CACE spotlights Colorado's capital appeal.
Under the new law, tax on direct premiums for $25 million and under will be reduced from 1 percent in 1991 to 0.5 percent in 1994. For more than $75 million in total premiums, tax on direct premiums will decrease from 1 percent to 0.1 percent by 1994. However, beginning in 1992, Colorado will institute a minimum tax on premiums of $5,000.
The future of the captive industry and where Colorado fits in to the big picture was also discussed. Mr. Fisher reported statistics showing the alternative risk financing market to be as much as 30 percent of the commercial market or $50 billion in premiums. He added that by the end of the decade, it is possible that 100 percent of the largest 1,000 U.S. corporations will be using the alternative market. Hugh Rosenbaum, principal of Tillinghast, said that as risk management becomes more sophisticated, the number of captives is likely to increase. He noted that in the first six months of 1991, 100 captives were formed, 36 of which are domiciled in Bermuda, considered to be the bellwether of captive havens. Another trend spurring the popularity of captives, according to Mr. Rosenbaum, is that owners and participants of captive entities are not returning to the commercial market but instead are venturing into other alternatives such as risk retention groups and trusts. A scenario that is also likely to occur in the near future, he said, is one organization owning multiple captives. For instance, a company may have a captive domiciled in Dublin for European risks, another in Colorado for domestic liabilities and perhaps another located offshore. "Captives will follow the geographic interest of their owners," Mr. Rosenbaum added. If captive insurance is done right, Mr. Rosenbaum said, captives will come to resemble commercial insurance, which should have a positive effect on the commercial insurance industry as a whole. He concluded that there are still untapped markets for captive insurers, especially in employee benefits and postretirement medical liabilities.
Reinsurers Move In Because reinsurers have long provided financial services to insurers, they are a dependable source for capacity, risk transfer and other types of financial arrangements for captives, says Kenneth LeStrange, senior vice president of Am-Re Managers Inc. in Princeton, Nj. "Reinsurers are used to, dealing with the problems of large commercial risks and can provide services to help a captive deal with the risks such as claims reviews, which reinsurer have performed for insurers for years, and other buying decisions that affect the bottom line of the corporation," said Mr. LeStrange. Another advantage of using a reinsurer, Mr. LeStrange said, is the short line of communications between the client and the underwriter. Generally, the reinsurance underwriter has the authority to make the necessary underwriting decisions on the account, whereas underwriters who work for an insurance company typically need several people to sign off on decisions. What is the best way to approach a reinsurer? There are pros and cons to going direct or using a reinsurance intermediary. Using a broker or intermediary is ideal, said Duane Hitz, a senior vice president of E.W. Blanch Co. in Minneapolis, when a risk manager is putting together large limits and needs several reinsurers on the contract. "The intermediary is working for the client and is going to put together the type of program that is needed," he said. "These relationships tend to be more complex because there are multiple reinsurers on one contract, and it is difficult for them to all agree on what is available." On the other hand, Mr. Hitz added, "if your broker doesn't tell your story properly ... there may be some expectation problems." However, when placing any type of reinsurance, the question of security becomes a major factor in the decision. If all the captive's reinsurance is placed with one reinsurer, the captive risks loosing all its money should the reinsurer go belly-up. Whereas if several reinsurers are named on a contract, only a fraction-depending on how many reinsurers are named on the contract-is at stake. Yet whether or not risk managers chose to work with an intermediary, they will find it difficult to land a consensus on the forms and structure of the reinsurance contract. Therein lies the art of the intermediary, said Mr. LeStrange.
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|Title Annotation:||Colorado Association of Captive Entities|
|Author:||Oshins, Alice H.|
|Date:||Sep 1, 1991|
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