Never been a better time to consider captives say risk managers

Offshore domiciles may raise concerns from tax authorities. Credit: Shutterstock/andy morehouse

The hardening insurance market and a reduction in coverage as a result of Covid 19 are leading more companies to consider self-insurance.

And with a greater range of options available to companies, from reinsurance captives to direct captives to protected cell companies, there has never been a better time to consider a captive.

This was the view of two leading risk managers, speaking at Commercial Risk’s Captives 2021: Now is the time for action virtual conference.

The hardening market has increased the frustration among risk managers with the traditional insurance market in regards to changes in terms and conditions, higher premiums, restricted coverage and other unfavourable dynamics.

“We don’t like it and we are taking our risk back in-house,” said Adri van der Waaart, director, global insurance at Dutch engineering firm Arcadis and president of Narim. “The captive is the solution of the future.”

The speakers’ views were supported by the watching audience at the event sponsored by AIG, Generali Employee Benefits Network, McGill and Partners, Swiss Re Corporate Solutions and Zurich, and supported by the Institute of Risk Management.

A poll of attendees found that the overwhelming majority (90%) are considering alternatives to traditional insurance while 80% have changed their approach to risk management as a result of Covid 19.

For Carl Leeman, chief risk officer at Belgian logistics firm Katoen Natie and vice president of Belrim, the argument for using a captive comes down to buying and selling. “If you have to buy insurance, you have to sell your risk and if you have a captive involved, it will make that sale much easier.”

His view was supported by fellow panelist James Bohan, assistant manager and head of global fronting & multinational, Ireland, AIG, who agreed that companies with captives are typically more attractive clients to insurers. “It demonstrates that there is a risk culture within the company.”

Insurance captives have traditionally been the domain of large companies with significant insurance budgets that decide they can spend their money more efficiently by running their insurance programmes in-house.

But the dynamics have changed since the hardening of the market in 2019 and then exacerbated by the pandemic of the last 18 months with greater volatility in the cost and availability of insurance.

Consequently a captive can bring more stability to your insurance renewal, said Mr Leeman. “It can take the fluctuations out of your insurance budget. It is not easy to ask your accountant to double your budget because of changes in the market.”

Covid has also led some insurers to reduce their coverage in certain lines. For example, Axa recently announced it would no longer reimburse French companies for ransomware payments. Other areas like contingent non-damage business interruption (CBI) have also become more difficult to insure in the wake of the pandemic and have strengthened the argument in favour of captives and self-insurance.

“There is a greater need to have more tailor-made coverage that is adapted for the needs of your company,” said Mr Leeman.

Nevertheless, getting board approval for establishing a captive can be a daunting challenge. James Bohan, assistant manager and head of global fronting & multinational, Ireland, AIG, stressed the importance of a feasibility study. “It comes down to what you are trying to achieve. A feasibility study should give you the quantitative and qualitative answers you need.”

However, any company looking to captives as a purely financial exercise should remember that risk management is the key to running a successful captive and critical to avoiding large losses in the first year, said Mr Van der Waart. “Manage your risk and know what you are doing.”

Nor should a captive be seen as a short-term fix. “Once you have a captive it is there to stay,” said Mr Leeman.

Mr Leeman also suggested that companies should consider a minimum of €1m to €1.5m premium for setting up a captive and to cover the cost of paying claims and fixed administration costs, which are subject to rising compliance expenses.

Another factor that has changed at board level is the perception of captives as tax avoidance schemes, said Mr Leeman. This perception stemmed from the OECD and was then reflected in corporate boardrooms.

“Times have changed,” said Mr Leeman. “We spent a lot of time informing the OECD that a captive is a risk management tool and the OECD’s thinking has changed.”

However, there are still steps that companies can take to reduce any negative scrutiny from tax authorities – for example, avoid using the captive to provide internal loans to the parent company or locating your captive in an offshore domicile like Bermuda or the Caymans when your business in based in Europe rather than the Americas.

Video recordings of all the sessions from Commercial Risk’s ‘Captives 2021: Now is the time for action’ conference can be viewed at https://vimeo.com/showcase/8463563

In addition, Zurich Insurance has recently published a guide to captives that can be downloaded here.