SilverLink - Winter 2008 - (Page 18)

• • • • • Electing the level of risk they are prepared to assume in the captive Deciding which coverages will be provided by the captive Controlling who may or may not participate in the captive Determining the type of approach they wish to assume regarding the management of claims Deciding whether the captive distributes dividends One of the latest supply restrictions, considered by some to be a crisis in coverage unavailability, involves medical malpractice insurance. The country’s current highly litigious environment has led to spiralling malpractice insurance premiums, with a resultant increase in consumer pricing. To counter the threat of potential litigation, physicians may err on the side of caution, ordering more tests or procedures than may actually be necessary, which then leads to over-consumption of medical services. And the vicious circle continues with no end in sight. This situation led not only to the wholesale formation of new medical malpractice captive carriers as a response, but also to captive domiciles (remember, “domiciles” are “places where captives are located”), who structured their licensing and regulatory environments to accommodate the specific needs of the newly formed carriers. One such domicile was the Cayman Islands, a British Protectorate that forms part of what is known as the British West Indies. Of the 745 captives in existence on the islands, 278 cater specifically to the healthcare industry, with premiums of almost $3 billion annually. Why do Captives Exist? The first insured-owned entities came into being before legislation created a dividing line between a traditional insurer and what is now known as a captive. One may assume that the original entities, such as the one owned by Imperial Chemical Company (ICC) of the United Kingdom (and established in the dawning years of the twentieth century) were formed simply as an exercise in vertical integration. Captives as we know them today came into being in the 1960s, the brainchild of Frederick Reiss (who became the founder of a captive management firm called International Risk Management Group) and Sidney Pine (an attorney with a law firm now known as LeBoeuf, Lamb, Greene, and MacRae). Together, they persuaded the government of Bermuda to institute laws that would ease the formation of captive insurance companies. At first, these entities were almost the exclusive province of Fortune 500 companies. But as insurance regulatory agencies began to tighten their grip on traditional insurance agencies, carriers found themselves dealing with increasingly inflexible and innovation-sapping bureaucracy.4 Coupled with an increase in litigation and the creativity of plaintiffs’ attorneys in extracting money from insurers, carriers found themselves reacting defensively—ultimately introducing a “culture of risk aversion” into the industry. The pressure on traditional insurance carriers began in the early 1980s, with the end result that certain types of coverage are now totally unavailable. Business entities that needed to remove some of the risk from their balance sheets began to look for alternative sources of insurance. At first, this produced a trickle of new participants to the captive world. As the number of traditional coverages declined, however, the captive industry found more adherents. 1 2 How Can Captives be Accessed by Business Entities? With the wide (and often confusing) array of insurance coverages available, an organization may have questions about which type of coverage—traditional or captive—is more appropriate for its risk. Insurance industry experts recommend that any business or private individual with complex exposures should find a reputable agent or broker whose expertise can be relied upon when placing coverages. The best way to find answers to questions about traditional and captive products is to consult an insurance expert who has experience in both worlds. SilverStone Group’s Captive Risk Management division has that experience and is available to help answer all your questions. 3 4 Merriam-Webster Online, http://www.merriam-webster.com/dictionary/captive,accessed October 22, 2007. This definition certainly applied to the original captive entities that were formed and essentially still holds true for the vast majority of those in existence today. However we must add that there are - as these entities have evolved over the years - a number of structures that are recognized as captives that would not fit under the exact terms of this definition. Although the level of risk assumed is carefully balanced to meet the risk appetite of its owners. The insurance industry, after banking, is probably the most regulated of the financial sector. contact adrian Bento at 402.96 4.5 473 or aBento @ ssgi.coM 18 http://www.merriam-webster.com/dictionary/captive

Table of Contents Feed for the Digital Edition of SilverLink - Winter 2008

SilverLink - Winter 2008 Contents Risk Management: Where in the World is Human Resource Consulting? Workers’ Compensation Rate Declines Insurance Certificates Haute Retirement It All Began with a Cup of Coffee Playing Fair in the Housing Market Captives 101 Proceed with Caution Fore! (Or is it Pull? or Giddyup?) Don’t Be Fuelish Employee Benefits: Medical Trend Countdown to Compliance Private Client Services: Buy & Sell Agreements Flood Insurance Pushing Wealth to the Next Generation Client Spotlight: Travel and Transport Internal Happenings: SilverStone Group Giving Back Since 1945

SilverLink - Winter 2008

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