Surging Insurance Rates Spark Boom In Offshore Captive Markets

by Carla Johnson, Investors Offhore.com

30 May 2003

Companies in the UK are increasingly choosing to opt out of traditional insurance schemes and set up their own captive insurance arrangements offshore in order to avoid crippling premiums and huge excess levels.

According to some observers, firms are routinely having to accept excess levels of between £2 million and £3 million whilst facing a double whammy of soaring premiums which in many cases have risen by up to 500 per cent.

Consequently, there has been a marked upsurge in firms choosing to set up their own insurance vehicles, known as 'captives', which is seen as an increasingly cost effective, if risky, alternative. Jurisdictions that have reported an increase in captive registrations include the Channel Islands, Bermuda, the British Virgin Isles and the US state of Vermont. According to recent figures, Vermont alone saw $7 billion injected into its captive market last year, up $2 billion on the previous year. In all, 462 captives were formed last year, continuing an upward trend which saw 316 new captives in 2001 and 245 in 2000, according to The Times.

One industry that has been particularly hard hit by rising insurance costs is the pharmaceuticals sector which has seen insurers demanding excess levels of £50 million according to some reports. Consequently, large established firms such as GlaxoSmithKline have been amongst those forced into establishing captives. This is a trend that has been repeated across other industries and other prominent organisations that have followed suit include the Royal Mail and UK grocery chain J Sainsbury.

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