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  • Derek Patience
  • Role
    Marsh Management Services Isle of Man Limited
    Location
  • “In a hard market where it’s difficult for organisations to purchase cover at reasonable terms, the captive offering comes far more into its own.”

Derek is Head of the Isle of Man office for Marsh Management Services and is a member of the Executive committee of the Isle of Man Captive Association. Prior this he worked for Marsh in its captive management office in Bermuda.

1)  What is a captive?

2)  What steps are being taken by your own organisation to stay fit for the future?

3)  Is there any area in particular that people want you to take them?

4)  Cost v return is an ongoing challenge for captives, what actions do you see being taken to manage against this? What effect is this changing challenge having on new entrants?

5)  Have you witnessed any changes in the size of firms involved in captive insurance – are the new models widening captive suitability to smaller firms?

6)  What are your views on the evolution of captives in terms of PCCs versus ICCs?

7)   Are you noticing any changes in fund management?

8)   How have banks adapted their services for the captive industry over time?

9)   What will market developments in SPV/ILS mean for captive insurers?

10)  How else is the captive industry expanding and developing?

11)  Solvency II has been a moot point for some time, what steps do you believe captives should be taking in readiness for Solvency II’s eventual implementation? What are the key facets of the regulation as far as Captives are concerned?

12)  What’s your view on using a captive to cover a company’s Life Insurance obligations?

13)  Have you seen captives expanding?

14)  How and why would you choose to run-off your captive portfolio?

15)  Which jurisdictions/regions are people focussing on this year and why?

16)  Do you see many captives re-domiciling?

1) What is a captive?

A pure captive can be defined simply as a licensed insurance company which insures the risks of the parent and affiliated companies only.

The extension of this is that the captive company can also write business that’s connected to the business of the parent – perhaps offering insurances to the customers, suppliers, or partners of the parent.

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2) What steps are being taken by your own organisation to stay fit for the future?

Marsh has over 1,200 captives under our management. Their needs are changing across the board as the parent companies react to changes in their own insurance needs, in the market, in responding to regulatory change and so on.

Marsh has extensive information sharing amongst the 450 colleagues in our captive group to help find solutions to the issues facing by our clients. We also cascade the resulting solutions and best practices through our captive group.

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3) Is there any area in particular that people want you to take them?

Not really. It’s more that the companies themselves and their insurance brokers and other advisers – are looking at what their organisation needs at this point, and whether those needs can be met by the commercial market at reasonable terms – both for the cover and the price. If they find that they’re not getting the response they need from the market, then they’ll consider whether those needs can be met by utilizing their own captive.

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4) Cost v return is an ongoing challenge for captives, what actions do you see being taken to manage against this? What effect is this changing challenge having on new entrants?

It can be less of an issue for a captive. You have to look at why the captive was set up and what it is being used for. If the captive is used to minimise the overall total cost of risk to the group, then the captive making a return for the group isn’t necessarily a key driver. There may be areas where the insurance market is unable or unwilling to provide cover – the captive does, so it may be meeting a need that cannot necessarily be measured purely in terms of the financial impact.

There has been pressure on fees – but probably no different than that which would be placed on any other service provider in that  clients want to make sure they’re getting value for money.

I wouldn’t say it’s extensively affecting new entrants. Yes, costs can have an impact; the captive has to make financial sense. That is something that would happen as a prospective captive owner goes through a feasibility study. But I wouldn’t say purely the cost itself is a key driver.

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5) Have you witnessed any changes in the size of firms involved in captive insurance – are the new models widening captive suitability to smaller firms?

I would say there is probably greater interest from smaller and medium sized firms. As you get saturation in the market at the upper end from the FTSE companies and multinationals, there is expansion downwards to smaller organisations.

The likes of the Controlled Foreign Corporation changes in the UK have helped, both in terms of the de minimis being raised to £500,000 income and also what is being referred to as Foreign to Foreign – where say, for example, if you have a UK-owned multinational with a captive in the Isle of Man, it is only the profits relating to the UK risks that the captive is taxed upon. These things may not necessarily be one of the major drivers, but they can help with the formation of captives – with the feasibility of captives.

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6) What are your views on the evolution of captives in terms of PCCs versus ICCs?

Let’s talk about the PCCs first. Although PCC legislation has been around for a long time, more and more domiciles are expanding their legislation in order to give a more encompassing captive offering – whether that be in terms of pure captives, PCC or ICC and so on.

I’d say the increase in the number of domiciles offering the legislation has been a factor in the ever increasing use of cells and also as service providers get more and more comfortable with the concept of a cell and with the separation of assets and liabilities, they in turn have been more comfortable in recommending PCCs to their clients.

In terms of the feasibility – it’s no longer a case of just, ‘does a captive make sense? Yes or no.’ There’s an extension to that question, i.e., ‘does a captive in whatever shape or form make sense?’ If the answer to that is yes, the next question is ‘what sort of structure should that encompass? Should it be a pure captive? PCC? ICC?’

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7) Are you noticing any changes in fund management?

Not recently. Maybe a number of years ago with the financial crisis there was a move towards fixed income. A lot of companies wouldn’t go beyond a fixed income, their view being that, “we take our real risk in our insurance programme, we don’t want to maybe magnify that risk by introducing investment risk into our vehicle as well.”

Certainly over the last few years, to most captive owners, preservation of capital has been a key factor regarding their funds than anything else. Also I’d say there’s the comfort factor, especially where you get a risk manager or insurance manager being the main representative of the captive board. They understand insurance inside out, back to front and can explain away if there happens to be an underwriting loss – but they may have more difficulty explaining away if there happens to be an investment loss within the captive.

There is perhaps also the thought that, with the investment side, you’re chasing greater rewards. Probably you’ll get little thanks for increasing your return by half a percent, or one percent, or two percent, but you’ll get a severe ticking off if, in chasing those returns, you place the captive funds in jeopardy – and, perish the thought, if there’s a diminishment in the value of the investment funds that the captive has.

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8) How have banks adapted their services for the captive industry over time?

The banks have probably come to view that the service they’re providing needs to be an all-encompassing service. So you maybe get your transactional banking for the day-to-day payments and receipts, the bank can also provide fixed income in terms of investments – whether it is through money market, fixed deposits and so on – and at the same time the bank can also be offering products such as Letters of Credit.

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9) What will market developments in SPV/ILS mean for captive insurers?

I don’t think it will mean that much for captives themselves. It might offer organisations an additional option in terms of their protection – whether it is by pure reinsurance or the Special Purpose Vehicle or the ILS. I think it will give parent organisations greater choice. That in turn might give captives themselves greater opportunity in terms of who they reinsure with. More often than not those happen to be one-and-the-same in any event.

I’m not sure whether the SPV or ILS will mean that much in itself for captive insurers. It may well mean opportunities for those who service the captive market – for captive managers. The requirements for managing an SPV in this area are pretty similar to managing a captive. So auditing firms, lawyers who provide services for captive industry – they may see a knock-on benefit as well if they are expanding their service offering to also include SPVs/ILS.

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10) How else is the captive industry expanding and developing?

If the insurance market happens to be a hard market where it’s difficult for organisations to purchase cover at reasonable terms, the captive offering comes far more into its own.

We’ve seen the general market have a prolonged soft cycle, so there hasn’t been the great opportunity for captives themselves to show their worth. Your captive offering could be the best thing since sliced bread, but if the insurance market is falling over itself to give your clients good terms and cheap pricing, then it doesn’t matter how good your captive offering is. If organisations can get the coverage they need from the market at favourable terms, then by all means they should go for it.

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11) Solvency II has been a moot point for some time, what steps do you believe captives should be taking in readiness for Solvency II’s eventual implementation? What are the key facets of the regulation as far as Captives are concerned?

Solvency II as it stands is very useful and probably something that’s long overdue as far as general insurance market is concerned. I’m not sure whether a lot of the principles that are contained within Solvency II are really that applicable to captives though, for example, the greater capitalisation requirement under Solvency II. Chances are your captive, especially longer established captives are pretty conservatively capitalised in any event.

Another of the principles of Solvency II is greater policyholder protection. That’s a very noble thing to strive for in general insurance. In a captive, the policyholder is either the shareholder or is related to shareholder, so there is probably greater protection for the policyholder in any event, just given the relationship between the parent company and the captive.

Another facet of Solvency II is earlier regulatory intervention to perhaps prevent failures. Well, there again in terms of pure captives, the failure of a captive is so few and far between that this is something which is fairly irrelevant as far as captives are concerned.

In terms of the pure captive market, Solvency II hasn’t done captives any favours or insurance advisers any favours. Advisers are repeatedly going to their clients – especially in EU domiciles – and counselling on the importance of Solvency II and that clients need to be ready for it. Then advisers have been forced to announce that there’s been a delay in implementation.

Solvency II and the lack of progress in implementing it has added a level of unnecessary uncertainty in the captive industry. It’s challenging for advisers to properly advise what’s going to happen with Solvency II and captives. I think with the service providers, a bit of credibility has been lost. Clients are saying, “Hold on, you guys are the experts, you’re telling us it’s important, then you’re telling us it’s been delayed, then you’re telling us it’s important, then you’re telling us it’s delayed.”

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12) What’s your view on using a captive to cover a company’s Life Insurance obligations?

I would say it  depends if the captive happens to be reinsuring an entity that’s already providing the life insurance cover. From a captive point of view, typically these are done with annual contracts, so as far as the captive itself is concerned, it’s not necessarily writing life business – although that’s the inherent risk. So, fortunately, as far as the captive is concerned, the policy is short term, it’s cancellable as far as its reinsurance, so it doesn’t necessarily have to have a change of licence and be treated by the regulator as a life insurance company.

Certainly we’ve seen a number of captives in the Isle of Man that we manage either doing that or having a greater interest in scoping out the feasibility of writing employee benefits, including the life insurance of its employees. We’ve had quite a bit of that business coming in – hopefully there will be more in the future. Certainly there’s a keener interest, and as more and more organisations write that employee benefits and as more and more people get comfortable with it, I see that being a greater feature of captives. Also, for a captive, life business is reasonably predictable, so it can bring an additional revenue stream into the captive without necessarily increasing the risk.

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13) Have you seen captives expanding?

If they are it’s probably in reaction to a need the parent has or a change in the market. It’s a regular feature of captives that they’re set up for one reason or another – maybe to write one line of business or two – then as the captives grow, they are able to play a greater part in the insurance programme of the parent. And the captive board themselves, the captive managers and the insurance advisers/insurance brokers look at different ways that the captive can be utilised. If there is an advantage of the captive writing additional lines of business then it does so. I would say that’s already a regular feature as a captive moves through its lifecycle.

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14) How and why would you choose to run-off your captive portfolio?

The exit strategy often gets overlooked when a captive is being set up. If the captive no longer meets the needs of the parent, or perhaps through acquisitions you get a captive owner having two, three, sometimes four captives in their organisation, chances are they probably only need one. Maybe at that time captives would get put into run-off and then they would look to see what’s needed to be done to relinquish the insurance licence and enter into liquidation.

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15) Which jurisdictions/regions are people focussing on this year and why?

In terms of the western world the captive is already an established product. For many years, it’s gained acceptance. A number of jurisdictions, a number of managers and insurance advisers are looking to the likes of India and China as being where the next great growth for captives can be.

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16) Do you see many captives re-domiciling?

Yes and no. It tends to be if there is a specific need or specific reason behind it. We’re seeing these mainly as a result of acquisitions. The parent company either has multiple captives in different domiciles and the most efficient way to amalgamate the risk in those is by re-domiciling and then combining the captives, or via an acquisition a company maybe inherits a captive and can see the need for that captive but perhaps, for them, the captive happens to be in the wrong domicile or there’s a domicile that offers the particular parent company a greater advantage. In those instances we do see re-domiciliations.

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