Captive use to increase with emerging risks a target

Some 117 risk managers and captive experts responded to the online questionnaire sent out as part of Commercial Risk’s Annual Captive Market report. The findings confirmed the results of Commercial Risk’s annual Risk Frontiers survey of leading European risk managers.

This survey found that the majority of risk managers that have captives may well be taking advantage of the stubbornly soft commercial insurance market conditions to maximise the risk transfer coverage that they buy to protect their assets and seek broader terms. But this does not mean that they are mothballing their captives.

A good proportion of those that took part in the Risk Frontiers survey said that they are seeking to make more innovative use of their captives to extend coverage into new areas such as employee benefits. Many also said that they plan to use their captives to help manage and transfer risks that the commercial market is currently struggling to cover as comprehensively as their customers would like.

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The online survey carried out for this report confirmed these trends. Some 46% of those who took part said that they planned to use their captive the same as now, some 34% said that they intended to use the captive more in the near future, some 11.4% were not sure while only 6% said that they intended to use their captive less in the near future.

Some 61% of those who took part said that they agreed that it is advisable to use their captive to ‘incubate’ difficult emerging risks such as cyber. Around 13% said that they are not sure currently whether this is a good idea while only 26% said that they did not think this was a good idea.

The idea that the capital markets could be tapped directly via captives to help cover such difficult risks appears to be gaining traction. Evidence gathered by Commercial Risk at the 2016 Monte Carlo Rendez-Vous meeting of the international reinsurance industry suggested that the capital markets are certainly interested in pursuing this option as the ILS market matures.

Around 40% of the Commercial Risk Europe readers who took part in the survey said that they believe that it would be sensible to access the capital markets directly to cover their risks via reinsurance special purpose vehicles (RSPVs) or Insurance-Linked Securities (ILS). An equal number were not sure and only 19% said that they felt this was not a good idea.

Another trend identified in the Risk Frontiers survey is the increased use of captives made by risk managers to manage their global programme. Over three quarters (79%) of those who took part in this survey said that they do use their captive to manage their global programme more effectively.

BEPS concerns

The impact of the OECD’s Base Erosion & Profit Sharing (BEPS) initiative and related efforts by the US government and European Commission to crack down on questionable corporate transfer pricing and tax arrangements is a cause for concern among the corporate risk and insurance management community.

Ferma is worried that these efforts assume that captives are some form of tax evasion strategy and so it is seeking to open a dialogue with the OECD, for example, to explain that this is far from the case.

Our survey underlined that captives are not vehicles to avoid taxes but rather genuine risk management tools. Some 86% of those captive owners who took part in the survey said that the primary purpose of the captive is to manage risk more effectively. Around 55% said that a key use of the captive is to gain direct access to the reinsurance market, 51% identified control of the global programme as a prime purpose, and the same proportion said that reduction in insurance premium cost is another main benefit of the captive. Only 6% identified tax benefits as a prime purpose.

Around 24% said that BEPS and the related tax evasion initiatives underway are likely to have a ‘considerable’ effect on the captive market. Some 38% said that they would have a ‘slight’ effect and only 11% predicted that these initiatives would have no effect on the market.