Asia, LatAm and the Middle East ripe for captive growth: CICA board chair

The number of captives in emerging markets could be set to grow in coming years, with countries in Asia, Latin America and the Middle East seeing an increasing number of launches, according to Steve McElhiney, senior vice president and director of reinsurance at Artex Risk Solutions and CICA board chair.

McElhiney said: “I am very excited about the prospects for captive growth in Asia, MENA, and certain countries in South America in particular. These regions exhibit all the characteristics for successful captive growth and should flourish.”

The US remains the world’s leading market for captive insurance, with these vehicles used extensively by up to 70 percent of the Fortune 500 companies, noted McElhiney. The US has 29 active domiciles, with competition between them, to attract captives to their state, constantly increasing. This is only likely to continue, with many states having many opportunities to broaden their market penetration and grow their captive industries, McElhiney said.

McElhiney believes there is scope for greater penetration into the captive market among both US and EU companies.  In this US, this means more captive formations in the middle market, among Russell 2000 companies and private companies, for example.

There is also an opportunity for existing captives to broaden the scope of their activities, McElhiney said. “Increasingly, captives will be utilised for new and emerging risks as a means of bringing reinsurance capacity to bear for those risks that are not well delineated in the carrier market,” he explained.

McElhiney said: “Clearly, the market for reinsurance and for large account property and casualty insurance in the US is in the midst of a sustained and very material pricing escalation and hard market phase that is multifaceted and is having wide-reaching ramifications.” This bodes well for both captive formations and for greater use of existing captives, he said.

“Beyond increased premium pricing issues, overall capacity has been reduced through the strategic realignments of certain global carriers for certain risk classes,” added McElhiney. “Where these carriers once provided up to 100 percent of the capacity needs for certain risks, the insureds are finding at renewal a drastically reduced allocation of capacity, coupled with a general market pull-back across all carriers, for some risks.” This is encouraging companies to consider captive formations for property and casualty reinsurance, he said.

McElhiney, who was scheduled to speak on a panel at the  CICA International Conference about runoff and exit strategies for captives, until it was cancelled, also predicted increasing demand for finality solutions, as captive owners look to close out dormant captives or to laser out certain transactions with innovative reinsurance solutions.

McElhiney expects technology trends to have a significant impact on risk and insurance procurement going forward. “Technologies such as internet of things and blockchain create possibilities to better aggregate and analyse vast amounts of data,” he said. “Through better data analysis, there are possibilities to better control supply chain risks generally and to better identify risk drivers with actual insurance exposures.”

Overall, McElhiney believes the captives industry is in a strong position and does not face existential challenges, though he accepts some tax-based challenges in the US could become problematic in some states if they expand.

However, he acknowledged there are certain areas the industry must focus on as it looks to grow. He stressed the captive community must work hard to raise awareness about how the industry works, to “thwart poorly conceived criticisms in the press and general communities.”

He added: “It is critical that best practices continue to be the guiding principles for the industry around captive formations, their use and their optimisation over time,” he said.

The captive community must also work to ensure it maintains a strong pipeline of diverse talent to fill the inevitable retirement gap that will surface as industry professionals exit, said McElhiney.

“These are reason why we’ve made “Building on the Best” the theme of this year’s CICA Conference,” concluded McElhiney. “As long as we are always sharing best practices, exploring new uses of captives and identifying ways to engage new talent we can make the industry better and stronger.”