Among the biggest beneficiaries I am witnessing are middle-market accounts and those in the health care sectors–both squeezed by a dwindling number of large national and regional carriers.

While it was relatively easy for most buyers to get quotes in a soft market (first dollar coverage was cheap!), it became progressively harder after Sept. 11, 2001 as carriers left and prices rose. While the issue of supply was a growing concern, so was the provision of experienced buyers to find alternatives. Most had never dealt with anything but an abundance of interested underwriters and intermediaries with desire to increase marketshare.

The learning curve to find affordable insurance year-to-year was steep and unmerciful, particularly in these and other segments, such as directors and officers liability. If they did find coverage, there was no guarantee the same carrier would be around to renew the policy.

Despite the fact that more than 100 insurance and related firms were started after 9/11, most were formed offshore. Collectively, they represented “new” capital of more than $30 billion, but the positive effect would not be felt immediately for U.S. policyholders. Indeed, getting offshore for most U.S.-based policyholders to access the capital was a job in itself.

Increasingly, state insurance regulators are in the mix, adding to the competition of traditional carriers and some excess and surplus lines markets to woo back their former policyholders.

Regulators are more cognizant of the stabilizing value of captives and RRGs within their respective states and their potential as a source of revenue. They are investing in talented financial analysts, actuaries and other professional disciplines to help them retain the captives and RRGs they have and to encourage more to organize the products under their supervision.

For example, Vermont's captive industry adds over $14 million in benefits to the state in addition to over 1,100 jobs. Numbers like that can be quite enticing to a governor, especially when they find out that the costs of actually regulating captives can be part of the existing state insurance department.

While the barriers for a state to enact captive laws are relatively low, it is the desire to maintain a balance of conservatism and stability with strategic thinking that will reward the domicile with new business opportunities. Thus, while some domiciles are quite happy with their mix of business, you will see a rise in segregated cell captives in others–although most are capitalized with a substantially higher amount of capital than offshore counterparts.

The irony is that in most cases, the capital required to form one of these segregated cell captives may never bear risk other than a business loss. Where's the sense in that? In time, we'll see a more competitive environment in this sector as the onus moves from one of capital to emphasis on business planning, corporate governance and cell-by-cell solvency opinions.

RRGs, in collaboration with captives (domestic and offshore), are the next natural evolutionary synergy that policyholders are seeking and regulators are progressively beginning to recognize as valid risk-transfer partners. RRGs are already allowed to issue policies, thereby eliminating the costs associated with obtaining a fronting company, which could be as high as 10 percent of the gross written premium.

Additionally, the Federal Product Liability and Risk Retention Act allows RRGs to reinsure with alien captives (captives domiciled offshore)–most of which are segregated cell captives. With the appropriate collateral for reinsurance purposes and business planning in alliance with the state regulators, we should be encouraging the use of these relationships–more so if our U.S.-based domiciles can develop the use of segregated cell captives for their RRG policyholders.

After a full year into the softening market, captives and RRGs continue to prosper in numbers and gain recognition as competent and compelling insurance products not only among a growing legion of insureds but among state insurance regulators.

Christopher L. Kramer is senior vice president at Neace Lukens Management Services in Cleveland, Ohio and Washington, D.C. He can be reached at [email protected].