- Head of Captive Insurance for Barclays
"ILS a growing market, driven by the demand for alternative asset classes and low interest rates."
1) Is Solvency II a burden for all or an opportunity for some? How do you see the rest of the world (outside the EU) responding to the directive?
The issue of regulation is still exercising people’s minds. Obviously, people recognise that having a well-regulated insurance industry is very important for all of us. From an insurance perspective, new regulation – including Solvency II – is clearly offering different challenges to different jurisdictions. But it’s offering different opportunities too.
For example, both Guernsey and the Isle of Man are feeling confident about the position they’ve adopted in terms of Solvency II. They’ve chosen not to comply, but on the whole people are clearer about Solvency II now. As an industry we understand that good and appropriate regulation is important. It’s there to serve a purpose and protect us. And it’s how we do business in the world of finance.
2) What innovation have you seen in the industry recently? And what new alternatives are you aware of?
The industry is changing on a broader scale: we’re seeing captives looking for new market opportunities. Bermuda is a good example. Captives there are very successful from an Insurance-Linked Securities (ILS) perspective. There’s a lot of demand for ILS these days and we’re seeing more and more ILS structures being put in place on a month-to-month basis.
From a Guernsey perspective, we definitely see ILS as an opportunity. At the moment it’s a case of taking our insurance and administration expertise and focussing on that from an ILS perspective. In fact, Guernsey is making great strides in that area. We’re keen to use cell company type structures for ILS effectively, and we’re seeing draft regulation emerging as to how Guernsey captives can facilitate ILS structures specifically.
ILS is a growing market. I think it’s in part driven by the demand for alternative asset classes and also by the current low interest rate environment. Although we’re set to see an increase in rates next year, I don’t think it’s going to be huge – and that’s a common view held by market commentators across the UK, US and Europe. This means the demand for an asset class that keeps delivering will remain strong, which is why ILS is proving so successful.
I’ve noticed an increasing engagement from shareholders and parents who ultimately own the captives. It’s fascinating to see how they’re looking not only at new ways to use their captive but also how it can be more efficient too. This is definitely a trend that has been emerging over the past few years. It’s in part driven by good governance – people want to understand what their insurance subsidiary is actually doing.
Once they have this understanding, they need to make sure it’s the right thing for them and that it’s being run in the most efficient way possible. This in turn leads to conversations about different ways to broaden the risk they’re taking through the captive. And it’s really good to see we’re having these kinds of debates about the role of the captive now and in the future.
Since the financial crisis in 2008, there has been a definite shift in the captive industry. Managers have been forced to readdress efficiency and returns, which has moved many from a more reactive position to a more proactive position. This is interesting for us because we’re seeing individual captive managers start to question us in terms of what we do and how we can support captives. In fact, more and more captive managers are questioning new ways to do business.
They’re involving the captive boards and clients too – bringing new ideas and views on how to structure captives to the table. For example, four or five years ago, Letters of Credit dominated. Now, we’re getting more enquiries from captive managers who want to explore how a trust solution compares to LOC. And they’re showing these alternatives to the captive boards, who can then make more informed decisions in the greater context of what’s available in today’s market.
There’s still a feeling of reluctance from a European perspective. While captive boards do understand more about other options these days, they can be reluctant to try them. At Barclays, we’ve been helping non-executive directors learn and understand more about alternative solutions. This enables them to add more to the debate at board level when discussing matters such as investment policies.
In the same way, we’ve been helping some captives review and reshape their investment policies. We’re trying to act more on a consultancy basis – where we can help captives understand what trends and options we’re seeing in the captive marketplace, and how we can bring these options to them. We can then work with them over an extended period of time to understand the choices available. The more comfortable they are with what’s on offer, the more likely they are to act.
Of course, we’re able to work very closely with our corporate banking colleagues, which I think is important. For example, if you’re a CFO group treasurer it’s reassuring to have that holistic approach that covers both your parent’s activity and your subsidiary’s. So increasingly, we’re having a dialogue with executives responsible for the captives.
It makes a considerable difference for us, both in terms of understanding their awareness of what we can do as a bank, and when showing them alternative solutions for investment management. Plus we can help take new solutions to captive board meetings as a discussion point. And the relationship with the parent organisation is really important – it’s fair to say that once the parent is comfortable with new investment solutions, the other directors are as well.
From a team perspective, we’re becoming more and more a team of insurance specialists as opposed to bankers. For example, a new member has recently joined our team who previously sat on captive boards and worked for captive managers. We hope that by making our team look more like our clients, we’ll be able to understand the industry even more. We can then add even greater value to the discussions, debates and thought processes our captive clients are going through.