Caution needed over captives
The hard market is helping drive growing demand and formation of captives, but they remain a long term play, according to the head of global programmes and captives at AXA XL.
“You would never advise a company to set up a subsidiary, particularly if writing risk that has a tail on it, for only a few years,” Latham told the RISCS Captive Conversation podcast. He was speaking with podcast host Oliver Schofield, managing partner and head of captives & ART consulting at strategic risk consultancy RISCS.
Latham admitted that hard markets had made it easier to make the case for captives.
“Over the last five years, you have seen some studies from clients where the risk manager hoped to set up a captive, but they weren’t quite able to get the business case that convinced the board to do that,” he said.
“The harder market, especially in terms of the premium pricing but maybe in terms of coverage as well, has made some of those business cases now viable.”
Once established, though, the solution would be for the long term in almost all cases of new captives, he insisted.
“I’m pretty sure they will be able to evidence through the success of that captive over the next few years why it should continue in whatever sort of pricing environment the market brings,” he said.
“Having that tool available to you is a great string to the bow for a client’s risk management department to fill in for any classes of business where the capacity is not there.” Often captives set up two or three core lines would be expanded to additional lines in the future, he added.
“Whether it’s a full-blown captive or even a cell, I think you’ve got to take a long-term view on this,” he concluded.
Schofield agreed: “If you think about the amount of time it takes to go through the whole captive establishment process, that in itself demonstrates the commitment that organisations need to deliver to set up these structures.
“You’re not going to spend all of that time, all of that energy, all of that money just for a 12-month quick win. It’s not the way these things should work.”
AXA XL, Captives, Insurance, Reinsurance, Matthew Latham, Oliver Schofield, Global