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CAPTIVES PURPOSE The current market is a result of a multitude of factors; a prolonged soft market, increasing underwriting losses, lower investment returns, a dismal equity market, poor results for re-insurers, claims from asbestos and other environmental exposures, the failure of high-profile insurers and industry consolidation. The catastrophic September 11, 2001 terrorism losses also accelerated the hardening of the market. As a result, the role of captives is expanding as owners take a broader view of their exposures and how a captive can address them. One fundamental change is in employee benefits. Several large corporations have successfully petitioned the Department of Labor and received permission to place their employee benefits into a captive. While the approval process is arduous, efforts are underway to streamline it for others that follow suit. Another change is in property liability. Today, since a captive provides insured’s with a mechanism to directly access the reinsurance market (or use intermediaries to do so), they are cutting their own deals with re-insurers. Property captives are being used to fill out missing layers of protection. Due to higher deductibles and retentions, captives are also being used to pre-fund for future losses within a retention or deductible as well as to post-fund for future payments from exposures that have arisen from prior activities. Captives are also being used to insure the liability of third parties. For instance, a captive can offer coverage to sub-contractors, while allowing a manufacturer to mitigate some of its risk by assuring that coverage is in place should a claim arise. As owners seek out new uses for their captives, many are looking at directors’ and officers’ liability, product recall, political risk, occupational disease, long-and short-term disability and enterprise risk exposures.
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