Ravenscroft’s Pierre Paul and Jon Pope discuss how where a captive is in its overall life cycle affects which investment strategy works best
Just to add to the plethora of information to be considered when a captive is deciding upon which investment strategy to go with, where the company is in its life cycle can also have a major implication.
Early years
In the first couple of years, following the formation of a captive, it is likely that cash balances will be smaller, claims history less certain and retention levels lower.
For these reasons, it might be that appetite for taking on any investment risk is lower and so maximising the return on cash is perhaps the best option.
Maturity
As the captive matures, hopefully the claims history is positive, meaning that cash balances increase. At the same time, claims history should become more certain and so the board of the captive will have better management information (and more money) to be able to make a decision with.-
It might be at this stage in the company’s life that slightly higher risk assets can be considered because it has the funds and time horizon to be able to make longer term decisions. The board may look at the timeframe of any likely claims and try to more closely align investment assets with liabilities for instance.
Run-off
If a decision is made to put the captive into run-off, then as the company will be in the process of exiting potential liabilities again it is less likely that they will want to be involved in longer-term or higher risk investments.
Instead, liquidity is probably more important and so, once again, a flexible cash solution may be appropriate.
