- Managing Director for Castletown Insurance Services Limited
“What we also see is the awareness that captives are only one part of the risk management process.”
The winners are companies that take the decision to self-insure by means of a captive and are able to enjoy the benefits of lower insurance cost in the long term.
We continue to believe that Africa, the Middle East and Asia represent opportunities for us and are working to develop our client base in these areas. We’re different to most captive managers on the Isle of Man insofar as we deal with very few companies in the UK.
3) Is Solvency II a burden for all or an opportunity for some? How do you see the rest of the world responding to the directive?
The Isle of Man is not going to seek equivalence under Solvency II for general business at this time. This means that our regulatory environment will continue to be tailored for captives and may not be overburdened by the requirements of Solvency II, which could offer us opportunities.
However, Solvency II should be looked at in the wider realm: many of the essential elements of the changing regulatory environment worldwide are converging, in particular risk based regulation. The Isle of Man regulator is fully engaged in these developments and the Isle of Man regulations are changing as a consequence to be fit for purpose in the world environment. I think when Solvency II first came on the scene it caused some concern but now the idea has been around for some time, everyone has become accustomed to its core principles.
It’s possible for an insurer to self insure and settle claims out of its current year earnings when they occur. A fund may be set aside to facilitate this and losses in this deductible layer need to be handled carefully if they are counting towards a conventional ‘catastrophe’ insurance aggregate deductible. If an insured buys a catastrophe policy from a conventional insurer, which triggers above an agreed volume of claims in a year, then those insurers want to ensure that the claims that occurred within that deductible have been handled properly.
This structure does not have many of the benefits that a captive can offer, such as deductibility of premiums and the ability to create reserves for example, but it can offer a simple way of enjoying the benefits of a self insurance programme. You can call it a ‘virtual captive’ – I believe our industry can assist with these sort of structures, where our role is to act as adviser to the client and as coordinator for the process.
5) Is captive insurance still as effective for risk management? What other risks are coming into play and how can captive insurance provide for these?
Yes, it continues to be a useful part of the risk management process and we continue to see captives being formed. Captives are extremely flexible and we see continuous development in covers offered: reinstatement premium protection, spoiled catch in trawlers, crop disease, losses due to exchange rate movements and cyber risks being some examples we have seen recently.
What we also see is the awareness that captives are only one part of the risk management process and that management of the risks they are exposed to is an essential part of the process. As a part of our offering, we formed a risk management consultancy some years ago that complements a client’s self-insurance programme and supports their initiatives in this area. Our offering includes site and operations review, business resilience planning, insurance structuring and training. Physical risk management and financial risk management are all part of the same process.
6) To what degree should captive insurance be a profit centre for its parent and how can captives improve their returns?
Clearly the more a captive grows the more risk it can take and flexibility it can offer. However, it is not a simple decision and it is really a strategic issue for the parent and board of the captive to consider. The captive needs to offer a competitive alternative to the conventional market. Its parent will operate in a competitive market itself and if the captive is not able to assist in reducing cost, its existence should be questioned.
Captives offer many advantages, they can offer broader cover than may be available in the conventional market and by pooling risks between companies and divisions allow greater buying power. I don’t think anyone wants to see money sitting around in a captive not being utilised, but on the other hand if a company has the resources in the captive, it has the flexibility to mitigate risks in a more creative way.
New territories, new covers targeting new and emerging risks, such as cyber risks. We also see companies continuing to use insurance as a tool to enhance their offering to their clients: loss or damage insurance to be added to the sale of electronic goods, for example. We would like to see a greater emphasis on the planning of the captive’s cover in conjunction with risk management initiatives on the ground and we have seen evidence that this is occurring.
8) What changes are you witnessing in the size of businesses using captive insurance and how do their performance priorities differ with an organisation’s size?
We have a variety of captives and rent-a-captives, some big, some small. The size of the risks retained in a captive tend to be in line with the insured’s own ability to carry risk and its appetite to do so, which are commercial drivers. For example, a selection of partners in a professional firm may use a rent a-captive to buy down deductibles. This could be very small but very important to them as claims may take a long time to develop.
9) When interest rates rise what impact could this have on captive insurance assets and what action could they take to address this?
Traditionally captives enjoyed significant income from their investments which have not been available in recent years. From our observation, clients were pleased to see income being generated in this way as it mitigated the running costs of a captive. We haven’t seen the closure of any captives due to low interest rates however, nor have we seen much appetite to invest in more risky investments to generate income. After all, they’re already in the risk business, so why would they want to take further risk with their investments?
10) Given the ongoing squeeze from regulatory and risk versus return pressures does captive insurance have a future and why? Are your reasons positive or negative?
The regulatory environment has become more onerous in recent years, which is in line with the world’s outlook on corporate governance and transparency generally. In fact, many of the requirements were already being carried out, but now they are carried out within a more defined process and documented more thoroughly.
From a client’s perspective this is probably a good thing; from a manager’s perspective, their systems and controls need to be efficient in dealing with these developments. The captive has always needed to be able to demonstrate that it offers good cost versus benefit and that hasn’t changed. The concept of self insurance as a means of reducing cost is just as relevant as it has always been. Our challenge is to deliver what’s required cost-effectively.
Good risk management is an essential part of good governance for all companies anywhere. This has never changed and never will. What we need to do is ensure that the concept of self insurance is understood, and the way in which a captive can be a useful part of this approach is appreciated and valued. We also need to ensure that the service we offer as an industry is effective. It should be carried out in conjunction with and be relevant to our client’s group risk management initiatives. If we achieve these things, the future for captives is bright.