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

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

It examines how owners of captives globally are tapping into surplus funds, while continuing to comply with local regulations governing the capitalization of their captives.

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

"One reason for the higher ratios is that inter-company loans are slightly less common in the offshore domiciles," explained Scott Gemmell, a senior vice president in Marsh's Global Captive Solutions Practice and author of the report.

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

He said that in the Cayman Islands, a large number of captives operate with only the minimum capital of $120,000. This reflects the fact that many of these captives have retrospectively rated insurance programs, providing for automatic adjustments in premium based on a captive's loss experience.

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

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

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

The survey found that the United States, the early adopter of captives, still leads in the numbers of captives owned, at 61 percent. Partial and overlapping figures from the survey indicate the United Kingdom follows at 8.7 percent, France and Australia at 3 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 were both 6 percent.

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

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

Regardless of where captives are located, inter-company transactions continue to be the most common use of captive investment assets, as captive owners strive to find efficient methods of returning excess funds to the parent company, Marsh found.

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

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

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

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

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