16 August 2017Analysis

Captives can be powerful tools for SMEs, says BNM governor

While many small and medium-sized companies (SMEs) do not consider captives as a feasible risk management option, there is a more compelling business case for their use, driven by innovations in captives models.

This is according to Muhammad bin Ibrahim, governor of Bank Negara Malaysia, speaking at the Asian Captive Conference 2017 in Kuala Lumpur, Malaysia.

Some of the innovations cited included the introduction of group and rental captives, along with protected cell companies.

Ibrahim said the captive industry was at a turning point, and should be focussed on better risk management, promoting macro-economic stability and encouraging new growth rather than concentrating purely on tax planning.

"There are promising signs, among business and regulatory sectors, that there is a growing space for captives to play a role. It is important that we move forward to harness this potential, responsibly and thoughtfully," he said.

Furthermore, Ibrahim expects captives to leverage on new technologies to modernise legacy processes and systems, strengthen risk management capabilities and to capture efficiency gains.

“At the frontier of development, the evolution of big data and insurtech has opened up significant new possibilities for segmenting and pooling of risk and capital, and tailoring solutions to specific needs and profiles," said Ibrahim.

One such example given was the insurance coverage for ride-sharing app Uber, specifically the drivers, which integrates exposures from private and commercial use, and call for bespoke and efficient solutions which may not be readily available in certain traditional insurance markets.

"Online platforms based on the group captive model and P2P insurance concepts are a case in point,” he continued. “Given that captives aim to provide specialised coverage that is not typically available in the traditional market, it is only natural for captives to operate in this space."

Ibrahim also noted the growing risk awareness across the entire spectrum of business.

He cited the 2017 Allianz Risk Barometer, which covers mainly large corporates, as well as a 2016 Zurich study on SMEs, which revealed that cyber risk is topmost on businesses' minds.

The same Zurich study showed that there are twice as many SMEs in Asia Pacific that now worry about cybercrime, fire, technological vulnerabilities, and the health and safety of customers or employees, as compared to four years ago.