Very high level of global interest in forming captives in next five years, finds Aon survey

Organisations have reported a very high level of interest in forming a new captive or protected cell company (PCC) in the next five years, especially in North America, Asia Pacific and the Middle East, according to Aon’s 2017 Global Risk Management Survey. It notes that certain industries, such as hotels and hospitality, machinery and equipment, energy and life sciences, have expressed a strong desire to form a new captive in the next five years, while others, such as healthcare, energy, beverages and conglomerates, remain big users of captives. The survey finds that 25% of North American companies, and 10% of European companies, currently use a captive or PCC. Aon says that, relatively speaking, the rates of captive or PCC usage in other regions of the world are surprisingly high. In North America, nine per cent of respondents plan to create a captive or PCC in the next three years. Aon explains: “We suspect that this could be driven by factors such as the confidence gained by most industries from positive economic growth in the last five years, growing interest in captives from middle market and upper middle market organisations and continued improvement in the science applied by organisations to assess, quantify and mitigate their own risk.” Aon points out that larger companies are more likely to own a captive, and 10 per cent of surveyed organisations with revenue above $15bn plan to create a captive or PCC in the next three years, with the majority from North America, but in all other regions as well. The survey reveals that the use of captives as a strategic risk management tool has increased significantly from 18% in 2013 to 37% in 2017. According to the report, this is being driven by the need for organisations to look to their captive to consolidate their assumption of risk in one vehicle as a way to manage and monitor their global risk appetite, as well as incubate emerging risks under controlled conditions in the captive. In addition, there is a need to use a captive mechanism to control and finance their risk management programme, greater confidence in the assessment and quantification of risks to be retained, and the ability to use the captive to collect risk management data and explore loss trends and develop insurance programmes to influence positive risk management behaviours across subsidiaries. One surprise in the survey, says Aon, is that access to reinsurance as a reason for setting up a captive has fallen from nine per cent to three per cent. The percentage of companies using captives for tax optimisation has increased from four to six. The biggest reason for North American companies (44%) and Latin American companies (42%) to form captives is for strategic purposes, while owners from the Asia/Pacific region rank cost efficiencies as the most common reason. Not surprisingly property damage including business interruption and general liability continue to be the most popular lines underwritten in captives, and are also the largest lines underwritten across all regions. After these lines, there are some regional differences. For North American companies, workers’ compensation, auto liability and professional liability rank next highest, while European companies are more concerned with product liability. Aon says it has seen a significant amount of interest from companies looking for ways to use their captive to underwrite cyber coverage, with 12% of respondents currently insuring cyber risk in their captive, and 23% considering cyber in their captive in the next five years. Employee benefits is another area seeing an increase in interest. “We expect to see more multinational companies use captive programmes to manage employee benefits so they can reduce expenses, retain cash flow inside the organisation, align risk retention with group risk appetite, and gain greater transparency of the programme data,” says Aon. And the survey suggests that credit will almost double as a risk written by captives in the next five years, as well as there being a trend in captives writing customer-related business, including warranty.

Very high level of global interest in forming captives in next five years, finds Aon survey

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