Captive Services May Be Harder To Find

While recent terrorist attacks in the United States might makecaptives a more attractive option for some risks, commercial buyerslooking to self-insure might find it difficult to procure frontingcompanies, reinsurance and service vendors, experts warn.

“The business of captives has been gravely impacted by thisevent, and it seems that each new day we understand that impacteven more,” said Lisa Ventriss, president of the Vermont CaptiveInsurance Association. “For a time you couldnt even think about itbecause the big thing was whats next. But in looking at the serviceproviders to captives, a lot of people who were here with us inAugust [at VCIA's annual meeting] are not coming back.”

She added that terrorist attacks coupled with a much hardercommercial insurance market “have got to spawn a far greaterinterest in captive formations.”

In Vermont, “weve been looking at a possible addition of 30captives this year, so it was already higher than average. I thinkthe end of the calendar year will be even more frenetic,” shesaid.

The aftermath of the terrorist attack, she added, makes the roleof the regulator “more difficult because certain assumptions thatwere in place when those captives were formed have changed.”

She continued that last years trend of reinsurance companiesdissolving or merging, creating a scarcity of capacity, is nowexacerbated. As a result, she said, captives, “will have to retainmore risk.”

Organizations that might not have the resources necessary to bea standalone, single captive “may need to look at other options,such as Vermonts sponsored-captive vehicle,” she added.

Ms. Ventriss was confident that the captive market would findsolutions. “Part of the [appeal] about the captive industry is thatits very entrepreneurial, and regulators have an open mind when itcomes to helping a corporation be self-reliant,” she said. “So Iwould expect that they have anticipated this eventuality and areprepared to talk about that and trouble shoot.”

Michael Mead, chairman of the Minneapolis-based CaptiveInsurance Companies Association and president of M.R. Mead andCompany in Chicago, agreed. “My short view is that there are goingto be a lot more commercial consumers looking at the alternativerisk field, particularly captives,” he said. However, he warnedthat there will be “fewer partners to share the risk with thecaptive, for fronting and reinsurance.”

What will evolve out of necessity, he speculated, is newinsurers. “I say this based on the history of the industry,” hesaid. “I think that by the time the dust clears were going to needmore insurance companies. Im also pretty confident were going tolose some.”

Mr. Mead added that, historically, the insurance industry “isvery entrepreneurial. All these companies started somewhere on dayone, arising out of a need, and I think there is going to be aneed.”

Carl Modecki, president of the Captive Insurance CompaniesAssociation and principal of Carl A. Modecki Consulting services inTallahassee, Fla., agreed that captives will become more popularout of necessity.

Citing estimates on potential losses from the WTC destructionapproaching $70 billion, he said, “I think even more people will begoing towards a captive situation if that is, in fact, the case,because I think the [insured loss] numbers will become even moreoverwhelming.”

He also warned that services will most likely become scarce forcaptives. “I think on the reinsurance side, you can buy anything ata price,” he said. “On fronting, that may or may not be true.”

One possible solution, he said, is for CICA to get “more heavilyinvolved. If the fronting portion of the equation is not available,[CICA could partner with an insurer] to do it on a largerbasis.”

Mr. Modecki explained that CICA potentially could endorse andpartner with a fronting company, “or do some other type oftransaction with a single insurance company so that we would havethe volume that would make it worthwhile,” he said. “This istypically what associations have done when theres been difficultyfinding coverage.” Mr. Modecki said the topic is up for discussionat CICAs October meeting.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, October 1, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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