The hard market conditions in the wider insurance markets are driving captive owners to look to leverage their captives to a greater extent, driving innovation in the process. But as corporates also look more closely at how they are using their capital in all parts of their business, this has also brought the use of run-off as a capital management tool into focus.

That is the view of Paul Corver, group head of legacy M&A at R&Q Insurance Holdings. He stresses that the way in which such solutions are being used has evolved dramatically in recent years. And wider market conditions are bringing their use to the fore more than ever. For many companies, using their captive to write more business has become a necessity.

“The captive market continues to evolve positively with corporates seeking to broaden how they use their captive,” Corver says. “The resulting entity is more sophisticated and comes with greater considerations.

“The hardening market we have seen since the pandemic has also led corporate owners to utilise their captive more, either by writing new lines of business or by retaining more of the primary layer.

“For certain lines, the open market does not provide coverage, leaving the captive as the only remaining solution.”

But as captives are used more, more premium is written and their structures become more complex, this also means a greater focus on exactly how they are used—and the best way of leveraging capital. This is where R&Q is increasingly helping captives owners.

“R&Q has a long history of helping corporates find solutions for their captives.”
Paul Corver, R&Q Insurance Holdings

“With more and more written premium into captives overall, this only goes to increase the spotlight,” Corver says.

“R&Q has a long history of helping corporates find solutions for their captives. Traditionally this had been because a captive had become redundant for various reasons. For example, it is no longer operating in a certain jurisdiction, or M&A leads to surplus captives in the wider group operation.”

This has led to a misperception of the role of R&Q, he believes. But this is now starting to change.

“This has wrongly led R&Q to be associated with end-of-life captives only, like some sort of insurance undertaker, not the most glossy or glamorous. R&Q would have simply acquired the redundant entity in whole, run off the claims and wound up the company. But there are so many more tools in the box.

“As with much of the insurance ecosystem, the world moves on. Run-off, or legacy, as our sector is more commonly known, changes with the needs of our clients and vendors.”

Corver says that while R&Q is still called in to solve problems, such as to assess severe reserve deterioration or to structure loss portfolio transfers or adverse development covers, it is more often asked to help in a more holistic way, helping clients better manage and optimise their capital.

“More commonly, our clients seek to better optimise their entities from a capital point of view, either by freeing up regulatory capital supporting legacy liabilities, or onerous collateral obligations for the front companies,” he explains.

“Companies set up captives as forward-looking entities to optimise risk management in their wider groups. Situations that leave capital tied up within the insurance entity, supporting years of underwriting long since forgotten, can leave the group cash constrained and certainly won’t help expansion into additional lines, or allow the loan of any more cash back to group for that matter.”

He says that is where R&Q devises solutions. These can be multifaceted. “Increasingly we are seeing captive clients seeking reinsurance solutions for prior years of underwriting, sometimes on a rolling basis. This leaves the risk manager to truly focus on the present here and now,” he notes.

Paul Corver is group head of legacy M&A at R&Q Insurance Holdings. He can be contacted at: paul.corver@rqih.com

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