Captives harder to justify but future remains bright, finds CRE survey

Half of respondents to a new survey by Commercial Risk Europe said it is getting harder to justify the use of captives, but this has not stopped owners using the vehicles to help manage a growing range of risks and those polled remain optimist about the future of the market. More than half a century after the term ‘captive insurance company’ was first coined, there is little sign that the concept has run out of steam. The captive sector remains buoyant, despite a prolonged soft insurance market. Indeed, there has been captive growth every year for the past two decades. By the end of 2016, there were more than 7,000 captive insurers around the world. Commercial Risk Europe’s report, Captive Survey 2017: Captives On The Rise, sponsored by AIG, AXA, Chubb and Zurich, reveals that risk managers clearly still value captives, but new rules are making things tougher. An online survey of CRE’s readers that formed part of our report found that 50% of respondents think it is getting harder for risk managers to justify a captive insurer, with more pressure on captives to prove their value. Just under four in ten respondents disagreed with this view. It is perhaps not surprising that half of respondents are feeling the pressure, given the intense international focus on tax dodging, transfer pricing and offshore financial centres post-Panama and Paradise Papers. The report also confirms some of the concerns in the market around the continuing soft market, the impact of the Organisation for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative, Solvency II and Brexit. While BEPS is probably not a threat to the vast majority of captives, it has clearly had an impact on some. More than half (56%) of respondents said BEPS has increased the administrative time and costs of running a captive. However, many in the market take a positive long-term view. As Daniel San Millán, risk manager at leading Spanish conglomerate Ferrovial and founding president of Spanish risk management association IGREA, said: “I am not worried about BEPS. If you are using your captive as a fiscal tool, then it is dead anyway. A captive is a risk management tool. When I talk to my colleagues about the captive, I do not talk about fiscal matters. I know that captives may have originally been used in this way a long time ago. But today, captives are a central risk management tool.” Mr San Millán’s views were expressed during a series of roundtables and one-to-one interviews that were carried out for this year’s European Risk Frontiers survey and formed part of our captive survey. Sabine Desantoine, insurable risks manager at ING Belgium and Belrim president, said during these discussions: “A captive is first and foremost a risk management tool, as opposed to a way to save money. Maybe that principle was lost a little bit in recent years as captives became more popular and as companies became more cost conscious. Even the best concepts can be open to abuse. But I think the risk management community has to do more to explain to regulators about why we use captives and the benefit they provide.” This is exactly what Ferma has been doing in response to the OECD’s BEPS project. It seems Ferma’s efforts are paying off. “It seemed initially as though the OECD had a very negative view of captives, although this seems to be changing, not least as a result of Ferma’s work in this area,” said Nuno Simao Antunes, senior vice-president, head of multinational – EMEA, at AIG. He added that that there seemed to be a perception that captives were essentially a tax-driven vehicle. “But that is very far from today’s reality. Captives are a central piece of their parent company’s risk management and risk financing strategies,” said Mr Antunes in the captive survey. According to Barry Beard, head of global services and complex multinational, UK and Ireland, at Chubb: “BEPS will continue to bring focus, transparency and consistency to pricing and decision making. “However, more work has to be done to promote the value of captives and their benefits in light of BEPS – many risk managers are actively pushing for more visibility at board level and encouraging others to do the same,” he added. There is a lot talk of a hardening commercial insurance market following the run of catastrophes in late 2017, which could well see further growth of captives. With a growing number of lines being written by captives – including cyber, employee benefits and trade credit – and the fact they are now being used to cover longevity risks and increasingly involved in insurance-linked securities transactions, it seems captives are on the rise. Our online survey revealed they are being put to an increasingly wide range of uses. For example, a majority of respondents (64%) said they use their captives to reward and penalise risk management practices within subsidiaries, while 69% said their captive is involved in third-party underwriting. In addition, 58% said they had considered ‘incubating’ an emerging risk in their captive with a view to gaining data and risk information that can ultimately help find coverage in the insurance market. It is also clear from the discussions with risk managers, captive managers and fronting insurers, that more and more captives are looking to write employee benefits. The numbers are still small, but the potential is huge with cost savings and better control of benefits programme both equally important for companies. “If you asked ten customers, five would say cost and five would say control,” said Rob Brown, customer and distribution management – UK and APAC, at Zurich Global Employee Benefits Solutions. “In many respects these are not mutually exclusive – if you maintain control over benefit design, rationalise medical inflation and make strategic investment in employee wellbeing, these will have a flow-on effect to claims and therefore cost, in a virtuous cycle.” There are also benefits under Solvency II of consolidating life and non-life risks in a captive. The online survey found that 59% of respondents had either done this or are considering doing so. The report also takes a detailed look at the potential for the captive market in Asia. It is still small in comparison to Europe and the US, held back by misperceptions, the soft market, lack of awareness and regulations. But the survey highlights the enormous potential in the region, in particular from China where interest in the concept is slowly increasing. As Christian Wertli – head of innovative risk solutions and director, corporate solutions at Swiss Re Corporate Solutions – explained: “Globally, over 90% of Fortune 500 companies have a captive, however China only started to allow setting up captives at the end of 2013. There is huge potential in China and reinsurers should stay close to those developments. We estimate that around 250–300 firms meet the RMB100bn (+/-$15bn) asset threshold to be eligible for setting up a captive.” Commercial Risk Europe’s report, Captive Survey 2017: Captives On The Rise, is available at: www.commercialriskonline.com/special-reports/commercial-risk-europe

Captives harder to justify but future remains bright, finds CRE survey

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