Despite the global economic recession and continued soft commercial insurance market, businesses in all parts of the world continue to use captive insurance companies as mechanisms to manage their risk, even as the rate of new captive formations worldwide has slowed compared with preceding years.

A new report by Marsh Inc., the world’s leading insurance broker and risk advisor, examined 939 single-parent captives around the world and found the U.S. and Canada (62 percent of the captives studied) continue to account for the vast majority of the world’s captive insurance companies, followed by Continental Europe (19 percent), the U.K. and Ireland (10 percent), and Asia. Despite accounting for just above five percent of the captives in the study, Asia may be the strongest growth area for captive insurance company formations in the years ahead as the region’s businesses become more interested in risk-financing alternatives. According to Marsh, the Middle East may also be an area where captive formations may grow in the future, as three territories in the region – Dubai, Qatar, and Bahrain – have new regulations that permit the use of captives.

Captives are insurance companies formed by one or more corporations, associations, or government entities as formal mechanisms for self-insuring risk. They are regulated by insurance laws in states or countries where they are located and may be used to underwrite risks beyond those of the entities that own them, subject to applicable local regulations.

Marsh found businesses use a number of criteria to determine where to locate their captives, including business purpose, sophistication of regulation and infrastructure, and efficacy of the regulatory authority.

"A U.S. company establishing a captive with the intent to benefit from the reinsurance backstop provided under the Terrorism Risk Insurance Act (TRIA) will narrow its choices to onshore U.S. locations," said Michael Cormier, a managing director of Marsh and leader of the firm’s Captive Solutions Practice. "On the other hand, firms that want their captive to issue insurance policies directly throughout the European Union most likely will choose an onshore location in the EU."

Among industry sectors, financial institutions, health care, and retail are the biggest users of captives, accounting for 20 percent, 14 percent and 11 percent, respectively, of the captives in the study. Businesses of all sizes, in various parts of the world and across nearly all industries now own captives. An exception is health care, where nearly all captive owners are located in the U.S.

"The fact that the U.S. health care system is private and the country is far more litigious than other parts of the world continues to drive the need for captives in this sector," Mr. Cormier noted.

Businesses in every region use captives to provide property and general liability insurance, which rank among the top three coverage lines among captives studied in all parts of the world. U.S. and Canadian companies widely use their captives to provide workers’ compensation coverage. By contrast, professional indemnity coverage is more likely to be provided by captives than employers’ liability coverage in the U.K. and Ireland. Elsewhere, marine insurance is the third most popular coverage line in captives owned by firms in the Asia-Pacific region.

The study found captives to be conservative in their investments, both to ensure that they meet regulatory requirements and have sufficient liquid assets to pay future liabilities. At 55 percent, U.S. and Canadian captives invest the highest proportion of their funds in inter-company investments, such as accounts receivable factoring, the purchase of the parent company's commercial paper, inter-company loans, and secured loans with unencumbered real estate and other assets. Captives owned by Asia-Pacific companies invest 45 percent of their funds in this manner, followed by those owned by firms in Continental Europe (37 percent) and the U.K. and Ireland (34 percent).

Captives originating in the U.K. and Ireland are more likely to have their funds invested in cash and money market funds. Nearly half (49 percent) of these captives use these types of investments, as compared with 24 percent of captives owned by firms from Continental Europe, and 17 percent of captives with parents in the U.S./Canada or Asia-Pacific. Meanwhile, 37 percent of captives of Asia-Pacific firms invest in bonds, as do 30 percent of captives owned by firms in Continental Europe, 21 percent of captives of U.S. and Canadian firms, and 11 percent of captives from the U.K. and Ireland. At nine percent, captives of firms in Continental Europe are most likely to invest in equities, while only one percent of Asia-Pacific firms make these types of investments.

Marsh's report, 2009 Captive Benchmarking Report: Single Parent Captives – A Global Analysis, is available free of charge.

With nearly 450 employees in 31 captive insurance domiciles worldwide, Marsh's Captive Solutions Practice currently manages more than 1,100 captive insurance companies. The Practice provides a full range of captive management services and related advisory services, including actuarial, benchmarking, captive assessments, feasibility studies, strategic reviews, and assistance with domicile selection.