BMS Group
Captives and legacy reinsurance: a growing symbiosis
The captive insurance market is growing and pushing into new frontiers including legacy business, according to Mory Katz of BMS Group.
“To meet the growing need, and the drive from capital wanting to enter this market, new legacy specialists have been formed.”
Mory Katz
BMS Group
Industry professionals are becoming increasingly aware of how the captive insurance and legacy segments of the insurance industry can work together to deliver economic benefits. Both are projected to see significant growth in the future and have developed solutions that solve common problems for corporations.
It has been exciting to watch the captives space over the past few years. After a slight dip between 2015 and 2020, the number of captives formed has grown steadily by about 2 to 3 percent per year. In the US, all but one of the 10 largest captive domiciles reported an increased number of licensed captives in 2022. By the end of 2022 there were just under 7,000 captives licensed worldwide.
This time has been characterised by innovation, with new jurisdictions bringing in captive legislation and the use of captives for new product lines. Corporations have remained eager to take advantage of the endless benefits captive ownership can bring, including bespoke products, potential tax savings, greater claims and premium control, to name a few. In addition, captives can cover a broader variety of risks, including cyber. It’s therefore no mystery why 90 percent of Fortune 500 companies now have a captive, and the industry has moved to make smaller captives more cost-effective to suit those with a lower premium spend.
A hardening insurance market also leads to more growth in captives. According to Swiss Re’s Global Economic and Insurance Market Outlook 2022: “Record premiums are predicted and expected to grow by 3.3 percent. Businesses can expect an increase in premiums due to increased claims activity, the continued COVID-19 pandemic and inflationary pressure.”
Old is new again
In the non-life legacy reinsurance space similar growth has taken place, according to PwC, which publishes an annual legacy survey (now the standard industry measure of the legacy market). In its 2022 report, it noted that total global liabilities are now approaching one trillion dollars. While deals have remained steady at around 50 a year, they are getting larger with transactions of $1 billion or more now routine.
To meet the growing need, and the drive from capital wanting to enter this market, new legacy specialists have been formed, often funded by large private equity firms such as Apollo, Carlyle, 777 and others. There are now more than a dozen significant legacy acquirers, double the number of just a few years ago.
A legacy transaction involves transferring loss reserves from one company to another through reinsurance or sale. The increase in the number and size of deals could be due to greater awareness in the general insurance market. While the industry grew out of deals relating to discontinued, distressed or insolvent business, it is now a mainstream capital management tool for improving ratings, freeing capital and releasing collateral. These benefits are also available to captives, where legacy liabilities can build with no clear exit. Figure 1 shows the range of possible drivers behind a legacy deal.
Figure 1: Drivers of legacy deals
Recently, there has been great interest in legacy solutions from captive owners to enable the economic benefits of capital release to be realised, often without losing control of claims-handling.
Corporate legacy transactions, a new frontier
As should be expected in a maturing market, there is now significant interest in the direct liabilities of the insured (ie, the underlying policyholders) where traditional legacy markets, along with new acquirers, are seeking to transfer the direct liabilities from a non-insurance company’s balance sheet to a special purpose vehicle (SPV) or a captive.
The SPV or captive can then be sold or re/insured by a specialist third party. This means a new potential use for a captive is to transfer balance sheet liabilities not generated by the company’s insurance programme. Examples of this include old asbestos, environmental or pollution liabilities, or the deductible portion of casualty liabilities.
Below is a short list of the benefits of a corporate legacy transaction that may leverage an existing captive:
- Facilitate a buy or sell M&A transaction
- Remove or reduce the risk of future payments
- Reduce expenses and eliminate operational complexity
- Remove balance sheet volatility
In summary, the captive insurance and legacy re/insurance segments are seeing continual growth and innovation and increasingly are being used together to improve company economics.
Mory Katz is senior vice president, global head of legacy solutions at BMS Group. He can be contacted at: mory.katz@bmsgroup.com
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