now and captives are shining as they never did before, or not for a long while.”
TOP US CAPTIVE DOMICILES
(Ranked by number of captive licenses at year-end 2021)
- Vermont: 620 (589 in 2020)
- Utah: 384 (396 in 2020)
- Delaware: 313 (288 in 2020)
- North Carolina: 257 (250 in 2020)
- Hawaii: 251 (242 in 2020)
- South Carolina: 183 (175 in 2020)
- Nevada: 161 (166 in 2020)
- Tennessee: 153 (145 in 2020)
- Arizona: 149 (131 in 2020)
- District of Columbia: 112 (106 in 2020)
Source: Business Insurance 2022 Captive Managers and Domiciles Rankings + Directory
TOP NORTH AMERICAN OFFSHORE CAPTIVE DOMICILES
(Ranked by number of captive licenses at year-end 2021)
- Bermuda 670* (680)
- Cayman Islands 661 (652)
- Barbados 253 (226)
*Business Insurance estimate