Local service on a global scale

Captives offer their parent companies many advantages, and these advantages are particularly apparent in times of market stress. At the start of 2020 the market was already hardening, and COVID-19 has only exacerbated this trend—and not only for lines directly related to the pandemic.

COVID-19 is just the latest in a long line of events to drive up pricing and push mid-market companies towards captives. Such companies increasingly recognise that captives are not only a way to save premium dollars or impact tax timing, but to gain greater control over risk management and financing.

Companies are struggling to find capacity in the market, and when they can it is at a price that makes it difficult to keep the business operating profitably.

Captives are becoming more affordable in part because the alternative—commercial insurance—is becoming more expensive. This creates a delta between the costs of the two options, since cost of running a captive has barely changed.

Businesses are responding by turning to captives, whether they are single parent captives or, particularly, group captives, where grouping together gives them more bargaining power with their reinsurers.

Captives exist to solve risk management problems. The best captive solutions are those that have been designed carefully—not only with a client’s particular problem in mind but with an eye towards a global strategic solution for the client that makes the captive valuable today but even more valuable in the future.

A captive manager should take the time to learn about its client, and help anticipate its future needs. It should not focus exclusively on the specific problems the client itself has identified, but use its experience to help it identify problems that may arise in the future, and opportunities that have not yet been recognised.

In this way a captive insurance entity and the captive manager become a strategic partner with the captive’s parent organisation.

The best captives are not off-the-shelf outfits, or even bespoke assemblages of off-the-shelf components, as offered by many captive managers. They are entirely bespoke structures that have been created in close partnership with a client, addressing its unique and specific needs and serving it from the cradle to the grave.

“Whether it is for groups or single parent captives, this kind of approach requires service providers to work with clients from an early stage in the development of the captive.”

The distinction is particularly clear with group captives. Traditional group captive structures were assembled with a marketing emphasis, an “if you build it, they will come” mentality. These types of programmes were organised around large market segments and sought to group together as many companies as possible in a particular industry, or across industries, chasing economies of scale by lumping together businesses that may have little in common when it comes to their approach to risk management—other than a desire to be a risk-taker.

The better approach is to create more “purpose-driven” groups that bring together companies that share similar risk management philosophies to solve a particular risk management issue. Such like-minded groups benefit from sharing information about things such as loss control measures and safety protocols, driving down claims and increasing efficiency.

These groups are often keen to recruit new members, but are also highly selective. The aim is to maintain a group where the captive is finely tuned to the specific needs of its members, which is possible because the needs of the members are aligned.

Whether it is for groups or single parent captives, this kind of approach requires service providers to work with clients from an early stage in the development of the captive and take the time fully to know and understand their businesses.

Cedar Consulting, which has been acquired by Davies Captive Management, always strove to conduct itself this way, but it was a small operation and was therefore limited in the number of clients it could serve.

Davies is a perfect partner: despite its size, it has the philosophy of an independent captive insurance consultant. It has always combined a diverse global presence with a focus on local-scale delivery.

Davies’ acquisition of Cedar has added depth and scope to Davies Captive Management. Cedar is currently being rebranded into the Davies Captive Management operation, a process that will be complete by the end of 2020. Cedar’s Bermuda operation is being folded into Davies’ captives operation, while in the US it will maintain offices in Vermont and Ohio.

The combined group offers the best elements of both businesses: the bespoke solutions and personal attention that was the hallmark of Cedar, with the scale and infrastructure of Davies. This is a powerful combination that will offer a local service on a global scale.