Revisiting your captive strategy: maximising the efficiency of existing captives and building out their use


Revisiting your captive strategy: maximising the efficiency of existing captives and building out their use

Bron Turner, Jonathan Barnes, KPMG

A regular health check is recommended for your captive to determine whether it is still fit for purpose, say Bron Turner and Jonathan Barnes of KPMG in Bermuda.

Active management is the key to tapping the potential of a captive insurer. A passive approach—setting up a captive, regarding it as a separate entity and leaving its business plan unchanged for years—will cause it to underdeliver over time. The more successful captives are those treated as an integral part of the group and as a risk-management tool that can help to cover the type of hard-to-insure risks that keep the CEO awake at night.

Self-insurance becomes even more attractive when a spectrum of emerging risks are taken into consideration.”

When establishing a captive, a parent traditionally takes a thorough approach, conducting a feasibility study and risk analysis and drawing up a five-year business plan.

As the years pass, the parent’s risks will evolve and market conditions will change. All too often, the captive is left to its own devices and its original business plan becomes progressively less relevant over time.

Key personnel changes can exacerbate the issue, with replacements perhaps not understanding the reasons why the captive was set up in the first place. And if a parent is acquired by a larger company, a captive may become dormant or be wound up.

Time for a rethink

Incentives to revisit a neglected captive and rethink its strategy are substantial. Factors such as a hard commercial insurance market and a range of emerging risks that insurers’ traditional products fail to capture leave great potential for captives to play a significant role in corporate insurance programmes.

A regular health check is recommended for your captive to determine whether it is still fit for purpose. This should be included as part of the group’s planning process, treating the captive as an integral part of the group’s operations and structure.

Several basic questions can help to inform the process:

• Does the captive’s business model make sense? Is it still of benefit to the group?

A captive has the potential to be a dynamic risk-management vehicle, if the business model is revisited regularly, at least once every three years. Diversification, through coverage of risks that do not correlate with each other, should ideally be built into the model. Claims management should be part of the revisits as mature captives of scale have seen benefits from moving their claims management in-house from third party claims administrators.

• Are there new emerging risks the captive can cover, and what is the risk appetite?

Cyber is an example of an emerging risk that is difficult to insure and might be put into a captive. In the commercial market, cyber coverage tends to be tagged onto other policies and very limited in scope with numerous exclusions. In a captive there is the opportunity to write a broad policy that can be relied upon to pay up in the event of cyber-related losses.

The pandemic has highlighted the gaps in cover that exist in business interruption insurance. A captive can offer a broad policy that covers all business interruption risks of the parent company.

A renewed focus on environmental, social and corporate governance (ESG) factors may also lead to an increase in ESG-related D&O claims.

Self-insurance becomes even more attractive when a spectrum of emerging risks are taken into consideration.

• Are there risks that could be put into the captive that could give the parent a competitive advantage over rivals?

A captive affords opportunities for creative risk management to provide the parent with types of coverage that are not available on the commercial market and that competitors are carrying on their balance sheet, rather than within a regulated insurance entity.

Such risks include retention of top talent, customer loyalty and regulatory changes. Identifying and pricing risks that do not fall into traditional insurance categories will require analysis. Tools such as Signals, offered by KPMG, can help companies to build a granular risk model through the consideration of thousands of insurance-relevant signals. A captive may also be able to increase its risk-bearing capacity by ceding a portion of the risk to reinsurers, who tend to be more amenable than insurers to underwriting non-traditional risks.

• What’s the state of the commercial market?

Risk managers can use the captive to reduce the parent’s premium outlay in a hard market and also to obtain broader coverage in lines where terms, conditions and limits are tight. For example, the captive could provide a broad D&O insurance policy to cover all types of D&O losses, rather than seek insurance under the different categories (sides A, B and C) offered in the hard commercial market, thus creating a reliable policy with less complexity and cost and, as stated earlier, protect the company from emerging D&O risks.

In hard markets where capacity from the commercial markets can dry up and retentions can multiply, a captive can be deployed in the short or long term, to fill a retention gap and protect the balance sheet from that increased liability while reducing premium spend.

• Is the captive in the right domicile?

Considerations including the regulatory environment, tax and insurance management expertise influence the choice of domicile. The choice has become greater, particularly with the growth in size and sophistication of US onshore domiciles. American companies may ask themselves whether it is still advantageous for their captive to be offshore.

• Could the captive’s capital be better deployed elsewhere in the group?

Captives can work as capital provider to the parent when managed correctly. During the COVID-19 pandemic, some financially stressed companies have benefited from using their captive as a source of capital.

Bron Turner is director at KPMG in Bermuda. He can be contacted at:

Jonathan Barnes is senior manager advisory at KPMG in Bermuda. He can be contacted at:

Bron Turner, Jonathan Barnes, KPMG

Captive International