CAPTIVEINSIGHT
Captives:
Andrew Cater
Senior Underwriter
Aon Risk Solutions
Setting the Scene - Why are
Reinsurers Interested in Captives?
Growth in the Captive Market
A CAYMAN
REINSURER’S
PERSPECTIVE
Captive insurance companies are
closely held insurance companies,
whose business is principally supplied
and controlled by its owners. They
are generally efficient structures where
the principal insured is normally the
main beneficiary. Such corporations
have ascertained value to retaining
a portion of their own risks within a
separated corporate structure- a captive
insurance company.
Reinsurers provide protection to
insurance companies in the commercial
insurance world, to protect those
entities from adverse loss. Reinsurance
can also allow them to take more risk
than their capital would ordinarily
allow. Certain reinsurers, including this
one, find the discipline required of a
client being prepared to accept its own
risk into a captive, or having “skin in
the game”, to be particularly attractive.
The perception is that clients who are
prepared to do this are generally much
more risk aware and understand the
value of loss prevention.
Traditional insurance markets are not
always efficient or prepared to offer
certain lines of coverage. This occurs
often at dollar swapping levels where
frictional costs translates into US$1
of loss costing US$1.30 to insure,
as traditional insurers have to fund
expenses. There are also certain areas
of coverage where traditional insurers
are afraid to walk. Captives often fill
56
these areas through careful analysis of
those risks, actuarial studies and their
own historical experiences, making
those lines of business acceptable into
a captive structure. As a result, captive
reinsurers are more prepared to look
at these possibilities and assist the
captive with extra capacity.
Benefits of Captive Reinsurance
Structures
As far as this reinsurer is concerned,
we are more likely to see wellmanaged reinsurance risks via
a captive than from the direct
marketplace. The risk managers and
captive directors mitigate and control
their risks generally more effectively
than pure “insurance buyers” and
that is very attractive. In addition
we see risks that are sometimes not
offered to commercial markets, but
they generally are profitable business.
Likewise, reinsurers offer captives
access to markets that they would not
have access to on a day to day basis as
an “insurance buyer”.
Pricing in captives is generally more
stable than commercial markets. Hence
a captive takes out the volatile swings
in pricing that can occur in certain
direct underwriting markets, which
reinsurers see as beneficial. Generally,
frictional costs are lower in a captive
environment too.
In short there are many efficiencies
and benefits to be gained from captive
reinsurance structures for both parties.
Despite some difficult economic
times recently, full captive insurance
company numbers have increased
worldwide from 4,659 to 6,057 in
the last 10 years. With continued
globalisation, we believe that the
captive market will continue this
growth in the future, possibly
accelerating as more domiciles are
created, and with more clients realising
the benefits of captives. Opportunities
continue to grow in traditional markets
with noticeably increasing interest
and reinsurance contracts coming
from EU, Eastern Europe and the Far
East. These newer markets will benefit
from the knowledge gained through
the trials and tribulations experienced
in the more developed markets, and
these areas present major opportunities
for experienced reinsurers and
captive managers alike. From all our
perspectives this has to be good news.
Captive Reinsurance from the
Captive’s Perspective.
A newly formed captive will generally
start small and build up over time.
In the early years a captive will seek
reinsurance to protect it from adverse
loss and protect its capital. In some
ways, reinsurers can act as a kind of
“incubator” for captive insurers, and
this still applies whether you are in the
old economies or the developing ones.
Reinsurance will provide a form of
contingent capital and reduce the need
for hard capital within the captive.