The captive solution: there are real advantages for both lenders and mortgage insurers that choose to be involved in captives. (Property/Casualty: Loss/Risk Management Insight).

In the December issue of Best's Review, I discussed the growth of captive reinsurance and how a broad range of industries has embraced the strategic advantages offered by these structures. As companies in many industries strive to increase revenue opportunities and strengthen partnerships to achieve financial objectives, the advantages of captive reinsurance structures have become increasingly attractive.

The mortgage insurance industry has made significant strides in accepting the concept of captives--insurance companies that insure or reinsure the risks of their parents or associated corporations. With the challenges of intense competition and consolidation in this industry, captives have provided a welcome solution, offering lenders access to a new arena for growth. In fact, nearly half of new mortgage-insurance business is now tied to captive reinsurance, according to Inside Mortgage Finance.

Captives appeal to the lending community for several fundamental business reasons. Captives provide:

* A structure that can be customized to help lenders manage risk.

* Enhancement of revenue opportunities, which is a strong incentive for lenders seeking new avenues to help achieve their financial goals.

* The creation and strengthening of long-term partnerships. This offers an important opportunity at a time when lenders across the country recognize the value of improving and sustaining strong business relationships.

* More efficient use of capital. Lenders can evaluate the benefits of various types of captive structures (single-parent, group and rent-a-captive arrangements, including protected cell and sponsored captives) and choose the one that fits their corporate plan for utilizing capital.

Two of the more popular captive structures are single-parent and sponsored captives. Although a single-parent captive may be an option for some lenders who wish to participate, many companies find that a group or sponsored captive arrangement is simpler and more cost-effective. Sponsored captives offer the chance for lenders to take part in a captive structure that requires less capital and spreads costs among participants. The structure offers faster startup and provides separate, isolated cells for each participant, a key benefit since this protects each book of business from the other participants' liabilities.

While participation in a captive can be a valuable business strategy the choice of the right risk-sharing partner is a crucial step in maximizing benefits for the companies involved. In the mortgage insurance industry, as in other industries, the participants who are most successful are those lenders and mortgage insurers with a philosophy that strongly emphasizes a long-term focus, a commitment to loss control and a willingness to share risk.

Mortgage insurers that demonstrate creative thinking, financial strength and risk-management expertise have created some of the most innovative and financially beneficial captive structures.

At the same time, the sharing of risk and reward can make captive reinsurance a beneficial tool for the mortgage insurance companies that offer the structures to lenders.

It is important to note that there is another side to the mortgage insurance portion of the captive story. The recent economic climate, which has fostered a rise in delinquency rates and a high volume of refinancing, has presented new challenges to mortgage insurance captives. Recently, more than one mortgage insurer announced plans to limit the percentage of risk and premiums it will share with lenders.

Most mortgage insurers, however, have remained committed to partnering with lenders to the fullest degree practical and are not modifying lenders' benefits because of short-term market conditions. Instead, these mortgage insurance companies have chosen to remain focused on the long-term benefits of partnerships with their lender partners. Regardless of the amount of premium shared, the fact remains that there are very real advantages for both lenders and mortgage insurers that choose to be involved in captives.

Forward-thinking companies, with a long-term focus, a commitment to loss control and a willingness to share risk, have found that taking advantage of these opportunities offers new and creative avenues for meeting the challenges faced by the mortgage industry. We expect that the value of this kind of partnership will continue to be recognized. Lenders and mortgage insurance companies will continue to work together to meet their financial objectives through the sharing of risk and reward represented by the captive concept.

Ron Kessinger is executive vice president and chief financial officer of Triad Guaranty Insurance Corp., a nationwide mortgage insurer based in North Carolina. He can be reached at [e-mail].