Brokers seeking to steer their clients through the toughest market in decades would do well to consider using captives, says William Lewis, UK Insurance Representative for Guernsey Finance.
With brokers battling the hardest insurance market in 30 years, captive insurance could offer a solution for both brokers and clients. Captives and Protected Cell Companies are a useful vehicle for those striving to find the coverage they seek in such market conditions.
We’re currently seeing rising premiums, a dearth of investment due to liquidity squeezes in areas such as insurance-linked securities, and inflationary pressures on coverage limits. The effect of this tough environment means traditional markets are looking less appealing and clients are leaning hard on their brokers for solutions. Brokers owe it to their clients to fully investigate all possible avenues for their coverage needs, and this includes areas that clients may not be overly familiar with, or may have even dismissed in the past. Captives and PCCs could provide a potential remedy for a client’s insurance quandary.
Why choose a captive?
A common misconception is that captives can only be used for niche purposes, but that is not the case. What a captive offers a client, which is particularly compelling under current circumstances, is the ability to better control the insurance element of their balance sheet. If premiums are becoming too expensive, or it is proving too challenging to secure the limits required, a captive provides a way for a company to reduce its exposure to the commercial insurance market by creating a capital structure that can shoulder part of their risk burden.
Captives have boards that oversee them, ensuring high levels of corporate governance, using expertise to price the reinsurance required, and helping to ensure the right levels of risk are retained at the right times.
Many clients might not realise that captives are not the sole preserve of the largest companies, either, and so could be a useful tool for a greater proportion of their client base than they currently believe. While they lend themselves to the likes of third-party business coverage, terrorism, medical stop loss and cyber liability, they are also well-suited to more traditional casualty areas of coverage and property.
Unexpected rewards
Although the first captive was incorporated in Guernsey just over a century ago in 19221, the structure, alongside the newer Guernsey-invented PCCs, are likely to feel niche to some clients and brokers. However, they are far from novel. With 201 captives currently domiciled in Guernsey –Europe’s leading centre for the structure – and more than 400 PCCs in their 25-year history – brokers may want to reiterate to clients the potential benefits of the solutions. A captive insurer, which is typically an entity that is a wholly-owned subsidiary of a parent firm, has the sole aim of insuring its owner.
The benefits to the captive’s owner include providing insulation against the insurance premium cycle, which could be rising in spite of a firm not making any claims, and enabling a more bespoke and targeted level of cover. The rewards also stretch into the brokerage market, too. Brokers play a role in the formation and management of captives, a value proposition that clients will readily pay for in testing markets when commercial insurance becomes too expensive or difficult to obtain.
In 2020 and 2021 alone, roughly 200 new captives were established globally, with $3.4 billion in premiums secured, according to Marsh Captive Solutions. Given that the 4% rise in global commercial insurance pricing in the fourth quarter of last year was the 21st consecutive quarter of price rises – the longest run since 20122 – finding solutions to mitigate this difficult environment will be extremely valuable to clients.
This is doubly so when the gap between the levels of supply and demand in the global reinsurance industry is estimated to be at least $50 billion, putting additional pressures on many insurance sectors. A standalone captive might appeal more to larger companies as it will have more control over its investments and operation. It may be similar in structure and operation to their own business, and so easier to understand and manage. For smaller companies, a PCC is an alternative option, which is less costly, can be established speedily and can offer an off-the-shelf solution.
In a PCC structure, the core manages the insurance activities of the cells. Assets and liabilities of each cell are segregated from the other cells, and the cells are only responsible for their own solvency capital requirements (SCR). This enables a truly segmented approach to managing risk for firms, and is still likely to require the involvement of brokers and agents to facilitate the process, whether a client is seeking to establish their own PCC or identify one run by a third-party. With the benefits of using PCC and captive structures, and the increase in the number of schemes being launched, there is clearly potential in considering the opportunity offered by captive structures to create coverage for clients.
Be the first to comment