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CACE spotlights Colorado's capital appeal.

by Alice H. Oshins When risk managers think captives, they may not immediately think Colorado. But if the Colorado Association of Captive Entities (CACE) has its way, the lack of association will not last for long. Colorado and captives have a unique and historic relationship: In 1972 Colorado became the first state to pass a captive law. And as Gov. Roy Romer of Colorado said at the recent CACE conference in Denver, "The 'old' captive state is now being recognized as a new captive leader. " "The insurance industry is a good fit with Colorado," the governor added, because of the state's central location, skilled populous and high quality of life. Bringing Colorado recognition as an important captive domicile was the motivating factor behind CACE's conference as well as the group's inception last year. CACE was formed to promote Colorado as a stable, innovative domicile for captives, and according to Samuel Fisher Jr., insurance manager for Hamilton Oil Corp. in Denver and founder and president of CACE, the Denver-based group already lists 70 members nationwide from all segments of the captive industry, from accounting firms to reinsurers. "In CACE we have all segments of the captive infrastructure working together for the common good of the state of Colorado," Mr. Fisher said. "We are at a crisis point in the development of Colorado as a viable domestic domicile. Crisis' is defined as 'the turning point for better or worse; the decisive moment."' For now, the outlook for Colorado captives is taking a turn for the better. This year the Colorado General Assembly passed a bill to reduce the premium taxes on captives. "The tax decrease was a substantial move forward," said Joanne Hill, Colorado's insurance commissioner, adding that the most important characteristics of a captive haven-a skilled work force and good government-could be found in Colorado.

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.
Publication:Risk Management
Date:Sep 1, 1991
Previous Article:An actuarial perspective on P/C loss reserves.
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