Captives and Global Programmes: A Good Match

Is a captive a necessary part of a global insurance programme?

Not necessarily, a lot of global programmes do not involve captives. But if a multinational organisation has a captive, they will try to maximise its value and use it as an aggregator for their exposures around the world. It is perhaps the other way around – most of our clients with a captive will have global insurance programmes. But there are very large global programmes that we insure at AIG that do not involve captives.

How is a captive best used in a global insurance programme?

There are the traditional values of the captive, working as an aggregator, and helping their companies to understand their risk and exposures, and to be able to capture more data. And by understanding the risk better, you can act on prevention and improve the risk profile, minimising disruptions to the company’s business. It is also a way to reduce the premium spent in the traditional insurance market, reduce price volatility and even leverage the negotiating position with the insurance markets. So there are many advantages from having a captive working in a global programme.
We are still seeing a need for clients to control their risks, to have a better handling of their global exposures, to learn lessons from the different territories and share that throughout the group’s subsidiaries worldwide. That is another one of the powerful things about a captive working in a global programme, that you can aggregate data. If you place insurance programmes separately in different countries, then you may be losing some of the capability to implement best practices and make the most of your insurance programmes.

What are the common structures for a captive global programme?

When it comes to global programmes, captives usually do not operate on a direct writing basis, and instead will look for a large multinational insurer that will provide them access to their network around the world, so that local policies can be produced throughout the world, in the territories where the regulation or the specific business needs require one to be produced.
Then, in terms of the reinsurance structure of that programme, there are many different ways of setting it up. Some clients look to reinsure as much as they can into the captive, so trying to get as much risk as they can into the captive and cede as little as possible into the reinsurance market. Others will instead look for a structure where there is a combination of risk retention (through the captive) and risk transfer, for example by retaining a first layer and then use a company such as AIG, not just for its fronting capabilities (issue policies around the world) but also for the ability to provide risk transfer capacity above the captive retained layer, or in some fewer cases, to reinsure on a quota share basis.
On other occasions, a client may be looking for a certain type of coverage that is not readily available in the insurance market, or is looking for certain specific coverage clauses that may usually be excluded or sub-limited. In this case, AIG would cede those specific sections of coverage to the captive and provide risk transfer capacity for the rest of the programme. The captive is a very flexible risk management tool.
Depending on the risk management objectives of the client, we can work with them and the captive and build a programme that makes sense for the client. No two captives are the same, they all have different ways of operating and different objectives, and we can find the best solution and build a programme that works for them. In general, most clients use both our fronting capability – the ability to issue policies around the world, in around 200 jurisdictions globally – and our retention capability to provide risk transfer capacity.

Are captives being used in a broader way in terms of lines of business?

We are seeing an increasing interest in bringing more specialty lines into captives, going beyond the traditional property/casualty lines. So there is definitely a greater will to expand the lines of business in a captive. As an example, the number of cyber programmes has rapidly expanded, and this will certainly continue given the amount of captives that we know are looking into this matter. Marine, trade credit, aviation and travel are other lines that are experiencing significant growth and as captives continue to look for diversification of risk this trend will certainly continue.
In general, global programme lines are expanding – we’ve seen double digit growth in global programmes in the last five years, both in terms of the number of programmes and also the number of policies that we issue as part of those programmes. And the captive programmes follow that trend. So the expansion of global programmes also means that there is an expansion of captive programmes even if, as it is the case in EMEA, the number of captives isn’t necessarily growing.

Does it matter where the captive is domiciled?

It doesn’t make any difference to us where the captive is located, that is ultimately part of the client’s strategy. We will adapt and work with the client, regardless of whether the captive is onshore or offshore, EU or non-EU. There will be differences in terms of global legislation, or the way that the recognition of insurance will work, depending on where the captive is located, but we will just adapt to whatever the situation is, and make it work for the client. The location doesn’t change the appetite that we have to do business with the client.