Hylant
Captive check-in: is yours living up to its potential?
The captive formation process is meant to ensure a captive meets business goals and aligns with a long-term strategy. But that doesn’t mean it should be established and then left alone, says Hylant’s Anne Marie Towle.
“New risks may have been exposed since the formation, providing an opportunity to expand the captive’s coverage.”
Anne Marie Towle, Hylant
Changes in the market, business size, regulatory environment and more can impact a captive’s efficacy. Although the formation process includes multiple analyses to ensure a captive helps a business achieve goals, those goals change, and with more domiciles being created each year, captive insurance legislation around the world in flux and business goals being re-evaluated on a regular basis, what may have once been a working solution may have left captive owners wanting additional assessment of their captive.
As a business evolves, adding more employees, merging or divesting other businesses, or simply responding to new risks, its captive should evolve with it. The business plan, which was originally filed with the domicile, outlines how and why the captive was formed. Since its original filing, the business plan may have changed in lines of coverages, capitalisation and expected premiums, all of which are directly related to the domicile.
Business plans need to be reviewed regularly to ensure alignment between such components and the domicile.
Is it time to reconsider the domicile? Does the governance model still work? Does the business keep the captive central to risk-buying decisions? How does the captive approach renewals?
If a business plan no longer aligns with the business’s goals, it may be time to re-evaluate the captive strategy and make some much-needed changes.
Make business operations captive-centric
Whether a business has newly elected to pursue a captive or has a long history of utilising captives as part of its business strategy, a captive needs to be central to all risk-buying decisions (Table 1).
A captive is usually established as a long-term business strategy. Keeping that captive at the core of the strategy requires a regular review, ensuring it aligns with an organisation’s risk philosophy. Does the captive cover the lines of insurance needed for long-term success? New risks may have been exposed since the formation, providing an opportunity to expand the captive’s coverage.
Another core component of ensuring a captive is used to the best of its ability is access to the reinsurance markets. Access to reinsurance capital allows a captive to build a reserve base when a market is soft and retain a larger portion of its risks and maintain coverage for owners when the market is hard, as the global market has experienced over the past year.
Captives owners also need to consider how to leverage the captive in the traditional market. Because a captive is a licensed, regulated form of formalised self-funding, not all risk needs to be transferred to the traditional insurance market.
Many organisations will take advantage of both traditional insurance and a captive, but it might make sense to transfer some lines to a captive and seek reinsurance capacity for capital relief.
Every business wants to lower the total cost of risk. Though captive strategies may provide greater control over insurance and potentially provide premium to members, organisations need to work continually to drive down the cost of risk to get the most out of a captive. Lower cost of risk means better insurance rates.
Table 1: Core strengths of a captive
Review and update captive governance
A captive governance model provides a framework for how the captive insurer’s policies, systems, structures and procedures work together. It also determines how the captive’s board and owners will operate together to achieve the captive’s overall mission. Although there are a few different captive governance models, the model should include a formal procedures manual to outline the business plan and keep protocols in place.
The governance model is adopted and overseen by the captive’s board. The board members hold the captive accountable, ensuring goals are met and driving decisions based on the insured’s needs and legislative requirements. The board provides internal support from key captive stakeholders, and as such should be educated on captive insurance operations to ensure understanding.
Particularly with group captives or risk retention groups, governance is a larger issue. The members elect the board to govern the captive and place their trust in them for guidance and advice for the overall process and procedures to keep the captive in compliance at all times.
The right domicile?
An original domicile was selected through a feasibility study—a thorough review conducted to learn more about a company’s existing coverage, exposures, cash-flow requirements and opportunities. The domicile analysis specifically examined the strategic, financial and operational impacts of forming a captive within a specific domicile.
Throughout the planning and establishment process, the domicile analysis examines the ease of formation, regulatory environment, examination process, geography, taxation and exit considerations of legal placement. All these elements are meant to ensure a captive aligns with business goals, ensuring long-term success and achievability of business objectives.
The number of captive insurance domiciles increases every year. On top of that, COVID-19 brought about operational changes and organic shifts in business strategy, forcing employees to work remotely, disrupting supply chains, and hitting the worldwide economy hard, all adding new risks, changes in finances and more opportunities.
What may have worked as a domicile even three years ago for an organisation may not match existing structures and strategies.
Why Bermuda?
The world’s largest captive insurance domicile, Bermuda has served as a captive domicile since 1958. The decades have meant Bermuda has shifted from the only domicile to one of many, but it still stands apart as one with a long history with solid regulations. The Bermuda captive insurance industry has developed a reputation for thought-provoking content and advisors, providing leaders with knowledge, skills and perspective to anticipate and respond to the complicated and ever-evolving landscape within the risk management industry.
Bermuda’s sophisticated, robust regulatory environment ensures captives are compliant and effective. Accreditation under the NAIC ensures Bermuda-based insurers can operate in the US without additional capital requirements, and equivalence under the EU’s Solvency II Directive ensures insurers writing business in Europe are not penalised through additional collateral or regulatory hurdles.
A Bermuda captive insurance placement gives insurers access to its reinsurers, insurance managers, auditors, actuaries, accountants and lawyers with deep expertise locally. And with all industry groups representing insurers, reinsurers and insurance intermediaries advocating for stakeholders in the government and on the international stage, Bermuda-based captives are provided robust support.
Bermuda is also competitive for third-party risk, providing better results for insurers.
Conduct a captive check-up
Regardless of captive age and current success, a check-up should be regularly conducted to maintain efficacy. Seemingly small changes in business strategy, risk exposures, changes in captive governance or shifts in legislation of domiciles may present opportunities for captive insurers to continually improve the value.
If a business plan no longer aligns with the domicile, don’t be afraid to make changes to the plan. It should serve as a living document, one to help guide decisions while allowing for increased growth opportunities.
Anne Marie Towle is global captive solutions leader at Hylant. She can be contacted at: anne.marie.towle@hylant.com
