Risk managers warned not to make knee-jerk captive decisions in hard market

Risk managers are potentially storing up future problems in their rush to establish captives in the hard market and add new risks without thinking through exit strategies, warned participants during a panel debate at Airmic’s annual conference. The experts said captives are on the rise in the hard market and taking on more risks, particularly from distressed insurance lines. But they added that some risks managers are making decisions on captives very late in the day, often because insurers are leaving renewal decisions till the last minute. They urged risk managers to formulate long-term captives strategies rather than make knee-jerk decisions. “Captives are back in fashion but be careful how you use them,” said Richard Cutcher, Airmic captive ambassador and debate host. Peter Child, chair of the marketing development committee at Guernsey’s International Insurance Association, said pretty much every risk is now being placed within captives as a result of the hard market. He flagged increased placement of P&I, D&O and trade credit risks, as well as more esoteric threats such as cyber and EIL. But Owen Williams, global programme and captive regional director for UK and Nordics at AXA XL, warned the audience of risk managers that some “are potentially storing up problems down the line” in the “rush to solve immediate problems” in the hard market through captives. “When we talk about distressed risks in captives, predominantly P&I and D&O, there is a reason they are distressed. These are not lines of business that intrinsically are easily priced to make a return. They are also long-tail lines. So once the risk is in the captive, you are in it for the long tail, and the long term. It does worry me slightly that people aren’t considering the feasibility and their exit strategy,” he said. “When you combine that with rushing the process and attempts to set up a captive very quickly, how much is the exit strategy really being thought about in the panic to solve the here and now?... My advice is: yes you should be looking at captives, but don’t go into this with a predetermined mindset of ‘that’s it, I’m doing it’, and always have that exit strategy in mind because getting out of the captive can be a really time-consuming and expensive challenge,” he added. Williams stressed that early engagement is key when trying to bring new risks into the captive. He has seen several risk managers try to establish a captives too late in the day during renewals. Many of these simply ran out of time to set up their captive this year and therefore yet more will come into play in 2021, he added. The panellist has also seen people belatedly change captive strategies for other reasons than the hard market, which again causes problems. This has been a problem during the past few months, said Williams, who urged risk managers to focus on strategy and their captive vision from the “get-go”. Child explained that although official figures are yet to filter through, more and more captives are forming. So far this year Guernsey has seen more than 40 new captive formations, including cells, and is on course to hit 60 for the 12 months, he said. This compares with about 20 last year and around ten each year since 2010. The expert said it possible to set up a captive in two weeks and has seen a rush to do so from risk managers looking to make a transactional play in the hard market. But he said a captive should “be for life and not just for Christmas”. He too urged risk managers to take a strategic approach to captives and not just rely on them in hard market conditions. “It doesn’t matter what the market is doing. The point of a captive is you are able to get bespoke coverage based upon your unique understanding of risk. If you come to the conclusion that your appetite and risk tolerance is such that you want, and are able, to retain risk in a formalised fashion at a price that is different from the market price, it should be a similar story in a soft or hard market. The longer you use a captive and drive captive strategy, the more you are able to build up funds and leverage those funds to drive even greater benefit for the business,” he said. Barry Beard, global services and complex multinational at Chubb, agreed that you need to plan ahead, set up the captives for the right reason and think about longevity. He also stressed the diversification benefits of putting more lines in the captive, which highlight the long-term benefits of a proper strategy.

Risk managers warned not to make knee-jerk captive decisions in hard market

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