Captive growth accelerating in Asia Pacific despite continued soft market

Captive numbers are low in the Asia Pacific region currently, compared with the rest of the world. Only 56 of more than 1,200 captives managed by market-leading captive manager Marsh have parent companies domiciled in Asia Pacific. There are probably just over 100 captives domiciled in the region, with 66 in Singapore, about 40 in Labuan and a handful in Hong Kong, according to the latest numbers. A large number of the Singapore captives—perhaps half—are owned by Australian companies that relocated to Singapore following a crackdown on the captive concept by the Australian government.hideBut interest in the captive insurance concept is reportedly now high among the massive state-owned enterprises (SOEs) in China as they better understand their potential benefits and move overseas in search of fresh markets and diversification, agreed panellists gathered for a discussion on captives at the event. Hong Kong and Singapore are both keen to attract this potential new business and have updated their captive rules recently to help do so. This would not be completely virgin territory. China National Petroleum Corporation (CNPC), the largest oil and gas company in China, created CNPC Captive Insurance in December 2013 as the first captive insurance company in China. The company is 51% owned by CNPC and 49% owned by PetroChina Company Limited (PetroChina). PetroChina is 86.51% owned by CNPC. CNPC is wholly owned by the Chinese government and is one of the largest SOEs directly supervised by the central state-owned Assets Supervision and Administration Commission of the State Council. PetroChina is the main operating arm of CNPC. It is engaged in exploration and production, refinery and chemical, pipeline and marketing businesses. The company is listed in Hong Kong, New York and Shanghai. There are also a number of Chinese captives in offshore centres outside of the Asia Pacific region. All in the timing Some would claim that now is not the right time for the captive market in Asia or anywhere else in the world for that matter. This is because it is argued that captives are less attractive when the commercial insurance market is soft. Why retain more risk when commercial insurance is so cheap? But the panellists in Singapore said that despite the continued soft market for insurance and reinsurance, statistics prove that captive numbers continue to grow worldwide. As noted above, Singapore and Hong Kong are the established leading captive centres in Asia Pacific. Labuan provides another option. The Chinese authorities are also reportedly currently looking at whether it would make sense to establish an onshore regime for captives. This would sit neatly alongside China’s planned new regime to potentially help develop an onshore insurance-linked securities market for Chinese companies, as reported in the first issue of Commercial Risk Asia, which was launched at the Parima event. The experts also agreed during the discussion at the Parima conference that protected cell company (PCC) structures, by which companies can set up captive companies within cells linked to a core managed by a professional captive manager that are—critically—not exposed to the liabilities of other cells, are another attractive option for Asian companies. PCCs would be especially interesting for middle-market companies that have just started to expand outside of their domestic markets and need to adopt more sophisticated risk management and transfer strategies, agreed the speakers. The rising demand from fast-expanding Asian companies for cost-effective cross-border risk transfer solutions through global programmes is also seen as another potential source of demand for captives. The main barriers to the development of a vibrant captive market in the Asia Pacific region are awareness of the value of proactive risk financing among Asian companies and potential regulatory complications, agreed the experts. The professional risk and insurance management community is quickly developing in Asia Pacific however, as proven by the rapid growth of Parima. But it was clear from discussions during the two-day event that the vast majority of Asian companies still regard insurance as a negative purchase and in many cases it is bought through purchasing departments. This will not help the growth of more sophisticated risk financing structures in the region. Also, the rapid development of the regulatory system in many Asia Pacific territories largely based on Europe’s Solvency II risk-based system could provide a barrier if captives are not treated differently to commercial insurance companies. Good signs Overall, however, the signs are good for captive managers in Asia Pacific and worldwide, according to Tracy Stopford, managing director, Willis Captive Management Hong Kong. “The captive concept started in 1930 and there are now more than 7,000 captives worldwide and it continues to grow. The majority of multinational companies have captives. You would think that formations would be in response to a hard market but we see it as part of longer-term risk management and retention strategy. Short-term cost savings are not the main reason for captive formations,” she explained. Ms Stopford said that interest from Chinese SOEs has “exploded”, adding that Asian companies that currently have captives in offshore locations such as Bermuda, Cayman Islands or Guernsey are looking to return to Asia, where domiciles such as Hong Kong and Singapore have attractive regulatory regimes for captives and the right infrastructure and support services such as investment managers and auditors. “We are seeing larger SOEs from China forming captives in a soft market. Customers are beginning to appreciate that this is a low cost subsidiary that can deliver a reasonable rate of profit. It can ring-fence and retain and help manage exposures,” said Ms Stopford. “SOEs understand that they can reduce the cost of risk by reducing the financial cost, [while] cashflows and investment income are improved, the company gains control over premium costs, there is less volatility in pricing and therefore they can achieve more consistency,” added the captive management expert. “Captives are able to access the reinsurance market direct and charge a commission in addition to providing an underwriting profit. This is all valued, even in a soft market, hence the rising popularity of captives among the large SOEs that we work with,” she added. Ms Stopford added that the commercial insurance and reinsurance market should not regard captives as a threat but rather as complementary. “We see this as a truly collaborative relationship, not a threat. The captive market has a successful track record worldwide as premium volumes grow and this needs to be insured and reinsured,” she said. The big international insurance companies can act as fronting insurers for captives. In territories where an insurer has a licence, the fronting insurer issues a policy to the company and reinsures it to the captive. The underwriting risk sits with the captive and the fronting insurer charges a fee and requires collateral from the captive’s parent company. AIG is one insurer that carries out fronting for customers worldwide. Tony McHarg, head of multinational Asia Pacific, AIG, agreed with Ms Stopford that demand is definitely rising for captives in Asia Pacific. Non-traditional risks “We definitely see a dynamic fronting market driven by the expansion of multinationals across the region. Yes, we are seeing demand from Chinese SOEs but it is not just China. Japan is a very vibrant market and we are seeing captive opportunities across southeast Asia. Australian companies are looking to explore more effective risk financing and risk management solutions,” said Mr McHarg. One big driver of this increased demand is the speed of change in the global economy, as expressed by the Internet of Things, according to the insurer. He said that this requires a level of flexibility and speed of response that currently appears to be ahead of what the standard insurance market can offer. Captives are, therefore, one potential tool to help deal with fast-changing exposures as the broader market works things out, said Mr McHarg. This was seemingly proven by Marsh’s 2015 captive survey, which found that the level of non-traditional risks, such as cyber, underwritten by captives across its 1,000-strong global sample group had risen by 11% last year. Mr McHarg added that the rising risk maturity of Asian companies is also driving demand for captives, despite the soft market conditions. “Macroeconomics are highly dynamic currently, as is the risk environment. There is more complexity and this is challenging traditional insurance placements. Captives can facilitate insurance placements and pick up gaps. Also, it is not just multinationals. Expansion to emerging markets is stimulating demand whether you are a multinational or not. This is because of increased sophistication among enquiring clients, irrespective of market conditions. The value of captives is seen and is driving growth,” explained Mr McHarg. The insurer also said that he believes that the PCC and segregated cell company kind of structure is of interest to Asian companies, especially if they do not want to immediately go down the full captive route. Attractive concept Rajeev Kadam, president and global head, internal compliance at Olam International, the India-based agricultural commodity business with just under $20bn turnover and more than 25,000 employees worldwide, is a big fan of the captive concept. He told Parima delegates that he believes they should be used for non-catastrophe risks and, increasingly, non-traditional covers for which solutions are currently limited. “We are involved in all the value chain segments. We are more of a processor than a commodity trading company. Basically we buy the produce, process it and take it to the end user. All these segments have various risks attached that need insuring. It is a big programme. We have stock throughput, a global property programme including processing units, plantations and political risk because of the many different locations. We have product and public liability, D&O. “The captive sits somewhere between covering non-catastrophe risk on global programmes, so the premiums are light and we are making savings in areas such as motor vehicles. Non-catastrophe risk is best via the captive because it is something that is not going to kill you; it does not disturb the workings of the company,” explained Mr Kadam. As with many of the captives owned by big Asia Pacific multinationals, Olam’s main captive—Olam Insurance—is based outside of the region, in the Isle of Man. It is managed by Willis. “It is used for the global properly programme and takes care of issues like locally administered policies. Non-traditional risks like product contamination and product recall are covered. We are trying to expand our non-traditional risks where coverage is not really available—crop yield protection and logistical issues for example,” concluded Mr Kadam.

Captive growth accelerating in Asia Pacific despite continued soft market

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