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David Gibbons, managing director of PwC Bermuda’s dedicated captive group, discusses growth opportunities for Bermuda’s evolving captive insurance industry and strategies for increasing captive value.
The combination of a continued low interest rate environment, increased regulatory oversight in the insurance and banking industries and the growth of emerging economies has led to new opportunities for the use of existing or new captive insurance companies.
There are opportunities on the horizon in Canada and Latin America, and an increasing focus on using captives for employee benefits and cyber risk.
Canada, with its rich oil and gas reserves, is a large user of insurance and reinsurance. Canadian companies are increasingly using captive insurers to manage the cost of insurance for traditional covers, such as property and general liability, by directly accessing the reinsurance market and through participation on specific layers of the reinsurance programme.
In addition, they are using captives to write more expensive and non-traditional lines of business, which the traditional insurance/reinsurance market is unable to price efficiently, especially if those risks originate in the US. The greater benefit to, and breadth of coverage for, Canadian companies has fuelled steady growth in the use of captives over the last few years.
Latin American countries have experienced significant economic growth in recent years. The result is a growing consumer class that has led many Latin American companies to expand beyond their home borders, creating what are known as ‘multi-Latinas’.
As the expansion of their business continues, both locally and globally, these companies are exploring ways to manage their expanding exposure to risk. One of the most effective ways they are managing their risk is through the use of captive insurers. Captives provide not only a way to get the required cover that may not be otherwise available, but also insight into the claims affecting the business.
In addition to the property and casualty covers popularly written through captives in Latin America, there are expanding opportunities in the energy sector. The crossover of the oil and gas industry in Canada and Latin America can allow service providers to leverage their understanding to offer better solutions and further develop the use of captives in both jurisdictions.
Europe’s implementation of Solvency II and its spread over the global regulatory landscape has created new opportunities for the use of captives by European companies. There is now a much greater emphasis on the long-term ability of companies to meet their insurance obligations. This shift means that the management of those liabilities and the efficient use of capital is of paramount importance to European companies. To that end, captives have the potential to be used as tools for both capital relief under Pillar I and risk management under Pillar II. The continued importance and effectiveness of captives, even in heighted regulatory environments, highlights the durability and flexibility of the market.
Insurance-linked securities (ILS), a broad descriptor for the market including collateralised reinsurance, catastrophe bonds, insurance linked warrants, and other capital market insurance products, have grown significantly over the last few years. Along with a greater number of companies using these instruments, there is also a greater breadth of cover being written with them.
The geography of the exposure is continuing to grow as large reinsurers especially, try to limit their exposure to very high severity risks or take advantage of pricing differences. The structures for these types of companies vary, however, they generally involve a special purpose insurer, a segregated accounts company, or both.
Captive insurers are being increasingly used to bring together non-aligned global insurance programmes. Moving a disjointed insurance programme to a single captive entity allows companies to better understand the risks they face as well as the cost of insuring those risks. This tactic is especially useful for large employee benefit programmes spread across a number of entities, jurisdictions, and service providers. The use of captives as business consolidation tools is a trend that is expected to continue as businesses try to maximise capital and resource efficiency.
The growing need for cyber insurance coverage has resulted in companies using captives for certain parts of their cyber risk programmes. The use of captives in this market is, at the moment, limited generally to reinsurance access and deductible buy-back policies. As the cyber insurance market grows, however, and companies become more aware of their exposure and techniques to mitigate that exposure, cyber insurance is expected to have much greater penetration into the captive market.
The use of captives to provide life insurance cover is not a particularly new concept. Captives, however, are being increasingly used to provide life insurance coverage to key executives. Through captives, companies are able to tailor their executive life insurance coverage to meet their needs and do so at generally reduced rates.
Related to the executive life insurance programmes being written are the increasing number of supplementary directors and officers liability programmes. Captives are being used to provide coverage not only for a single parent in a pure captive, but increasingly for multiple companies operating in the same industry through group association captives.
The uses and users of captive insurance companies have grown and changed in the last few years. The changing regulatory environment, far from driving a contraction in the captive market, has highlighted the importance of captives as both a tool for risk management and efficient capital use. There are no doubt challenges ahead, but the captive insurance market and the jurisdictions in which they operate have proved their resilience and relevance.
David Gibbons is managing director of PwC Bermuda’s dedicated captive group. He can be contacted at: firstname.lastname@example.org
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