Captives touted as the safe haven in time of uncertainty (Captive Review)

RISK MANAGERS have been advised to consider captive insurance as concern over the state of the commercial insurance market intensifies in light of the federal bailout of AIG and the ailing health of other notable insurers.

Speaking in a Strategic Risk Solutions webinar, John Boland, president of invest­ment advisor Maple Capital Management said: "The potential for carrier failure is increasing and will be accelerated if we ex­perience a catastrophic claims event while the markets are weak.

"The question risk managers really need to be asking themselves is will their carrier even be here next year?" he said. "That becomes a pretty significant issue to consider and is certainly a good reason to set up a captive."

Boland went on to say that a continu­ing rates spike would have a positive effect on captive formations. "[It is] certainly a great reason for current captive owners to be happy that they have their captive in place," he said.

In a separate podcast by Towers Perrin, Stephen Lowe, managing director, Global P/C Insurance Practice, said the likely im­mediate effect of the credit crisis and the federal takeover of AIG on the commer­cial insurance market was a stabilisation of price levels.

"They may not go up much but they will probably stop falling," he said. "While competition for AIG's business will cer­tainly occur to some extent, we expect that most commercial insurers will maintain underwriting discipline."

Longer-term, the potential for further deterioration in the stock market, addi­tional catastrophe losses and a recession would all contribute to create upward pressure on prices, Lowe said.

According to Boland, existing captive owners would be well-advised to look at the quality of the assets backing their claims-paying ability, to adjust their re­turn expectations and to review their in­vestment philosophies. "This is probably not a short-term event. Market disrup­tions take a long time to work themselves out," he said.

Captive owners might also want to con­sider whether collateral requirements are likely to change, said Boland, although he indicated that this was unlikely.

"You might see a renewed focus on the quality of the collateral, even if the amounts you are required to maintain don't change," he said, adding that the regulatory environment for captive invest­ments is unlikely to change.

[The regulators] just want to make sure that the holdings confirm with your in­vestment policy statement, that they are properly priced and that the assets you are holding in the captive are sufficient to meet the payouts that might be further down the road."