6 March 2014Analysis

Hitting the target

Malcolm Cutts-Watson has a problem with the status quo, at least in terms of how the captive insurance industry sells itself. The chairman of the Global Captive Practice—International at Willis, he’s been on the front lines of a marketing campaign that, to his mind, just isn’t working.

“It’s something that’s interested me for a while, because I think we undersell ourselves consistently,” he said. “It’s difficult to know the exact amount of premium volume that goes into captives, but a lot of people think it’s in excess of $50 billion a year. It’s a material amount of money.”

Despite the value of the captive concept, Cutts-Watson thinks efforts at marketing have been ineffective and fragmented. “I don’t think that captives are perceived as they should be,” he said, “which is as a very valuable risk financing and risk management tool.”

Martin Fone of the specialty insurance services department at Charles Taylor Consulting said, “I don’t think you could ever accuse the insurance industry of marketing products well. Captives are part of the standard range of offerings that brokers and consultants discuss with their client base, but it would be wrong to say that there’s a concerted industry-wide marketing campaign, as far as I can tell.”

A fragmented approach

According to a group of industry experts, three major issues arise with the topic of marketing the captive concept. The sheer number of stakeholders—all of whom are looking to attract business themselves—dilutes the message, industry groups are too often on the back foot and captives seem to have a perception problem. The last of these, according to Cutts-Watson, might be down to a misunderstanding.

There just isn’t a lot of information publicly available about captives, he said. “The captive industry could do a better job of explaining the value of the premiums written by captives and also how conservative they tend to be in terms of their capital bases. The failure rate of captives is very low.”

Cutts-Watson said, “A lot of captives are established in offshore centres and inevitably become tainted by this ‘tax haven’ brush. There are always stories about tax avoidance that seem to come out. That negatively impacts captives and the way they’re seen.”

According to Gaynor Brough, chair of the Isle of Man Captive Association, there is not a great deal of information available on captives domiciled offshore as the majority of the captives are pure captives and their financial strength is of no interest to the public.  She explained, “Clearly if a captive is underwriting policies for the benefit of individuals then there could be an argument for transparency; however, the majority of captives are pure captives whereby they underwrite the risks of their parent company only. In this scenario it would be difficult to envisage where a need for visibility would arise”.

Romina Soler, a partner at PwC Malta, added, “The captive concept may be perceived to be purely a tax planning instrument. Of course it is much more than that—captives are primarily risk management vehicles, which often also involve tax planning.”

Brough added “We would never recommend that a captive is formed for tax purposes.  Captives are a medium to long-term risk financing strategy and provide captive owners with greater control and visibility over their total cost of risk.  Our guidance would be to seek tax neutrality.”

While industry groups are efficient at responding to accusations, Cutts-Watson finds that they’re rarely proactive. In addition, the sheer number of domiciles, captive mangers, brokers and other stakeholders dilutes any joint message from the industry.

“Captive groups tend to respond and take positions as specific industry issues arise,” he said. “That’s not really a marketing exercise, and it’s not a positive message. It’s more defending the interests of the particular members. The other aspect is the number of new domiciles. You have a large number of jurisdictions promoting themselves as the place to do business. It can dilute any message coming from the captive industry.”

Mixed messages

With so many stakeholders clouding the water, the inevitable question becomes who among them is responsible for the continued success of the captive insurance concept.

Brough said, “From the perspective of the Isle of Man, we have certainly suffered in past years from a lack of marketing activity. However, the captive association has worked very hard during the last three years to market the Isle of Man’s value proposition as a domicile with appropriate and proportional legislation and which has been recognised globally as a transparent, safe and reputable jurisdiction.  This concerted marketing effort has produced some excellent results in recent times with a number of new substantial pure captives being formed in the Isle of Man.  We are realistic though and appreciate that our position as a non EU domicile is contributing to the success of our sustained marketing campaign.  Historically, some regulators around the globe have acted as key spokesmen for the industry. This appears to have waned in recent years as their focus shifts to the regulatory framework.”

According to Brough, the responsibility largely falls with captive managers and domiciles. Soler tends to agree, saying, “The ones who are more predominant are the domiciles themselves—the regulators, the service providers and the managers. They are the ones who are more proactive in terms of setting up structures and are very much at the forefront.”

“Rather than being on the back foot—silent until attacked—the industry can propel itself forward by changing its message in key areas.”

Fone agrees that domiciles play a large role, but not always to the benefit of the wider captive concept. He explained, “Domiciles have an interest in explaining why, if you’re going to establish a captive, you should use their regulatory environment as opposed to someone else’s. They’re always more interested in what the benefits of domiciling in their territory are compared with somewhere else, rather than necessarily the overall benefits of having a captive.”

This, he argues, is natural in a free market economy. Just as domiciles are interested in promoting themselves over the larger concept, Fone is concerned more with Charles Taylor’s position in the market than the wellbeing of the industry as a whole.

“That’s the inevitable consequence of free market economic sectors,” he said.

Soler and Cutts-Watson tend towards a different view. Cutts-Watson said, “Everyone has a responsibility. Clearly the people involved in the actual industry itself will do all they can to market and brand the captive business. But it’s really a combined effort, with all of the other parties also getting involved.”

The trouble with the captive concept, according to Cutts-Watson, is the difficulty of finding parents, risk managers and other stakeholders to speak publicly. While Willis attends in conferences and PwC Malta participates in meetings and writes articles to help the industry as a whole, it can be difficult to get sectors to speak in public about what many consider proprietary information.

“It tends to be risk managers who have organisations with captives, and if you get them in a closed group they’re happy to talk about what their captive is doing and exchange ideas, the successes and the failures. But they’re quite reluctant to speak at major captive conferences because quite naturally they’re nervous about spilling their information to a wider audience,” he said.

In addition many stakeholders—including brokers such as Willis—have broader responsibilities to their clients. “While captives are useful risk management tools they certainly aren’t the only option. There’s a broader agenda there,” Cutts-Watson said.

A leap forward

The captive insurance message, regardless of who delivers it, needs to change. Rather than being on the back foot—silent until attacked—the industry can propel itself forward by changing its message in key areas, according to the experts EMEA Captive spoke to.

By changing the perception that captive insurance is helpful only to Fortune 500 companies—many of whom already have captive insurance structures in place—the industry can open itself up to an entirely new audience.

Soler said, “There is scope for the use of captives by middle market players, particularly with the advent of protected cell structures in select jurisdictions. Currently captives are more widely used as a risk management tool by multinationals.”

Soler also thought that the concern about regulatory change in the EU may have slowed down the interest in captive solutions. “There needs to be more discussion about Solvency II in a positive light,” she said. “Proportionality will apply to captives.”

Doing battle with the perception of captive insurance as something dark, secret and involving tax is another important priority. Cutts-Watson said, “While it may have been argued in the past that captives are a way of saving cost they’re also now being shown to have strategic value in terms of understanding and managing risk. Once a captive is in place it’s a very good way to collect management information so that you can monitor the success of your risk management strategy.”

Brough added, “It is crucial that a high quality feasibility study be performed with a company’s strategic objectives being clearly articulated and the foundation of any decision concerning potential captive formation.”

Tax information exchange agreements are vital to this perception, Cutts-Watson argued. “The more these accreditation processes take place, the more new jurisdictions are audited by major organisations like the World Bank, the more credibility those jurisdictions will have. It’s important that regulators follow proper standards so that every captive owner can be sure they’re operating in a reputable jurisdiction.”

Brough said, “The track record and longevity of a captive domicile coupled with the pedigree of its existing client-base is a strong marketing tool.  No company wishes to be a guinea pig, especially given the good governance which exists in boardroom decision-making and new captive owners are seeking a well-regulated jurisdiction with a proven history”.

Ultimately of course, all of the marketing in the world can’t replace targeted marketing by knowledgeable and trustworthy stakeholders. Fone explained, “There is a higher level promotion of the captive concept, but when it gets down to the nitty-gritty of an insured wanting to set up a captive it’s driven by whoever is advising them.”

Soler said, “We all play a part, but the captive domiciles predominate: the regulators, the insurance managers and other service providers. They are the ones who are more proactive in terms of promoting the concept, and are very much at the forefront. They play an important part.”