Recent New York Times article on captive insurance companies falls short Article added by Andrew Barile on September 22, 2011
Andrew Barile

Andrew Barile

CA

Joined: August 21, 2010

A recent article in the New York Times, "Seeking Business, States Loosen Insurance Rules" fails to distinguish between captive insurance companies owned by the parent corporation and the subsidiary insurance company formed by MetLife, The Hartford Financial, Swiss Re, Genworth Financial, and American International Group, Inc., all of which have numerous regulatory oversights to contend

On July 16th, 1978, Lisa Bergson of the New York Times interviewed me for the article, “Captive Insurers Slip Their Chains." My textbook, "The Captive Insurance Company ... An Emerging Profit Center," explained why corporations should form captive insurance companies as another risk management tool. The interview and the textbook created the captive insurance company industry.

Over these 33 years, the number of captive insurance companies has grown to 5,000. In the next three years, the number will grow to 10,000 captive insurance companies, in a global insurance setting.

A recent article in the New York Times, "Seeking Business, States Loosen Insurance Rules,"fails to distinguish between captive insurance companies owned by the parent corporation and the subsidiary insurance company formed by MetLife, The Hartford Financial, Swiss Re, Genworth Financial, and American International Group, Inc., all of which have numerous regulatory oversights to contend with.

Parent corporations, such as Verizon Communications, Inc., Major League Baseball, and the Carlisle Companies have all set up captive insurance companies. The reasons for these corporations to use captives are the same that I put in my textbook 30 years ago. Advantages of captive insurance companies:
  • cost savings for corporation’s insurance program
  • long-term cost stabilization
  • direct access to reinsurance company markets
  • creating a profit center as captives send dividend to parent corporation
  • accelerated deductibility of premiums for parent corporation
Major League Baseball set up a Vermont captive called MLB Burlington Assurance Exchange Society, which has saved $41 million since 2003, writing workers’ compensation, auto liability, umbrella liability, general liability and property insurance coverages in their captive.

Carlisle Companies, Inc. formed their Vermont captive in 2000, called the Carlisle Insurance Co., to mitigate and finance the risk of loss. The captive has been very successful over the 11 years in business.

Verizon Communications, Inc. has been utilizing captive insurance companies for their casualty, global property, patient infringement, and third party reinsurance (i.e., personal lines, OCIP, and handset insurance). They, along with their consultants, develop risk transfer solutions.

The feasibility process for a captive insurance company

(1) information gathering
(2) review of loss data/ financial information
(3) captive modeling
(4) business plan development
(5) structure of captive
(6) determination of optimal ownership structure
(7) analysis of tax issues
(8) domicile analysis
(9) implementation steps
(10) final conclusion
(11) ongoing consulting, if necessary

Feasibility studies for a captive are required by every regulatory domicile, with a sign off by the captive regulator.

The creation of subsidiary insurance companies by AIG (MG Reinsurance), MetLife and Hartford Financial Services should not be confused with the growing captive insurance company owned by U.S. corporations both public and private.
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