Capital levels in captives should be reassessed


Questions about the capitalisation of captives, including a debate over what constitutes the right level of capital, prompted some interesting debate at the Cayman Captive Forum being held this week.

After a decade of declining claims frequency combined with favorable investment returns and good underwriting results, some captives have accumulated significant levels of capital.

Ellen Varney, senior vice president of finance and chief financial officer of CRICO, argued there should be an objective way to answer whether too much capital is being held, because simply benchmarking against peers in the commercial business, wasn’t taking their individual risk-profiles into account.

“You have to be clear about where the risk is sitting,” she said. “Is it with the captive or is it with the policyholders?”

Eric Clapprood, principal, Deloitte, outlined a multi-faceted approach to get a real understanding of the level of capital needed, which starts with an internal capital management framework.

This analysis strips out any external forces to get a pure capital view, before bringing in an external and internal reinsurance strategy, he explained.

“Look to develop your internal philosophy first and then see where it conflicts externally,” he said, outlining how risks should be defined and assigned to various buckets, so that the correlation between these risks can be assessed, which is important under Solvency II.

Warning against giving back too much capital, particularly in the current market environment, David Flandro, global head of analytics at JLT Re, said regulators, ratings agencies and actuaries have all been wrong in the past and the perceived wisdom should be challenged.

“Captive capital is valuable and it allows you to purchase reinsurance more strategically,” he said. “Think about capital on a 10-year basis, especially where the bond market is now. A surplus of capital is a sign of stability. Don’t give excess capital back at this stage in the economic cycle.”

Cayman Captive Forum, Cayman, Ellen Varney, CIRCO, Eric Clapprood, Deloitte, Solvency II, David Flandro, JLT Re

Captive International