Captive risks: Employee benefits yes, D&O not so sure

The experts on the panel agreed that employee benefits risks should definitely be considered. But the discussion moved onto the recent trend of including directors’ and officers’ (D&O) risk in the captive programme and they were not so sure. One delegate from Zurich Insurance’s captive team pointed out that affinity products are already included within captive programmes in Korea, for example, but he said that it really depends upon the country and local rules and traditions. “Employee benefits is of interest but it depends on the market. China has a state-regulated scheme and so it is not viable. For other [states] it could be of interest. Companies are looking at it but we are not at the stage that Europe is for example, where Solvency II has really kickstarted the process,” he said.hide“We also do not have as many risk managers in Asia as in Europe; often it is a dual role and traditionally human resources (HR) manages the employee benefits function and this is not necessarily an easy task for HR. But the real question is: Is there a risk that you cannot put into the captive?” continued the Zurich man. Rob de Jonge, director, risk and analytics UK/international at global broker and captive manager Willis, said he definitely sees potential in employee benefits for captives in Asia and worldwide. “Yes, the interest in employee benefits in captives in Europe is driven by Solvency II because it is uncorrelated risk and therefore lowers the capital requirements. Human resources is generally not involved currently but once the discussion about benefits begins and the CFO becomes involved it tends to proceed quite quickly,” he said. D&O is increasingly included within captive programmes but, as one delegate pointed out, there is potentially a conflict of interest. If a claim is brought against the chief executive of the company how is that claim decided fairly? Peter Kuczer, global client executive—Asia Pacific at ACE Insurance, based in Australia, said that captives are definitely underwriting D&O business and recognised that it can become a problem. “You have to make it quite clear what is covered and what is not covered, such as side A, B and C and whose interest is being secured. There is a potential for conflict… it really comes down to the amount of risk that it is prepared to take and whether the traditional market is willing and able to provide true risk transfer. But overall there is huge potential—parametric covers, double, triple triggers, multi-year. It really is only limited by the imagination,” he said. There has been discussion in the US and Europe recently about the potential for captives to use the capital markets to transfer risks that the traditional market does not have the appetite for in sufficient volume. The idea is that special purpose vehicles—probably using protected cell structures (PCCs)—could be created to sell the risks to the capital markets via the captive, especially for large multinationals with a broad portfolio of risks. One delegate from XL Catlin asked about the potential for this market. “What about PCCs funded by third-party capital such as hedge funds and banks?” he asked. Tony McHarg, head of multinational Asia Pacific at AIG, said he definitely sees potential in this market and not just for the biggest companies. “You do not have to be a multinational to use a PCC. My sense is that it would be a logical step. The use of captives will be exploited by other forms of capital to establish PCCs. Why not?” he asked.

Captive risks: Employee benefits yes, D&O not so sure

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