26 June 2024ArticleAnalysis

Embed the cross-cycle benefits of captive ownership

Mark Rogers, head of business development at Vitesse, provides a guide for some of the pitfalls—and advantages—of setting up a captive.

It’s a hard and difficult market out there. The price of commercial insurance programmes is at a cyclical high and rising, and an array of new challenges—from cloud risk to funded litigation—are presenting new and complex challenges for companies. Around the world, risk managers are considering alternatives that could increase the efficiency of their risk transfer. 

From parametric to risk retention groups, experimentation with alternatives might, like prices, be at an all-time high. Captive insurance is on the top of the alternative pile, delivering tested benefits including tax efficiency and access to sophisticated reinsurance markets. Captives are more popular than ever as a result. 

But whether you are a captive manager, a regulator, or a company wanting to retain risk through an in-pocket insurer, it’s important to remember that forming and operating a captive at peak efficiency isn’t straightforward. Even with the help of a professional third-party manager, optimisation requires multinational regulatory awareness and a suite of technological solutions that minimise capital allocations and maximise profitability. 

For example, captives may be required to sequester large cash piles within idle international loss funds to satisfy potential future local liabilities. They trap operating capital and may even erode the benefits of being your own insurer. Expert outside support can ensure this necessity is managed as efficiently as possible and may enhance a captive’s returns to make it an invaluable asset even during soft, easy insurance markets. 

New captives, old approaches

Since the first captive was formed more than a century ago, the model has become embedded in corporate risk management. With around 7,000 captives in operation now, compared to around 1,000 in 1980, the approach has matured. Innovations such as protected cell companies have improved efficiency over that period, but like the wider commercial insurance sector, captives have retained many of their old practices. They have been slow to adopt recent technological innovations, even those that have been proven to enhance efficiency. 

Yet in the background, the world is racing ahead, particularly through technological innovation and the advent of globalisation. Real-time transactions have replaced monthly settlements. Complex risk analysis and modelling have revolutionised loss forecasting and reserving. Cross-border systems have shrunk the risk landscape into a single territory divided only by regulatory differentials. Together these changes have made many of the insurance sector’s old practices obsolete. 

Meanwhile regulators are also modernising their captive insurance landscapes. As well as encouraging technology, some are transforming their regulatory environments. Hopes have emerged that a revamped UK captive regulation regime could attract around 700 captives—10 percent of the global total—with the right regulatory conditions. A consultation on a new approach was pledged by Chancellor Jeremy Hunt, but the general election on July 4 is likely to alter the course. 

In the interim, regulators with a light touch dominate. Guernsey remains the leading European domicile for captives, with Malta, Gibraltar, Ireland, and the Isle of Man following. Larger multinational firms may tend to favour Bermuda, Vermont, or the Cayman Islands. Each new and established captive regime has a different set of requirements surrounding the nature and size of the claims reserves and funds which must be maintained, as do the various global territories where insured risks may be located.  

“Managers must ensure that a service or system they like the look of operates in line with appropriate jurisdictional regulations.” Mark Rogers, Vitesse

No need to go it alone

Against this evolving procedural background, and regardless of the jurisdiction in which a captive is domiciled or where its risks sit, captive owners and managers can benefit from a broad and flexible wealth of third-party expertise and support. Owning a captive is not as simple as buying an insurance programme. 

It means participating in a sector which is striving and sometimes struggling to shed established processes and replacing them with modern, efficient solutions which embrace technology and (as far as possible given the difference between different domestic insurance regulatory regimes) can overcome the nation-state boundaries which inhibit the unimpeded passage of premium and claims around a corporation’s global footprint.

To gain maximum efficiency from the ownership and operation of a captive demands:

• awareness of the variety of innovations available—from satellite-fuelled earth observation data to fraud detection platforms; 

• an assessment of their relevance to the captive’s specific portfolio of risk; and 

• implementation of those which make sense.

An expanding army of partners is on hand to help with this large task, each espousing the benefits of their own approach or solution. Some make sense for all; others will be of more value to some captives than others. Some are relevant only in certain jurisdictions, so managers must ensure that a service or system they like the look of operates in line with appropriate jurisdictional regulations. 

At Vitesse we see increasing demand from the captives sector to deliver financial products that facilitate treasury management and payment processing. Our purpose-built systems allow captives to minimise the balances in loss funds which sit idle worldwide awaiting claims, and through treasury and claims-management services give customers real-time visibility of their loss funds. 

They are the basis for Faster Claims Payment, our fully integrated, worldwide funding and payment solution for the Lloyd’s market.

Embrace efficiency 

The maximally efficient management of claims funds is too important a goal for captives to ignore. Fund balances are sometimes a very large asset, and can generate financial returns for captive owners, but balances should be kept at levels neither too little nor too great. With the right third-party support, active management of fund balances ensures cash for claims remains adequate and instantly available, but not overfunded and therefore inefficient. 

Active claims-fund management becomes integral to the maintenance of maximum efficiency when multiple, discrete organisations unite to buy insurance through a multinational group captive. Those structures demand in-depth, current knowledge of shifting local solvency and situs funds regulations. 

When such support is augmented by leading-edge technology that works efficiently around the world, maximum-efficiency risk retention and management strategies are within reach. They can transform the marginal benefits of captive ownership across the insurance pricing cycle into an enduring benefit.

Mark Rogers is head of business development at Vitesse. He can be contacted at:

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