An International Perspective on Developing Captive Insurers
October 25, 2022
This article originally was published on Captive.com and is reprinted here with permission.
A growing number of companies have discovered the many advantages of establishing a captive insurance company. A correctly structured and managed captive insurance structure can provide coverage when traditional insurance carriers are unwilling or are demanding exorbitant premiums and can allow companies to tailor coverage to address their specific risks.
Captives have been used internationally in increasingly sophisticated ways. In fact, the list of nations enacting laws to permit the use of the captive insurance strategy is expanding rapidly. Many other governments, among them France, Germany, and the Netherlands are studying the concept or drafting legislation to allow captives. Companies in Asia, Africa, and South America also utilize captive insurance and other forms of alternative risk transfer.
High Premiums and Complexity
The movement is led by companies with sophisticated risk management strategies that have long purchased traditional coverage. Faced with the global increase in premiums and the increased complexity associated with doing business on a global scale, these innovative leaders are exploring alternative options such as captives. Some are establishing captives to address risks directly, while others use the strategy to access reinsurance markets so they can broaden coverage either vertically or horizontally. Additionally, as familiarity with the strategy grows, smaller businesses also examine the advantages.
Using captives is especially attractive to companies with operations in multiple countries. A properly structured captive can address general risks and issues related to doing business in specific locations. In addition to traditional uses in property and casualty, we have seen an increase in captives for D&O, environmental issues and other specialized coverage.
Over the past two to three years, companies that may not have previously been seen as good candidates for captives have begun to explore the concept. Those businesses have recognized they have emerging exposures or unusual risks traditional insurers are not eager to cover. As a result, some have received sharp increases in premiums and deductibles or new exclusions. One prominent example is companies involved with exposure to the cannabis industry. While that sector is thriving, cannabis remains illegal in many jurisdictions. Thus, traditional insurers are typically wary of what they see as unusual risks, so creating a captive offers an alternative.
Emerging tech companies face a similar situation, even though there is little concern about the legality of their businesses. In their case, what they are developing is so new and innovative that insurers may not want to underwrite their potential risks due to a lack of data or new exposures. The companies have a better understanding of what is at stake, so they can create captives focused on those specific exposures and build up data to share with the market.
Cyber a Key Motivator
Covering cyber risks is a common motive for establishing captives these days. As cyber insurance premiums soar and actual coverage become more limited, companies may find those policies no longer offer the risk mitigation they need. The first step in exploring the use of a captive for cyber risk is developing a complete analysis of the specific risks a company faces and the exposures each creates. Such an analysis should also explore the risks posed by vendors who are linked into the company’s systems because attacks on subcontractors have actually caused some major breaches.
As the concept of captives is being introduced to an increasingly wide audience, it is vital for company leaders to fully understand the strategy so that they are able to demonstrate its value to internal stakeholders and verify the validity of its risk transfer mechanism to regulators and taxation authorities. While that may seem daunting, it provides an excellent opportunity for risk managers to display their expertise and confirm the value they provide for the organization.
Establishing a captive requires extensive knowledge about each country’s specific laws and familiarity with wider rules such as IFRS 17 – which addresses how cash flow and results are recognized throughout much of Europe and elsewhere.
Finally, while captives may theoretically operate in perpetuity, it is prudent to perform regular strategic reviews to compare the captive’s cost to current market pricing. Reviews also offer an opportunity to verify that the captive continues to address a company’s constantly changing risk exposures.
Unlike most forms of insurance coverage, captives involve an entirely bespoke approach. It is not practical for a company to simply duplicate what another company — even in the same industry — is doing. That is why it is important to work with insurance professionals who have extensive experience with these unique tools. The best way to begin is to discuss your company’s specific risk management objectives.
Captive establishment and administration require specialized expertise from a team of captive insurance and healthcare industry experts, together with actuarial, tax and legal professionals. The Hylant captive team has extensive experience helping healthcare organizations and other entities develop effective, affordable captive programs.
Senior Captive Consultant
The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.