Captive formations

Time to take a look at captives?

Captive insurance is still seen as a relatively niche product, especially in Europe. While the larger multinational companies often have captives whether they are based in Europe or the US, smaller European companies are less likely to have them than companies of an equivalent size in the US.

Even in companies that have captives, a relatively small number of people fully understand what they are or how they benefit their parent companies.

Captives are engrained in the psyche of US risk managers in a way they are not in Europe, argues Ronan Ryan, managing director at Robus Risk Services (Malta). He thinks there are many reasons for this.

First, Europe has always been a very traditional insurance market. With Lloyd’s at the heart of the global insurance industry, and several large established European players such as Allianz, AXA, and Aviva serving European corporates, there was arguably less need for companies to think about self-insuring.

“The market developed very differently in the US and Europe,” explains Michael Matthews, commercial director, international at Artex Risk Solutions.

“Captives emerged during the 1960s in Bermuda, while most providers and clients came from the US, so it had a big head-start in terms of formations and the development of onshore domiciles.”

Matthews notes that Europe has not seen the same level of competition between domiciles that the US has between its states.

“Some large European corporates created captive insurance brokers as a way of reducing premium spend by commission offsets, which also reduced the need for captives,” he adds.

“Lloyd’s is revisiting captives and France is also introducing captives legislation— they are becoming mainstream and well recognised in Europe.”
Michael Matthews, Artex Risk Solutions

Increased interest

It would be a mistake, however, to see Europe as a backwater in the world of captive insurance. “It may be smaller, but Europe has significant numbers of captives across many well-established jurisdictions,” says Ryan.

Matthews adds that key jurisdictions such as Guernsey, Luxembourg, and Ireland are seeing strong growth.

“Lloyd’s is revisiting captives and France is also introducing captive insurance legislation—they are becoming mainstream and well recognised in Europe,” he says.

This increased interest is evidenced by the fact that Davies and Strategic Risk Solutions (SRS) have both boosted their European presence, with new offices in Guernsey announced in January 2021. SRS has also opened a new office in Zurich.

There is little doubt that the hardening market is leading to increased interest in captives in Europe. Coverage is getting more expensive, leading risk managers to wonder whether there is a cheaper alternative. Some lines of coverage are getting harder to obtain, especially for smaller clients that have less clout when negotiating with carriers.

Terms and conditions are getting tighter, with more coverages being excluded. In some cases, companies are only now fully appreciating what is and is not included in their coverage—as in the case of pandemic-related business interruption. These factors are encouraging risk managers to consider all their options.

Having a captive gives companies considerable flexibility in how they develop their risk-financing strategies going forward, says Matthews. Forming a captive is in a sense future-proofing companies’ insurance arrangements.

“Corporates are looking at increasingly creative uses for their captives, deploying them as bespoke contingency solutions. The growing importance of things such as reputation and environmental, social, and corporate governance factors plays to captives’ strengths, as commercial insurers have never been geared to that kind of risk.

“Buyers are instead looking to their captives to insure those risks.”

“There is no particular downside to having a captive in Europe as insurance can be written worldwide on a non-admitted basis to most jurisdictions.”
Ronan Ryan, Robus Risk Services

Europeans come out to play

“The hard market is the key playground for captives,” says Matthews. “Having a captive allows you to build up a war chest to fund uninsurable or unknown risks, such as the risk of a pandemic or supply chain disruption.

“It allows businesses to take a long-term view of their insurance costs. At the moment, having a captive may deliver only a marginal saving, but as a long-term, risk-financing strategy it offers more options in the future—for example, if the price or availability of cover changes in years to come. This consideration tends to outweigh other factors in the longer term.”

It is not uncommon for companies to make initial enquiries about captives with a specific—and relatively limited—purpose in mind, only for those early discussions to evolve into something far more ambitious. For example, a company might approach a captive manager about the possibility of creating a captive to write a specific line of coverage that they have not been able to negotiate satisfactorily with a commercial carrier, only for something far more comprehensive to grow out of it.

“Clients are often quite surprised by the way conversations develop when they first approach us about the possibility of creating a captive,” explains Matthews.

“They tend to bring it up in the context of premium spend and the cost of coverage compared to what is available in the commercial market. Often it then evolves into a more holistic discussion about risk, especially uninsurable risks that are more fundamental to their business than anything they were previously thinking about.

“That will lead us to create a bespoke programme that allows the client to better manage those uninsured and uninsurable risks.”

Ryan confirms he is seeing an uptick in captive insurance enquiries from a wide range of company sizes and industries.

“We expect to see existing captives being asked to participate in new lines of business and more sophisticated re/insurance structures being involved. There may also be a demand to increase capital efficiency by way of loss portfolio transfers for older lines of business, and this is where the run-off market will have a role to play,” he adds.

“There is no particular downside to having a captive in Europe as insurance can be written worldwide on a non-admitted basis to most jurisdictions.

“If a parent is domiciled in Asia or the US then management time to attend board meetings in Europe may pose some issues,” he concludes.

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