Roger Crombie

It happens every so often, and the response is always the same. Registrations drop off in one or another of the major captive jurisdictions, and the competition at once claims victory. Then, a year or two later, registrations go back up, and everyone else falls silent.

Two unexciting years in the Bermuda captive market have led to prognostications of an end to its thus-far permanent lead in the captive market. Net captive registrations in Bermuda increased only slightly in 2003 and 2004, as opposed to the 100 or so net companies that were being added in the early 2000s.

By contrast, some other jurisdictions have improved their tally. The Cayman Islands has grown its captive base by 20 percent in the last couple of years. Vermont has also seen a solid increase. The British Virgin Islands, Hawaii and Dublin have also been growing at a fair clip, albeit from a lower base.

The trade journals have rushed into print, under headlines such as "Challenging Bermuda's lead," and "Captive competition from the U.S. heats up." One went so far as to ask: "Do the latest figures signify the end of Bermuda as a captive domicile?"

The answer is no. The number and percentage of non-Bermudian captives is still growing, even if Bermuda's share of the global total of active captives is down to about a third from a fairly constant 40 percent a few years ago.

Affecting Bermuda's market share are a number of factors:

* The opening up of the global captive market to about 50 jurisdictions, plus a couple dozen U.S. states that now allow captive operations in one form or another.

* The development and increasing popularity of risk retention groups, whose relatively small size makes them not especially suitable for domicile in Bermuda.

* Savvy marketing by a number of other leading jurisdictions, notably Vermont and Hawaii, which have the advantage of being American.

* Developments in the type of corporate vehicles available, such as the introduction of segregated account companies, that have skewed the statistics.

* The natural effect of economic and insurance cycles.

* The many different ways in which jurisdictions count their captives. Should a company that was a captive, but has now been dissolved, be counted? Some jurisdictions think so.

Apart from a long-standing tradition of not criticizing the opposition, and the "Spitzer effect" that still has insurance executives fighting shy of saying much of anything, the view among Bermuda's captive management community appears to be that there really isn't much to talk about anyway.

It's just the cycle, they say.

BERMUDA STRENGTH: SIZE AND SCALE

On background, Bermuda captive managers argue that captives incorporated in Bermuda are significantly larger when measured by premium volume than those of any of the competition, which makes incorporation comparisons odious.

They also point out that efforts in the past couple of years to attract rent-a-captives to Bermuda are only now beginning to bear fruit; that the overall numbers may not be increasing as fast of late, but the Bermuda service providers are still working flat-out to meet demand; that insurance has been so successful that growth is exceeding the community's ability to accommodate it, so a little breathing space is welcome; and that Bermuda is not alone in experiencing lower rates of captive growth than had been the ease. Guernsey and Barbados have also been flat.

Bermuda's captive management service providers are not without concerns, however. Each new set of statistics that shows slippage in the lead, however slight, is greeted by some as a harbinger of doom. A relatively light year for incorporations always sets off an internal debate as to the sustainability of what has been a remarkable track record.

Bermuda's share of the captive market has been eroding for a while. In the mid-1970s, about 80 percent of the global captive market could be found listed on notice boards at the entrance to the offices of Bermuda's two largest law firms. Now that percentage has fallen by more than half. Superficially, that sounds like trouble.

AN ERODED HEGEMONY

Back in the day, when the world boasted fewer than 500 captives, Bermuda's hegemony was complete. But in time, every successful market leader inspires competition. Once Bermuda made a core economic activity out of captive management, other jurisdictions decided that what was good for Bermuda could be good for them, too.

Now that an estimated 4,800 captives exist around the globe, having a third of them is keeping Bermuda busy.

Of the competition, Vermont, the Cayman Islands, the British Virgin Islands and Hawaii have all found sufficient room to build stable and meaningful captive sectors of their own. Among them, their total number of captives exceeds Bermuda's. Each offers different advantages and areas of expertise. The competition they have introduced has broadened the market.

One other reason that Bermuda's share has fallen is cost. Bermuda is expensive, as are most offshore facilities. Cost matters most to smaller captives and those that operate on slimmer margins. The global spread of the captive franchise in the 1990s drew in mostly midsize and smaller companies because the majority of the major players had captives in place by the mid-1980s.

It might be argued that cost does not work exclusively to Bermuda's disadvantage. Its target client base is comprised of the larger U.S. corporations and their European and South American equivalents. Reputation is easily the most important element of the captive-formation decision for such organizations; the quality of professional expertise and ease of access are also important. Cost is barely a factor.

Then, too, a herd mentality is at work in corporate circles. Corporate architecture is not advertised; its development spreads through word-of-mouth and media coverage. Some Bermuda captive owners will confirm that they view the island as an exclusive club that prospers on quality, not quantity.

This is not to say that Bermuda might never lose its charm, or its competitive edge, or its dominant position in captives or other branches of insurance. The island cannot develop captive managers as quickly as it needs them, and so must import guest workers to meet demand. That places stress on the infrastructure, especially housing, schools and traffic. A perpetual movement exists in Bermuda that calls for the introduction of a taxation system aimed at companies rather than people, and at overseas companies rather than Bermudian people, to balance inequalities in the economic system.

As yet, this group remains on the fringe, but its voice is always heard, mooting the argument that Bermuda would be better off without the wealth that insurance and the allied disciplines have imported.

But thus far, the nattering nabobs have failed to capture the public attention.

ROGER CROMBIE, a writer, editor and former accountant, is a regular columnist for Risk & Insurance[R]. He also covers issues on alternative risk. He can be reached at riskletters@lrp.com.

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