Bermuda Angle

Bermuda Angle

Matt Damsker

Captive Audience

The captive insurance industry had its beginnings in Bermuda, so it’s only fitting that at least one of the growing number of captive conferences that fill out the year’s schedule be based on the island. Indeed, the recent 2001 ICAP event–or International Captive Conference–marked its fifth year with increased attendance from the year before, according to conference organizers, and a greater mandate than ever to explore the captive world.

That’s largely because captives, while a conceptually mature instrument for risk transfer and self-insurance, are finally flourishing in a firming market for primary insurance. The hard market for the sorts of insurance that captives help companies cover–such as workers’ comp and various property and casualty lines–is the logical force for opening up corporate eyes to the captive alternative, and the conference circuit is where the C word takes on an almost evangelic glow.

At ICAP 2001 (which, for the third year, Risk & Insurance served as lead publication), attendees and presenters alike were clearly determined to explore the dynamism of captives as financial instruments that could also yield greater returns. Thus, one well-attended session focused on customizing an investment strategy–a “robust” one, in fact–in an uncertain financial environment.

To many of the captive managers on hand, the concepts of DFA, or dynamic financial analysis–as propounded by a team of presenters from the Boston asset management firm of Standish, Ayer & Wood–were unfamiliar. And the challenges of equity management, core bond management, sector rotation, and yield curves were eye-openers. So was the knowledge that DFA software tools, such as Crystal Ball, could be added on to managers’ Excel spreadsheets.

Likewise, the conference made clear, through two high-profile workshops, that the often confounding issue of writing employee benefits business through a captive was an idea whose time was edging closer. The problem, of course, with writing ERISA benefits in a captive has been meeting the stringent, complex and often changeable requirements of the U.S. Department of Labor, Attorney Bruce Wright, of New York’s LeBoeuf, Lamb, Greene & MacRae, described the tortuous path he had to take in leading Columbia Energy through the DOL maze before securing its landmark decision that established something of a model for writing ERISA in captives.

Not easy stuff, but important, and clearly the sort of thing that captive managers will want to master. Another three-hour tutorial, led by Scott Turner and John Wyoke of Tillinghast-Towers Perrin, offered an indepth look at how to do employee benefits in captives, which can be a boon for insuring internationally mobile employees, retiree medical, and deferred compensation. The session offered a good pre-qualification diagnostic to help managers determine if employee benefits would even be a good fit for their captives.

And as good fits go, no Bermuda conference of any stripe would be complete without a greeting from the island’s staunch premier, the Hon. Jennifer Smith, and a keynote address from one of its insurance industry titans. Filling the latter slot, Ace Ltd. CEO Brian Duperreault reflected that Ace itself began as a “quasi-captive” during the excess liability crisis of decades past. Now, after diversifying Ace into a globe-spanning giant with some $5.5 billion in shareholder equity, Duperreault was eagerly eyeing the captive future.

“Capital is moving in search of higher returns,” he said. “And in Bermuda, the reinsurance and captive industries are the largest in the world, but the two do almost no business together. Well, with reinsurance rates rising almost as fast as primary rates … I believe we will do business together. During the soft market, the primaries took the difficult risk, and the captives took the good stuff, so what did you need reinsurance for? Now, the risk is more concentrated. With increased volatility, and everyone more risk-averse, where to go? There’s finally a need your friends down the street can meet.”

By the end of Duperreault’s talk, at least one Ace executive, Roger Gillett, was wondering aloud whether the time had come to create a new reinsurance product for captives. Clearly, ICAP had done its job, forcing attendees to don their thinking caps.

Matt Damsker can be reached at madamsker@lrp.com.

COPYRIGHT 2001 Axon Group

COPYRIGHT 2001 Gale Group