Santiago Gomez, the head officer of PEMEX’s captive reinsurance company in Switzerland, talks to Captive Review about the challenges of running your own captive insurance company without a captive manager and offers his advice on when captive owners might consider taking this approach
Captive Review (CR): Could you introduce yourself and tell us about your job role and responsibilities with PEMEX?
Santiago Gomez (SG): Our captive is based in Switzerland, and I am serving as head officer in our office in Zurich, acting as a legal representative in Switzerland, mainly in charge of legal and compliance, general and technical accounting, fi nance, and IT.
CR: Can you tell us how you first got involved with captives?
SG: I joined a legacy and discontinued business operation back in 2004. During this period, I was in charge of reorganising the operational and legal setup of our branches in the UK, Singapore, the Netherlands and Switzerland. This was accomplished by using exit strategies for finality or by pursuing liquidation or sale of these entities. It was just during this time when I first had contact with captive solutions offered to our clients.
CR: What value do companies get from forming captive insurance companies?
SG: In my view, forming a captive insurance company means adding an instrumental element into the value chain by embedding risk management and risk awareness within the organisation. It allows you to anticipate potential risks to come and implement mitigation actions as well. It also serves as a really strong technique for implementing complex capital management strategies.
CR: As someone who self-manages their own captive, what are the advantages of taking this approach?
SG: You are really taking full control of the value chain. From inward underwriting to outward placements, from claims management to capital management, you are on top of your inward premium, of the risk retention at cedant level, of placement to the market and finally to the net retention at the captive. You can strongly manage the capital of your shareholder.
CR: What are the main challenges with this self-management approach that need to be overcome?
SG: Knowledge and talent in all the areas you need is one of the biggest challenges we face. In principle, a captive is a small company in terms of full-time equivalents, but a complex company in terms of knowledge needed. You are acting as a professional inward insurer but also as a professional reinsurer. You need high-level actuaries and a qualified inward as well as outward claims team. Additionally, you need a strong finance team to deal with your investments, cross-border tax regimes and different accounting standards. Last but not least, competent compliance, audit and risk management teams are needed. Having the above areas outsourced limits your capacity to fully benefit from the full potential of a captive. It is difficult to get the best deal possible on premium cost if you are not talking directly with both cedant on the inward or with the lead reinsurers on the outward. The same happens if you are not able to talk directly with the regulator in terms of capital management.
CR: What advice would you give to captive owners who are considering managing their own captive?
SG: I would clearly set the main goal of the captive in terms of capital management to noticeably distinguish between the type of captive you want it to be. Either a full reinsurance captive with a large net retention or a pass-through reinsurance captive. After that, I would start planning knowledge needed and resources, focusing on the idea of what will be managed in-house as opposed to outsourced.
CR: Under what circumstances would it make sense for a captive owner to manage their own captive?
SG: The more complex the risk is, the better it is to have your own self-managed captive company. Everything that is sort of standard can be either placed directly to the market or outsourced to a captive manager. However, complexity and untraditional are good elements to think about when managing your own captive.
CR: Why did you choose to have your captive domiciled in Switzerland and what are the benefits of Switzerland as a domicile?
SG: Switzerland is a stable country. Insurance laws as well as economical laws are quite constant and there exists a specific insurance law for captives. There is also a high-quality market of reinsurance professionals and a well-educated finance and legal community. The supervision law is strong and demanding, which creates a fantastic environment to provide certainty into your business. Finally, there is an openness with both the legislator as well as the supervisory body.
CR: What does Switzerland use for regulatory solvency requirements? What are its strengths and weaknesses?
SG: We do not have Solvency II in Switzerland but the Swiss Solvency Test. In principle, both regimes are looking for the same thing. I’ve found it is a really good instrument to be embedded in the management of the company. It serves as a perfect tool to evaluate different strategies for the company in terms of net retentions and capital management. It gives you a recognised set of rules to come up with educated decisions on strategic choices.
CR: What lines do you think will increasingly get written into captives in the next couple of years and why?
SG: Besides traditional lines of business, captives are useful to underwrite anything that the market does not like. Take examples like directors’ and officers’ liability insurance, cyber risk, high catastrophe bonds, etc.
CR: What’s your view on the current state of the European captive industry?
SG: More and more European countries want to have specific captive reinsurance legislation. Until now, there are few countries with this dedicated law and professionals, however, it looks like more governments have realised how important it is for the larger corporations of their countries to have a local legal environment to avoid the need of looking for an offshore location to create their captive.
CR: What effect would there be if more European countries established their own captive regimes?
SG: If you take, for example, the main stock market index in Europe, few companies of those index have their captive in the jurisdiction where the parent company is located. Having their own captive regimes may have as a first impact the repatriation of captives, and as a second step promote the creation of new captives.
CR: What effect has the hard commercial insurance market had on the European captive market over the last few years?
SG: It seems to me that it brings awareness to corporations of the need of having enough capital in the captive to increase net retentions in case of market hardening. In such cases, a captive can keep more business on its balance sheet if the capital allows it. This has, consequently, created the need for a regulation that allows the captive to create so-called ‘equalisation reserves’ or ‘fluctuation reserves’. This is also probably what has led to a revision of specific regimes for captives, which is what is happening in some European countries like France.