Caution needed over captives

08-10-2021

Businesses must take care in their use of captives and do their due diligence, Richard Cutcher, Airmic captive ambassador, has said. Speaking after a debate at the organisation’s annual conference earlier this week, Cutcher reiterated the need for caution, echoing warnings from Owen Williams, global programme and captive regional director for UK and Nordics at AXA XL. 

Williams told the audience that those rushing to set up captives could be “storing up problems” for the future. 

Cutcher told Intelligent Insurer that there was no doubt captives were back in fashion. “The hard market has really forced insurance buyers’ hands to look at other options, and if they have got captive, that gives them greater flexibility,” he said. 

The industry was seeing captives set up for new perils, such as cyber, and businesses retaining more risk within existing captives. “I know some captives, for example, that have been dormant for the past five or so years and then are getting reinvigorated and so they can start serving a purpose.”

As Williams and other panellists noted on Wednesday, however, the risks captives were taking on were often difficult to price and included long-tail risks. Cutcher echoed warnings against acting in haste in response to rate rises.

“It should be a long-term risk financing and risk management strategy. Your D&O policy going up 80% is not a good enough reason to set one up,” he said. “You have to have a long-term strategy and an exit strategy if the captive doesn’t work out.”

He added: “It’s just about doing your due diligence and making sure the captive is the right option for the long-term, not just the next renewal.”

 

Nevertheless, Cutcher, who also hosts the Global Captive Podcast supported by legacy specialists Randall & Quilter, was optimistic for the future of the captive industry. He pointed particularly to their use by new types of businesses, such as social media giant Facebook, which set up its captive last year. 

 

“We’re seeing a whole new generation of companies form captive insurance companies, which further proves the concept,” he said. “A whole new generation of very forward-thinking, very innovative companies see the value in captive insurance.”

AXA XL, Airmic, Captives, Insurance, Reinsurance, Richard Cutcher, Owen Williams, Europe

Captive International