RPT-Fitch: Proliferation of captive domiciles increases risk of weakened oversight

Fri Sep 13, 2013 8:05am EDT

Sept 13 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings believes the greatest risk to the recent increase in the number of captive insurance domiciles is the possibility that domiciles might sacrifice prudent regulatory oversight in order to attract and maintain a minimum number of captive registrations, as discussed in a report published today.

To date, two additional U.S. states have enacted captive insurance legislation in 2013. This brings the total number of U.S. states with captive legislation to 32, including the District of Columbia. Fitch understands that other states may also be in the process of drafting captive legislation. This represents an increase of approximately 50% in the number of U.S. captive domiciles in the past 10 years. Nine domiciles license 100 or more captives but half of the current U.S. domiciles license five or fewer captives.

'Some states view captive growth as an important potential source of revenue and some are very actively courting the captive market,' said Don Thorpe, Senior Director at Fitch. 'States will need to carefully manage the potential conflict of interest between rapid growth in captive registrations and prudent captive oversight.'

'While some captives will manage themselves with prudence regardless of the regulatory flexibility afforded them, Fitch suspects a many would weaken their risk management if allowed by weak regulation,' noted Keith Buckley, Managing Director at Fitch.

There are also practical operational risks linked to proliferation. Some jurisdictions may not be successful domiciles if they are unable to achieve the scale necessary to support a captive insurance regulatory infrastructure. Fitch believes there is also a risk that the proliferation of captive domiciles may strain the regulatory infrastructure, as currently there are a limited number of individuals possessing experience in regulating captive insurance.

Despite the noted risks, Fitch believes the proliferation of captive domiciles also potentially provides captive sponsors with a number of benefits by keeping taxes and fees to reasonable levels; by streamlining the review and approval process; and by allowing sponsors to innovate new structures and uses for captive insurance.

Ultimately, prudent and balanced regulatory oversight would have the most favorable long-term effect on captive ratings. On the other hand, there would be a negative long-term rating effect if domiciles competed for captive registrations by weakening their regulatory frameworks.

A full report is available at www.fitchratings.com or by clicking on the link above.

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