13 June 2018Analysis

Eight myths around captives debated and de-bunked

The captives sector is still held back by the prevalence of a number of myths about captives that are inaccurate and unhelpful to the sector, and which practitioners should debunk at every opportunity.

That was the theme of a panel discussion held on Tuesday afternoon at the annual  Bermuda Captive Conference, which is taking place at the Fairmont Southampton Hotel on Bermuda this week.

The session, called De-bunking the common captive myths, was chaired by Ellen Charnley, president, Marsh Captive Solutions. The panelists comprised: Susan Molineux, associate director, property/casualty, AM Best; Maria Sheffield, corporate counsel, Caterpillar; and Jane Sadler, vice-president, global risk management, McKesson Corporation.

Charnley identified eight myths about captives, which she and the panel set about ‘de-bunking’ one by one. These were: captives are only formed in hard markets; they are only formed by large public companies; they are only formed for tax reasons; they don’t pay tax; only US companies form captives; they trap companies’ cash; they are only used by certain industries; and they are only used for traditional property/casualty risks.

Commenting on the myth captives trap cash, Charnley said offered an insight to the captives Marsh deals with which showed that while these held an estimated $106 billion in capital and surplus, they also loaned $76 billion of this back to their parent companies. “It is a big fear of many CFOs but it is simply not true,” she said.

Commenting on the myth that they are only used by certain industries, Charnley said that while certain industries such as financial services use them a lot, there is almost no industry that does not use captives in some shape or form. Molineux also offered some quirky examples she had seen including fraternities that have used them to secure general liability coverage and companies that offer odds on rare sporting achievements such as a hole in one.

A theme running through the session, as the panel dispelled these myths, was also just how sophisticated companies have become in the way they are using captives – and the fact that this is true of companies from all corners of the globe.

Both McKesson Corporation and Caterpillar own multiple captives and manage extremely sophisticated risk-management programmes, which the panelists touched upon, and they acknowledged that many companies are becoming more and more innovative in what they are willing to do.

“People will start with just a couple of lines but as they become more confident over time they will often extend this and add more exposure over time,” Sheffield said. Sadler added: “We see many companies become more innovative over time and their risk appetite increase. It is a natural progression.”

This innovation was also clear when the panel discussed some of the lines of business captives are increasingly being used to cover. Some of the fastest growing areas of risk include cyber, terrorism and even protection against an economic downturn while employee benefits business is also enjoying stellar growth.