11 June 2019Analysis

Captives at mature stages can act like commercial insurers

The key stages of a captive was the focus of a break-out discussion during the Bermuda Captive Conference with the audience told that a mature captive could almost act like a commercial insurer. Parent companies can generate profits from additional premium by underwriting third-party risks in their more mature captives.

Rachel Derry, senior vice president at Liberty Mutual Management, Treasa Walker, from the Bermuda Monetary Authority, and Oceana Yates, senior vice president captives, at Quest Management Services, took part in a session, Captives: How do You go From Initial Interest Through to Formation and Maturity?

The panel said there were several forms of captives – such as single parent captives, multi-owner captives and segregated account captives.

Yates said initially, there would be a need to conduct a feasibility study to analyse issues such as the risk taking position.

“It will look at things like policies and loss history. It will involve a group of people – actuaries, brokers, the bank and tax advisers as well as a captive manager,” she said.

“This group of people will come together to help analyse the risk and see if it makes sense to have a captive and what level of risk.”

Even if the study said it was a good idea, there was still a need to get management buy-in the panel said.

Asked how that could happen, the panel agreed that there were four main reasons - cost reduction, access to reinsurance, investment and cash flow and use an administrative tool.

Walker said that from a regulatory point of view at the initial stage, the authority would look at the draft business plan as well as examining issues such as whether the parent company was financially viable.

She also stressed the importance of talking to and meeting with the regulatory body. “The key is having initial meetings.”

At the midlife stage of the captive, the panel said it was important to look at which risks were being taken on, for the regulatory authority to look at new changes in the business plan such as a new line of business as well as whether any extra risks were being taken on.

Panelists also said it was important to submit board minutes to show that the board was in agreement about the new business.

Derry added: “Five years on, make sure you take a fresh look at premiums and losses. Keep the premiums conservative, although they can still be competitive. You want to generate returns and build a surplus.”

At midlife, asset liability management is also very important. “Your bond manager will need to understand the structure of the bond portfolio so there is cash when you need it.”

When the captive reaches mature life there is a need to look at how it will help the parent company and whether it was still helping with cost, control and cash flow.

Yates added: “At a mature stage, it will act like a commercial insurance company. It becomes a very complimentary asset to the parent company and could be a big contributor to the parent company’s profits.”