Captives on the rise in Asia

While Asia has had a relatively small captive market to date, it is seeing considerable growth and interest. Statistically, Asia represents just a fraction of the captive market, both in terms of domiciles and captive numbers/premiums. Certainly compared to the US and Europe, the captive solution is relatively uncommon, for a number of reasons including culture, regulation and market dynamics. But growing acceptance of risk management, emerging risks and globalisation have all led Asian companies to increasingly look at options such as captives. Many Asian corporates have risk managers or chief risk officers and are looking to effectively manage risks and captives undoubtedly fit into such a strategy. And as companies become more global, the captive solution fits well into a global insurance programme. And of course, the hard market, combined with emerging and changing risks, means that the traditional insurance sector is no longer seen as meeting all the requirements of corporates. And captive managers and fronting insurers in the region are reporting growing interest in captives. Captive growth There has been a marked increase in the establishment of captives and cells, and perhaps even more prevalent is the increased use of existing captives in Asia, according to George McGhie, managing director, captives Asia-Pacific, Willis Towers Watson (WTW). He says in Asia acceptance has varied across countries, due to the wide range of economic, regulatory and cultural environments, but WTW is seeing a significant increase in interest from a number of countries. He notes that WTW experienced a major increase in interest from Australian clients beginning about two years ago, which has continued to develop. Marsh saw a 25% increase in owners of captives from the Asia-Pacific region in 2020. Stuart Herbert, captive solutions leader, Marsh Asia and Pacific, points out that this is largely wholly owned captives but there is strong interest in cells as well. Total captive revenue and net assets for clients managed by Marsh in the Asia-Pacific region have grown by approximately 55% and 24% respectively, he says. Aon too says it has received an increase in captive insurance interest across Asia, including from China, India and Japan. Alastair Nicoll, regional director, captive and insurance solutions, Asia-Pacific, Aon, says: “We are establishing new captives in Singapore, while we are seeing cells are popular with Australian clients. There also has been a surge in special purpose reinsurance vehicles in Singapore and special purpose insurers in Hong Kong with new Asian catastrophe bonds.” Captive fronters are also reporting more interest. Ben Vale, head of multinational, APAC, AIG, notes a growing interest in the concept of captives in the Asia-Pacific region, with an increasing number of enquiries during the past 18 months a key indicator, largely as a result of the current hard market conditions. “However, acceptance is a very different dynamic and interest can quickly wane once brokers and insureds understand the organisational commitment of entering into a captive arrangement,” he says. “Often, initial enthusiasm decreases once there is greater understanding of the associated challenges, such as the initial feasibility study, ongoing management costs and capital commitments, particularly where short-term insurance spend reduction is the key driver, as opposed to a medium- to long-term risk management strategy.” He continues: “In this sense, the acceptance of captive structures in Asia-Pacific still seems to lag behind some other regions. Greater knowledge sharing with respect to captive options, benefits beyond price considerations and developing a clear understanding of the role a captive can play in an organisation’s overall risk management strategy will be key to growing acceptance. But Asia-Pacific does have many established captives, which points to long-term acceptance once the benefits, potential challenges and fit with corporate risk management strategy are understood and supported.” John Bang, head of country desks, Asia and captive lead, Singapore, Zurich, agrees: “The captive insurance sector in Asia is relatively small but has potential for significant growth, with high interest and enquiries. While a global broker has reported a 24% increase in the number of captives it manages in APAC in the past five years, most of the growth comes from Australian middle-market corporations and a lot of associated services remain in Australia. While it is a compelling concept, we have yet to see momentum in the use of cell captives as they are still a new concept in Asia, and most existing and new captives are wholly owned.” Captive growth in Asia has been robust, albeit coming off a small base, supported by a hardening market and regulatory easing, particularly in Hong Kong, says Christie Lee, senior director – analytics, AM Best. She says that within Asia, new captive formations in 2020 were largely from the Labuan International Business and Financial Centre (Labuan IBFC) and Singapore. She adds another observation – an increase of Japanese-owned captives moving to Asian domiciles like Singapore, Labuan and the Federated States of Micronesia, although Hawaii has traditionally been a hub for Japanese captives. Shiwei Jin, global programmes and captives regional director, APAC, AXA XL, says captive growth is driven by both a strategic risk management need and a tactical solution for navigating the changing market environment. She explains that the pandemic has fostered a more holistic and increasingly important risk management philosophy in the region, noting that multinationals’ risk management teams are taking the centre stage to actively engage in matters critical to enterprises’ resilience and have a much stronger connection and better visibility with c-suites, boards of directors and key functions across the organisation. She adds: “Our Asian captive community has been expanding in the last five years and the ecosystem for captives in the region is developing too. Thanks to the strong push from Asian domicile regulators such as the Labuan IBFC, Parima and other risk management associations, captive consultants, insurers and other support systems, captive prospects now have better understanding of the concepts. They also have access to growing resources and support to explore a potential captive roadmap and/or to seek senior management and board approval.” Leading domiciles Singapore has long been the leading domicile, with captive regulations dating back to the early 1980s. It continues to lead in captive numbers and premium volumes and its insurance-linked securities (ILS) offering is now well established. The other major domicile is Labuan, which was established as a captive domicile in 1990 and has the unique ability in the region to allow the establishment of protected cell company (PCC) facilities or structures. Hong Kong is looking at establishing a leading role for Chinese-owned (and other) captives, and has established an attractive ILS offering, while the Federated States of Micronesia remain popular with Japanese companies. AXA XL’s Ms Jin says that a major domicile development in Asia is the Gujarat International Finance Tec-City (GIFT) in India. It has established itself as a captive domicile for Indian-headquartered companies to form pure captives to write risk for a company’s Indian-based exposures only. “This is groundbreaking for the Indian captive industry after a long wait for captive legislation. It is great news for Indian companies that want to set up captives for its Indian risks,” she explains. Ms Jin says it is particularly complicated for Indian risks to be exported offshore due to reinsurance restrictions, and adds that a few Indian companies are already looking into captive formation in the GIFT, “so it is definitely a captive domicile to watch”. Asia-specific captives? In recent years, there have been a number of closures of captives around the world as a result of M&As or restructuring. Companies have moved away somewhat from having multiple captives, but are global companies now looking at having a separate captive for APAC risks, domiciled locally? It would appear that there are some companies that seek to have their risks held more regionally to be more responsive to the local needs, generally using cell captives. Captive managers say they have some clients with a Singapore captive and another for example in the US. WTW’s Mr McGhie says that multiple captives are more often driven by different regulatory needs, for example a US captive for domestic employee benefit business, alongside a Singapore captive for global programmes. AXA XL’s Ms Jin says they see a trend of global companies looking at having a separate captive for APAC risks domiciled locally, and at the same time Asia-headquartered companies looking to redomicile their captives from traditional offshore territories like Bermuda or Cayman Islands to Asia domiciles. Zurich’s Mr Bang notes that global companies are looking for innovative ways to improve their risk management and says that many multinational corporations in APAC are forming a separate European or North American HQ, which he says may be a sign of possible separation of captive domiciles. However, he warns that regulatory restrictions and “time crunch” are important factors that need to be addressed. Broader risks Captives have historically tended to focus on standard P&C risks but they are increasingly being used to cover a broader range of risks, including emerging or difficult-to-place risks. In Asia, Aon’s Mr Nicoll says they are writing “nothing too exotic for now, although cyber risks, D&O liability and benefits are topics for discussion”, adding: “Identifying and quantifying the initial risk classes for a new captive is essential and takes time to ensure the maximum benefits for businesses.” Other areas being explored by captives in Asia include professional indemnity, contingent business interruption and parametric solutions. Looking ahead, says AIG’s Mr Vale, with much of the global trade infrastructure becoming more ‘virtual’, physical assets and traditional premises and product exposures are no longer the main risks faced by today’s insureds in Asia-Pacific. “Companies are exploring parametric insurance solutions via captive mechanisms for pure financial loss covers. As these types of requests become more frequent, they will continue to pose challenges for many captive domiciles in terms of how these products are viewed and the associated licensing requirements under each domicile’s captive licensing regime,” he says. Traditional v innovation Hard markets are traditionally a time when captives focus on traditional uses such as trying to alleviate the impact of increasing rates, getting better value for money, improved terms and conditions, and reversing exclusions. But with emerging risks, the impact of the pandemic and a growing focus on risk management in Asia, will there also be scope for an expansion in use for captives in other strategic areas? “Over these more challenging conditions, we have seen captives reverting to their principal coverages – where they spend the most money,” says Marsh’s Mr Herbert. “Logically, making savings in your largest premium spend is more valuable than participating in other lines. However, it is important to note that for many clients, the conditions have increased other policies’ spend and thus they become more ‘interesting’ for captive utilisation. The type of coverage still largely revolves around improving rates, removing ‘hotspot’ pricing points and ensuring coverage is fit for purpose and/or regulatory compliance for the businesses.” WTW’s Mr McGhie says it is not an either/or question. He believes the difficult market for traditional risks has increased clients’ focus on the value of their captive and enabled a broader conversation about use in less traditional ways. “A captive provides a client with a formal, licensed and regulated means to value and finance retained risk, and access a wide range of risk transfer arrangements. These principles apply to any class of risk and writing a range of risks in a captive helps spread the risk exposure of the company, and opens the possibility of multi-line, multi-year reinsurance programmes, which can also spread risk forward over time,” he says. Clearly, much depends on the captive’s owner and the attitude towards risk management of the parent company. “Less risk-mature companies are typically looking for a quick fix for an existing problem like higher pricing or less capacity, while more sophisticated buyers already utilise their captive(s) widely across the whole spectrum of their insurable risks, often building their main programmes around the captive’s strong balance sheet,” say’s Aon’s Mr Nicoll. June Wang, associate financial analyst, AM Best, believes that captives form part of the solution as the market hardens, “and provide risk managers with a greater value proposition to optimise risk retention from reinsurance, as well as narrow coverage and capacity gaps”, adding: “Captives can be a key part of an integrated risk management strategy for organisations as emerging risks call for more flexible and customised solutions.” There may be a way to go before Asian captives start truly looking at alternative solutions and broader uses for their captives. Zurich’s Mr Bang believes that while the demand for non-traditional solutions such as extended warranty and product recall are high, there is insufficient expertise in the Asian market and a lack of a simple-enough solution for corporations to make the final decision. “Once there is a simpler and faster innovative platform backed by new regulations, customers are likely to respond faster to the new solution,” he says. “More c-suite engagement is needed if the captive market is going to get meaningful traction, be it traditional or non-traditional.”

Captives on the rise in Asia

The captive sector is experiencing a boom time as the hard market bites and companies look at alternatives to the traditional insurance market, says Tony Dowding

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