20 years of Captive Review

This edition marks Captive Review’s 20th birthday. Throughout the last two decades there have been five British Prime Ministers, five summer Olympic games, four US presidents and countless articles exploring the challenges, trends and successes surrounding the risk management community.

As the industry has continued to evolve, Captive Review has been ever-present as a source of information-driven content serving captive owners and the industry’s key stakeholders.

Throughout the past 20 years, the captive insurance world has grown into a global business and such structures are now seen by many as a mainstream solution to challenges facing every business, according to industry leaders.

At year-end 2018, Captive Review forecast there were 6,315 active captives around the world. North America was home to half of those, while Bermuda and the Caribbean accounted for 34%, Europe 13% and Asia-Pacific 3%.

Previously seen as structures only open to multinational entities, captives are now being set up and inherited by smaller businesses, whether through a sheer desire to actively manage risk and drive down costs, or through the merger and acquisition activity currently dominating the most developed markets.

The growth of the North American onshore market has been a driving force behind the increasing sophistication and expansion of the industry. With states competing with each other and a “protectionist” feel currently engulfing the US industry, terms and legislation are becoming increasingly favourable for businesses experiencing a changing risk profile.

In Europe, the number of captives has decreased in recent times, and the barrier for entry has increased. Tightening regulation and scrutiny from tax authorities has moulded the European captive market into one made up exclusively of multinational businesses. However, the landscape could be poised for change, and industry leaders are now scanning the upper small and medium enterprise (SME) pool for the next set of opportunities.

While Bermuda and the Cayman Islands have been main-stays in the domicile landscape, Asia has experienced steady growth in Singapore and Labuan. The region has seen around 10 new captives form each year since 2015, and Western multinationals are increasingly viewing it as the next growth market.

The captive insurance world is predicted by many to continue on its growth path. Despite consecutive drops in captive numbers, many well-placed industry leaders believe the gross written premium (GWP) running through them is growing year after year.

Captive operations are also becoming more sophisticated. Despite beginning merely as a way to cut insurance costs, captives are now being widely used as a profit centre for their respective parents. Whether through investing in liquid markets, introducing additional business lines, or incorporating third-party risk, captives have become increasingly integral to their parents’ business.

The number of structures now offered has also evolved. Businesses are now able to “dip their toes” into the captive market through cell structures, PICs and groups.

John English

John English, Aon Captive & Insurance Management CEO
How has the industry changed?
Well, there certainly has been a pronounced increase in regulation. There are a number of drivers for this, but I think that the origins lay mainly in the 2008 global financial crisis. In the immediate aftermath, regulatory authorities redoubled their focus on requiring more resilience in insurers balance sheets while on a parallel track. So we saw a risk-based approach to capital adequacy come into the being with the implementation of Solvency II and a range of measures on both sides of the Atlantic to combat perceived tax avoidance. In addition, the Organisation for Economic Co-Operation and Development’s (OECD) Base Erosion and Profit Shifting (Beps) initiative was launched.

How will it develop?
There is no way we will see a decrease in regulation or compliance. The pace may ease overall, but the burden for captive owners will inevitably grow.

The shape of the economy is also vastly different from what it was 20 years ago. It will bring different risk profiles, and the market will open up.

Despite economic uncertainty, we’re experiencing growing economies on a global scale and the digital commerce arena is expanding rapidly, which will undoubtedly drive the need for new approaches in risk financing.

Malcolm Cutts Watson

Malcolm Cutts Watson, founder of Cutts-Watson Consulting
How has the industry changed?
The industry has changed in a variety of ways, and these can be broken into three segments: Offerings, markets, and business models.

When it comes to offerings, the biggest change was the introduction of the protected cell company (PCC) structure, which was around 1995. Ultimately, it then morphed into the incorporated cell company structure (ICC). That subsequently facilitated a lot of the insurance-linked securities (ILS) deals we hear about, and the pension de-risking transactions.

The introduction of the cell opened the captive industry up to a whole range of new risks, companies and markets. More importantly, it opened the market up to a whole new way of thinking. Following their introduction, you were not bound to having insurance risk remain in the (re)insurance market. It gave you a vehicle that was bilingual in terms of financial markets

With regard to markets, the biggest development has been the proliferation of domiciles. There is now a whole raft of jurisdictions that have sufficient infrastructure and dedicated legislation. There is much more choice for the consumer.

Looking at operating models, I believe there has been a consolidation of insurance managers. When I began my career, in Guernsey there was around 28 captive managers. Now we’re down to five or six. It’s dominated by broker-owned managers, and there will be further consolidation, I predict.

What does the future look like?
I’m optimistic that the captive industry can provide solutions for climate change. The governance, discipline, structuring and accountability of a captive in a reputable jurisdiction is ideal for this.

Captives can provide for pre-disaster funding and accessing cheaper excess protection. You can guarantee payments triggered by parametrics for example, meaning governments and aid agencies can plan much more efficiently.

As we move into the technological age, corporate risk profiles are also going to change. Captives will insure not just traditional risks, but new ones too. The traditional market has always had trouble dealing with new risks because it finds it hard to model and price them. The captive can act as an incubator until the market is comfortable to assume it.

Bill Fitzpatrick

Bill Fitzpatrick, VP of corporate risk benefits, DHL
EB experience…
From the employee benefits (EB) perspective, one of the first global captives was in 1996. The volume coming from this is continuing to increase as rates have continued to rise in relation to medical trend. Medical costs are increasing at an average of 8-10 per cent a year, which is forcing companies to think about health and wellness initiatives.

EB started off as a financial mechanism to keep costs at a break-even basis, but now it is about diversifying a captive’s portfolio as well as better managing the risk.

What’s next?
The utilisation of technology will be key. Historically multinationals just looked at the financial data and assessed losses. Now, companies can look behind that, find out the types of losses, where they come from and can form a plan to mitigate them.

Companies now have the ability to look at what’s driving change in a certain country by digging down into the data and offering insight.

There is a tipping point to this, but what it looks like is anyone’s guess.

Dave Provost

David Provost, deputy commissioner, Vermont Captive Insurance Division
How have the challenges faced by the industry changed?
A lot of them are the same challenges. Taxes have not changed, there is still a struggle with the Internal Revenue Service (IRS), risk retention groups are still struggling with certain states.

What I have seen change is the use of surplus that has been built up. So many captives have grown, added programmes, and become a huge part of their respective parents’ operations.

Healthcare and manufacturing have always been the biggest sectors. Banking came in and went out.

The sophistication of a captive’s operation is much higher, and the data is better. However, I don’t think the risks have changed much.

What does the future hold?
We are now at a sophistication level where we are exploring parametrics, blockhain and other tools to drive greater efficiency. It’s exciting times.

Captives are now mainstream for business. The world of commercial insurance is a different environment, a world unto itself. Captives are a relatively small part of this world, but there’s significant money in now, so it’s definitely part of the matrix.

Heather McClure

Part of me wants to say not much will change, but there will be some new risk. Captives will continue to do the things they do well now, but even better.

Heather McClure, VP and CLO, University of Oklahoma
What’s changed?
We’ve all seen the growth in other states creating legislation and building infrastructure for new domiciles. That’s been fun to watch and ultimately healthy for the industry as a whole.

As technology and products evolve in business, the captive world responds with insurance solutions that can support those risks. I’ve been happy to see how new insurance products are tested in captives and then reinsured by companies who have supported the philosophy that captives bring to insurance – we will always find ways to control our own loss when new are the ones invested in it.

How can you see the industry developing?
We will continue to see companies form captives. The ones that already exist will take on more financial risk. The reinsurance industry will respond by partnering with us in controlling severity as primary layers work on frequency.

Ultimately, the captive model is the best way to control both aspects by making sure the insured organisation has invested in its own risk. It’s a great time to build captives or refine them to respond to the current business environment.

Paul Owens

Paul Owens, outgoing CEO of Willis Towers Watson’s captive practice
How has the industry changed?
Regulation is the most significant change. Not only is the regulation stricter, but there is also more of it.  We see it developing all over the world, so no matter where you are, captives are forced to operate in a much more sophisticated environment.

The professionalism of the industry has also increased in the past 20 years. I’ve been in this role for five years, and it has been the best role I have had at Willis Towers Watson. The calibre of people working in this space is very high.

Captive operations are also sophisticated now. Elements, such as third-party business, managing a captive’s assets, have all helped to turn captives into profit centres for their parents.

How do we tackle the ‘talent crisis’?
The captive insurance community needs to adopt an outward-looking approach.

As an industry, we need to attract people, but we also need to bring in the next generation of leaders. These people need to be readily qualified and have an understanding of the industry – although smart people will pick things up quickly.

Nuno Antunes

Bob Gagliardi, AIG head of captive management and US fronting. Nuno Antunes, SVP, AIG EMEA head of multinational and captive fronting
What challenges have captives faced?
In recent times, there has been increasing pressure on captive owners to expand the use of their captives by writing a much more diverse range of insurance lines. In the soft market, captives needed to show that they were still providing clear benefits to the parent and that they were making the most effective use of capital.

The role of the captive was being questioned and challenged, and captives had to be forward-thinking and innovative in order to add value to the parent company.

Bob Gagliardi

How can a captive prove to be effective as risk profiles change?
Despite a lot being said about tighter regulatory restrictions, the popularity of putting a captive at the centre of a multinational programme has increased globally.

On the coverage side, as the world of risk evolves with a shift from tangible to intangible assets, there is certainly a need for enhanced collaboration between captives and commercial insurers when it comes to these emerging risks.

Dan Towle

Dan Towle, CICA president
How does the industry tackle the ‘talent crisis’?
Part of the solution is engaging with younger professionals and putting them in positions where they can become our best advocates. Insurance has never been viewed as a sexy, innovative industry. Yet, when you talk with members of our NEXTGen and Young Professionals Task Force, you get a very different view.

The NEXTGen task force is putting forward a series of recommendations that will help us refine and increase many of our current initiatives to make sure we are meeting the needs of young professionals. This is an exciting time as we have a great opportunity to effect change.

What does the future hold for captives?
The captive industry has proven resilient. We are going through an evolution right now where best practices and doing captives right are more important than ever. We are seeing it with the scrutiny in the small captive space by the IRS. It has never been good practice, whether 20 years ago, today or 20 years from now, to set up captives solely for tax purposes.

The majority of companies that set up captives for strong risk management reasons and follow best practices will only have good things to come. We are proud to represent these companies at CICA and continue to promote best practices that will serve our industry for decades to come.

Debra Walker, senior deputy commissioner, North Carolina Department of Insurance
How has the industry changed?
One of the primary changes that has taken place in the industry is the growth of the number of domiciles that have passed laws allowing for the formation and operation of captive insurers.

The captive industry in North Carolina was established six years ago when the North Carolina’s Captive Insurance Act was signed into law.  Since then, the state’s captive industry has seen robust growth.

Business owners are learning about the benefits of forming a captive insurance company in North Carolina and are relying on the expanding network of insurance professionals and service providers in the state to accomplish their risk management goals.  There has also been an emergence of new jobs in our state to support this growth.

Debra Walker

What future do you see for captives in NC?
One of the primary changes that has taken place in the industry is the growth of the number of domiciles that have passed laws allowing for the formation and operation of captive insurers.

The captive industry in North Carolina was established six years ago when the North Carolina’s Captive Insurance Act was signed into law.  Since then, the state’s captive industry has seen robust growth.

Business owners are learning about the benefits of forming a captive insurance company in North Carolina and are relying on the expanding network of insurance professionals and service providers in the state to accomplish their risk management goals.  There has also been an emergence of new jobs in our state to support this growth.

 

 

 

 

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