Survey shows captives slow Asian adoption

The survey showed that 45% of risk managers already use a captive to manage some of their risks, while another 15% are currently exploring the feasibility of using a captive.

For the remaining 40% that do not envisage using a captive in the near future, size – or lack of it – was the most commonly cited reason. Some risk managers believe that funding a captive requires a balance sheet of a certain size, while others believe that critical mass is needed to make the effort in running a captive worthwhile.

For many others, the regulatory environment in certain countries is the biggest obstacle. For example, Indonesia does not formally distinguish a captive from a conventional insurance company, while India does not grant any tax benefits to captives.

However, other jurisdictions – most notably China – are actively looking to establish a more captive-friendly regulatory framework in recognition of the growing interest among corporates in using a captive.

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Captives are especially popular in the more established Asian insurance markets of Hong Kong and Singapore. Hong Kong-based telco PCCW has had a captive in place since 2007 and it has proven to be an “extremely valuable” vehicle for the company, said David Ralph, senior vice-president, risk management.

Mr Ralph said that for companies with a global programme, a captive is a necessity. It is invaluable for smoothing the costs of risk financing, tailoring coverage specifically for a company’s own risks and, most importantly, driving down an appreciation of the cost of risk to the general employee population, said Mr Ralph.

“Nothing makes them sit up more than when you say: ‘Yes, we have insurance but a very significant amount is self-insured and every time we pay a claim, that comes directly off the group’s bottom line and thus out of your bonuses.’

“When the company’s bonus pool is directly impacted by the size of losses paid by the captive, it’s amazing how much all levels of the company, from the MD to the newest recruit, are engaged in risk management.”

The Risk Frontiers Asia survey, which canvassed 50 risk managers in 17 different countries, showed that a number of risk managers are currently engaged in feasibility studies to see if using a captive would make sense.

For those risk managers that do not yet use a captive, size is a commonly cited issue. “I think we are too small to have one,” said Guan Seng Khoo, risk manager at Changi Airports International. But while size may impact the ability to fund a captive, Dr Khoo recognises the benefit of self-sufficiency in terms of liquidity and capital allocation. “The enhanced capital management would be my biggest motive for having a captive, as opposed to the risk transfer benefits.”

“We want to test the following hypothesis – rather than managing our risks through a decentralised insurance approach to a group consolidated insurance programme, we would be better off using a captive. If the hypothesis is proved, it could be another way of saving costs and improving efficiency,” said Victoria Tan, group head for risk management and sustainability at Philippines-based conglomerate Ayala Corporation.

Geography and the respective regulatory regimes play a big part in the feasibility of captives for many risk managers. For example, in Indonesia the captive concept is not recognised by the Financial Services Authority, known locally as the Otoritas Jasa Keuangan, and they are instead classified as standard insurance companies, making them less appealing options for companies. Consequently, companies such as ABM Investama, the investment arm of Indonesian energy group Tiara Marga Trakindo, that are keen to manage their own risks and insurance spend, have set up segregated accounts to fund their risks.

“From an internal perspective we have a captive but from the perspective of audit, we do not. So regulation is in fact a big barrier to the development of the captive sector in Indonesia,” said Bernado Mochtar, head of enterprise risk management at ABM.

“For a captive in Indonesia, you need a legislative process. You need to establish a reinsurance company and you need a certain level of capital, which is quite large. The captive also needs a certain level of operational processes. But companies need to raise deductibles in order to obtain lower premiums and so retain a substantial level of risk,” he explained.

Regulation is also a barrier to setting up a captive in India. “There are no tax advantages for captives in India and this [should be] one of the main advantages of a captive,” said Saurabh Verma, Pan-Asia Risk and Insurance Management Association board member for India and risk manager with a leading Indian conglomerate.

“If you want to self-insure then you have to put up the same capital as a commercial insurer, which is about $18m-$20m. So if you want a captive insurer, you need to persuade the boss that you need that asset. Regulations do not allow you to go to Bermuda or another such domicile,” said Mr Verma.

Meanwhile in Malaysia, the big buyers of corporate insurance regularly employ captives, some of which are used to cover employee benefits and other self-financing risks, as is the case for Petronas, the state-owned oil and gas company. A big benefit of this approach is the ability to control risks, said Raziyah Yahya, general manager, risk and insurance at Petronas.

“Our captive writes parent-only risks and all operations are included. It is financed by only our own equity and this helps us determine what we are actually buying,” she said.

The biggest change in the use of captives may well come in China. There are currently just five captives in the world’s most populous country but according to Keith Xia, head of risk management, business reputation and responsibility, global risk management at InterContinental Hotels Group, this could rapidly change as more Chinese companies expand overseas and see other ways to manage risk.

Furthermore, China’s regulators are prepared to make changes to encourage a more active captive sector, with the Chinese Insurance Regulatory Commission (CIRC) consulting with international consultants, brokers and insurers on how to establish a suitable regulatory framework for captives and mutuals.

There are challenges, such as the fact that so many Chinese corporates are state-owned and the insurance market is so cheap, plus there is a conservatism among a lot of Chinese companies when it comes to insurance and many are happy to be led by their broker. But as Mr Xia said, “the potential is huge”.

Should the captives sector increase as expected in both China and other Asian countries, there is likely to be fierce competition among a number of offshore domiciles to be the destination of choice for Asian captives.

Currently, many look to Hong Kong or the Malaysian offshore island of Labuan. But there is also growing interest in forming Chinese captives in Europe, the Caribbean and mainland US, according to Steve Kinion, director of captives, Delaware at rating agency AM Best, who has worked with the CIRC to build the captives sector in China.