NU Online News Service, April 29, 11:46 a.m.EST

BOSTON--Captive insurers tend to be capitalized inexcess of the statutory minimums regardless of where they aredomiciled, according to a new report from Marsh insurancebrokerage.

What's more, as businesses worldwide strive to navigate thechallenging economy, those firms with captives are examiningopportunities to put surplus capital to work within theirorganizations, Marsh said.

At the same time, the brokerage said firms are continuing tocomply with local regulations governing the capitalization as wellas insurer collateral requirements of their captives.

The report, Single Parent Captive Benchmarking: Capital andCollateral, was released here at the 2010 annual conference of theRisk and Insurance Management Society, Inc. (RIMS).

Marsh's study focuses on activities in the past year of morethan 750 businesses that own captive insurance companies.

It examines how owners of captives globally are tapping intosurplus funds, while continuing to comply with local regulationsgoverning the capitalization of their captives.

In meeting these requirements, offshore captives tend to havehigher premium-to-capital ratios than those domiciled onshore inthe United States or the European Union, Marsh said.

"One reason for the higher ratios is that inter-company loansare slightly less common in the offshore domiciles," explainedScott Gemmell, a senior vice president in Marsh's Global CaptiveSolutions Practice and author of the report.

"As a result, captives in these locations may be more likely toreturn excess capital to the parent company by way of dividendsthan those in the U.S. or E.U. domiciles," added Mr. Gemmell.

He said that in the Cayman Islands, a large number of captivesoperate with only the minimum capital of $120,000. This reflectsthe fact that many of these captives have retrospectively ratedinsurance programs, providing for automatic adjustments in premiumbased on a captive's loss experience.

Among captives, letters of credit (LOCs) remain the most commonmethod of providing collateral to fronting insurance companies,representing more than half of all collateral instruments, followedjointly by trusts and escrow accounts.

Typically secured with cash and certain allowable investmentsfrom the captive, an LOC is provided by banks for a fee andguarantees the ability of the captive to meet its obligations tothe insurer, Marsh noted.

The most popular form of coverage provided by captives was foundto be property insurance, followed by general liability, workers'compensation or employers' liability, professional indemnity, andauto liability.

The survey found that the United States, the early adopter ofcaptives, still leads in the numbers of captives owned, at 61percent. Partial and overlapping figures from the survey indicatethe United Kingdom follows at 8.7 percent, France and Australia at3 percent and "other" at 10.1 percent.

Also organizations base their captives predominately in Bermuda,23 percent; Vermont in the United States, 20 percent; and Cayman,14 percent. Luxembourg was 8 percent and Guernsey and Hawaii wereboth 6 percent.

Casualty coverages accounted for nearly 70 percent of theinsurance policies for which the captives provide collateral. Ofthose, almost 45 percent are for workers' compensation/employers'liability and auto liability.

Property insurance, written by almost 35 percent of thecaptives, is less likely to have any collateral requirements.

Regardless of where captives are located, inter-companytransactions continue to be the most common use of captiveinvestment assets, as captive owners strive to find efficientmethods of returning excess funds to the parent company, Marshfound.

According to the report, related party investments that couldinclude inter-company loans, the purchase of parent companycommercial paper, or accounts receivable factoring are the mostcommon use of funds, regardless of where a captive is located.These approaches are most widely used by captives based in theU.S., with nearly 70 percent of their assets invested in thesetransactions.

"Not surprisingly, inter-company transactions have becomeincreasingly popular in the current economic environment," Mr.Gemmell said. "Many parent companies can get a much better returnby reinvesting this capital in their own operations than frompursuing outside investment strategies."

According to the report, 35 percent of all captives surveyedwrite property insurance, 32 percent write general and third partyliability, 20 percent write employers' liability and workers' compand 15 percent write professional indemnity.

The survey also found that 35 percent of the captives aremonocline--which may indicate that captives often are establishedto meet a particular need, with limited attention paid toadditional advantages a captive could offer.

The report is available free of charge by registering at:http://global.marsh.com/news/articles/Captivebenchmarkreport.php.