Growing role for captives

There is no prerequisite for a global programme to involve a captive but it can play an important role, especially given its flexibility, access to reinsurance markets and control of retentions. Tony Dowding reports

A captive is a highly flexible tool and can be easily incorporated into a global insurance programme, and indeed can become the focal point of the programme. It can take a vital role in managing local retentions, premium allocation and utilising the reinsurance markets.

A captive’s involvement in the setting and funding of retentions can be invaluable to a global programme. A captive is the one of the most cost-efficient ways to fill the gap between the group retention and the local retention levels, with bulk buying concentrated in the captive. The captive can then allocate retention levels among the subsidiaries and operating units of the group.

Central focus
As well as funding retentions, a captive can be used to provide a central focus for the programme, by reinsuring all the primary policies that are issued at local level. It can then reinsure either with the local reinsurer, if that is a legal requirement, or with the worldwide reinsurance market.

Where some classes must be insured locally and others can be insured with a non-admitted insurer, the captive can be used to centralise the arrangement, insuring the non-admitted classes directly and reinsuring the admitted classes via a fronting insurer.

Another useful advantage of a captive is that it facilitates the ability to allocate premium to subsidiaries and operating units, and thereby improve loss control and risk management. This is one of the major benefits of a multinational insurance programme, providing central control for the encouragement of risk management and loss control.

Above all, a captive can provide greater transparency on a group’s risks globally, increased control and bring greater stability to its insurance programmes.

Stephen Morton, multinational head of complex accounts, AIG believes that the current hard market environment presents an opportunity for brokers and insurers to create joint, scalable captive solutions that provide benefits both locally and at a global level. He says that as coverage becomes more expensive in the traditional market, one of the greatest advantages of a captive is the ability to craft bespoke terms and conditions at a lower rate.

He explains: “The programme flexibility granted by a captive is often one of its greatest benefits, as the traditional market offerings may not provide sufficient capacity or coverage terms. A captive can step in to cover these gaps and the owner can then choose to retain those risks or, or if capacity is available, directly access the reinsurance market. For many companies, using a captive to help manage a global programme is a way to centralise and optimise a multinational insurance programme’s retention strategy and meaningfully manage global risk.”

Paul Wöhrmann, head of captive services EMEA, APAC and LatAm, commercial insurance, Zurich Insurance Group, says: “We have observed that a captive self-retention within the primary layer of an international property programme provides financial incentives to reduce future frequency claims through active risk management and the systematic identification, assessment and improvement of risks.”

Marine Charbonnier, global programmes and captive director, Europe, AXA XL, says that for many of their international clients, a centrally coordinated global programme is the most efficient way to manage their risks. “Using a captive as part of their programme can be an effective way for them to retain some of their risks – usually the first layer of their exposure – and to get a handle controlling their losses,” she says. “This allows captive owners to take meaningful retentions at the parent level – rather than at the local level – and in turn, to have greater oversight with regards to the cost of their risk globally.”

One of the many advantages of a captive is the ability it offers corporates to utilise the global reinsurance markets. And this has great benefits for global programmes, as Wöhrmann explains: “I believe the access to the reinsurance markets through a captive can be an interesting opportunity for captive owners to navigate the hardening market.”

He continues: “Overall, my experience has taught me that, in the context of international programmes, captive owners use their reinsurance captives mostly to optimise insurance and reinsurance structures. They will also look to benefit from arbitrage opportunities in the markets (pricing, coverage and capacity) as well as look to strengthen the core business of the captive owner, develop new solutions for new risks and also to merge two worlds (life and non-life) into one reinsurance captive.”

The flexibility of the captive as a risk financing tool also means it can offer new types of covers, such as parametric. “We’re seeing a rising demand for more sophisticated approaches,” says Charbonnier. “Embedding parametric coverages into captives has several benefits for captive owners. First, they are attractive because they provide speed and certainty of payment. They also enable captives to accept risks that they would not ordinarily be able to underwrite, as well as offset some risks that they may otherwise find hard to place in the traditional insurance market. It subsequently allows them to build up more powerful data on those risks and become an even more useful tool in their owners’ overall risk management strategy.”

Morton adds: “The most successful insurance programmes maintain a balance of risk retention, traditional and alternative risk transfer, with a strategy that adapts to and achieves a smoothing effect across changing market cycles and risks. The benefits of self-insurance, including having greater control over risk financing and risk management, as well as customisation of loss control and claims mitigation strategies, remain relevant when prices soften again.”

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