- Head of Captive Insurance for Barclays Wealth & Investment Management
"Some interesting feedback I got from some fronters I was talking to at Captive Live was that the STA brings in a degree of diversification to them."
Since 2008, the landscape for captives has changed on a number of fronts. There is now greater parental involvement in the day to day running of their captive, and the returns on captives assets have significantly reduced, which means captives are now not always self financing based upon assets returns. It’s therefore interesting to see that the four experts we have spoken to during this report all have similar thoughts on the main issues at work.
Regulation is certainly an ongoing challenge – particularly Solvency II, which will have an impact on many jurisdictions, creating opportunities and challenges to business. We’re seeing parent organisations taking a much greater interest in the activities of their captives, whether this is by trying to improve operational efficiency, or writing additional lines of business through it.
The current dilemma of returns – with costs increasing and returns on cash dropping – has challenged captives, who now have to consider exploring investment options based on the likely situation that interest rates will continue to stay at historically low rates. Generally, European captives have always been cash-focused while markets such as Bermuda, the Cayman Islands and onshore US have been more comfortable about investing, albeit at the lower end of the risk spectrum. But now more and more captives across the European market are looking at the options for increasing the yield on their assets within acceptable risk parameters.
We are encouraging captives to look at the net return they are getting on their assets, which includes the deduction of any costs of the collateral posting arrangements they may have in place. For example, European captives have historically posted their collateral by way of a Letter of Credit (LoC). At Barclays, we have developed the Security Trust Arrangement (STA) as a non credit alternative to LoC’s, which can be a more flexible and cost effective alternative. In many ways, the STA is similar to the Regulation 114 Trust that has been used in the North American market for a number of years.
Generally speaking, the role of both captive managers and non-executive directors sitting on captive boards has become more demanding since 2008. In the face of the changing economic landscape, captive boards now have to explore unchartered – and sometimes uncomfortable – routes in the hunt for alternative, more efficient ways to operate. It can be a challenge to get to grips with the different options and it’s crucial that any decisions taken must be appropriate for the specific captive – one size does not necessarily fit all.
The Barclays Captive Insurance team spends time with managers, non-executive directors and even representatives from the parent board in order to educate and explain our ideas. We try to help boards understand not just what we have to offer but also what is most appropriate for captives in terms of the economic landscape, whether that involves changing their approach or simply sticking with their traditional way of working. For example, we encourage boards to review their investment policy mandates in light of the current environment – from the diversification of bank deposits to different asset classes – but we recognise that captive boards do need to spend time understanding their options before making any decisions.
Understandably, many are wary of the risk of investment as the mantra of return of capital, as opposed to return on capital is of paramount importance. Within our team we have investment qualified individuals who have a pedigree in advising captives and other insurance structures on the most appropriate investment solutions for their particular objectives and needs. It’s about getting the right balance between risk and reward. At Barclays, we’re trying to educate our captive clients so they are aware of the range of options open to them and they can then make an informed decision
From my perspective, captive business is comparatively low risk. On the whole, captives are well-run corporately governed structures that are managed by professional captive managers in well regulated jurisdictions. It’s fair to say that in whatever sector of the financial services industry you are involved in, the regulatory bar in recent years has got higher and I don’t envisage that this direction of travel is likely to change. In my opinion, the most important aspect when dealing with regulation is ensuring that people are clear about what any current and new regulation requires them to do and any potential impact on the way they operate.
An obvious example is Solvency II, with its wide ranging impact and the delays in implementation it has been a particularly difficult situation for the captive sector, and wider insurance industry, to wrestle with. It creates opportunities and challenges depending on where a captive is regulated. Keeping ahead of regulation wherever possible and planning accordingly, coupled with sharing information with clients on the actual or potential impact is necessary in making sure new regulatory implementation is as painless as possible. Whilst regulation is becoming increasingly complex, it is right and appropriate to ensure that the broader global financial system is as robust as possible to prevent another economic situation like 2008. There is a considerable amount for practitioners to get their heads around, however regulation is, and will continue to be an increasing part of everyone’s life.
The current climate has made the role of a captive manager of even greater importance, as parents or shareholders of the captives are increasingly looking for their captive manager to provide a consultancy style approach to make them aware of changes in the market and the options this gives them to drive greater value from their captive. I am pleased to say that in my experience, the majority of captive managers are viewing this as an opportunity to visibly demonstrate the additional value that they bring to the table, in addition to the efficient day to day running of a captive programme.
As the Captive Managers roles become more complex and demanding, this will lead them to call for greater flexibility and a greater range of solutions from their service partners, we are already responding to this and have a wide range of solutions available. We will also continue to have a proactive dialogue with all key stakeholders – with our ideas being shared to promote discussion and debate, which we hope will ultimately help in shaping the way the industry develops going forward, as Barclays strives to be the ‘Go To Bank’ in the global captive market.