The services required of captive management companies are continually expanding, to enable the demands of the captive owner to be satisfied. The majority of captives nowadays transact business with several countries, and have direct relationships with insurers, reinsurers, insureds, brokers and other service providers on a worldwide basis.
The true internationality of captives, however, cannot be derived from simple statistics; the fact is that the role of the captive insurance company is changing rapidly, the number of risks underwritten is increasing, and the captive is in many cases becoming the focal point for the risk financing and insurance needs of large multinational corporations.
Traditionally, the captive manager was expected to provide relatively straightforward accounting services, comply with relatively simple regulatory requirements, and sign off insurance documentation. Captive management companies were mainly staffed by accountants, with perhaps a token insurance presence to ensure that policies issued and reinsurances arranged fitted the client's needs. The captive manager was effectively an administration centre, little concerned with the structure of the captives programme, and certainly not included in any discussions regarding the development of the captive and its role within the parent's insurance programme and risk management strategy. In any case, a more proactive approach was seldom justified, as the captive would be accepting only small net retentions in the context of the overall programme, and its business was limited to a simple deductible or quota share participation for risks where conventional insurance was both available and purchased.
Many captives nowadays perform a completely different function. They are at the centre of the parent's risk financing strategy, rather than an adjunct to a conventional insurance programme. High retentions are more common, and, in some cases, the captive is dealing directly with the parent's own subsidiary companies on a worldwide basis.
It makes sense, of course, for the lowest level of losses to be retained by individual subsidiaries which are within the risk retention appetite of the parent, and for the provision of global insurance and risk financing services to be centralised through the captive into the worldwide insurance and reinsurance markets.
But why are captives becoming used more actively in this way? In many cases, the captive owner has seen that a captive works well, producing financial and managerial benefits, and wishes to extend those benefits into other areas, perhaps not traditionally insurable. Alternatively, having tried formalised self-insurance for a few years, and perhaps built up additional capacity, the captive owner has the confidence to expand the captive's role.
This all has huge implications for the captive management industry. It is, of course, still necessary to provide the traditional captive management service, and to ensure compliance with the various regulatory requirements. But the globalisation of captive programmes requires improved standards, international capabilities, access to information and a far greater comprehension of the captive's overall aims within the context of the parent company's risk management objectives.
The captive manager cannot be expected to be an expert in every area in which he deals. The complexities of risk and insurance-related products themselves require the advice of specialists in each area. Internationally, it is no good trying to rely on single markets' providing identical needs for multinational insureds. The different legal systems of each country provide a high diversity of insurance coverage needs, without even considering the different risk profiles of geographically diverse corporations.
Equally, the challenges posed by underwriting risks based in many different currencies are considerable. In many cases, the policy limits may be in one currency, premium receipts in another currency, and underlying local sublimits in a third. This generates not merely banking and treasury problems but also accounting and reconciliation problems, particularly when considering the application of exchange rates to outstanding losses.
Captive managers may take advice from many parties. One group is likely to be worldwide insurers or reinsurers - the availability and cost of reinsurance can itself dictate the terms of the original cover provided by a captive. Alternatively, advisers may include brokers or risk financing consultants. The key is that the captive manager has ready access to a multinational and multidisciplinary resource. The need for this backup goes far beyond avoiding paying for unnecessary learning curves to be overcome. If the captive manager is to perform the required role at the centre of a corporate risk financing programme, he needs to be able to identify the key risks to his client and how they can best be protected - assisting his client to make the right decision with or without the captive.
There are additional dimensions of complexity in the captive manager's role. The use by large corporations of multiple captives is becoming quite common. In many cases, where critical mass is obtained from a segregated type of risk, it can make good sense to use more than one captive; equally, some companies make use of the advantages of having captives in more than one domicile, in order to offer the most integrated and comprehensive service to the client. The client will require a consistent service, with identical standards being maintained globally; if this sounds exaggerated, just consider that the application of global standards is a vital element of corporate governance for many multinational corporations - they have the right to expect exactly the same standard of service from external service providers, too.
It is not the case that only those captive managers with multinational capabilities will be in business in a few years' time. It is quite certain that only those multinational captive management operations will be able to handle the diversity of international corporate business which provides the largest slice of captive business today, and which represents the major growth area for captives in the future.
For further information contact:
James Boyd, Isle of Man on +44 (0)1624 620274 Malcolm Cutts-Watson, Guernsey on +44 (0)1481 720049 Jenny Hill, London on +44 (0)171 488 8866 Michael Trainor, Dublin on +353 1 478 4832 Jean Thomas, Luxembourg on +35 248 9020 Bruno Callaghan, Gibraltar on +350 51801 or Guy Ragosta, Vermont on +802 658 9466.
The international diversity of the business is partly demonstrated by looking at the ultimate parentage of captives:
GRAPH A (Source: Tillinghurst)
Estimate of Total Bermuda 1,050 Cayman 390 Barbados 200 Bahamas 24 British Columbia 17 British Virgin Islands 53 Guernsey 310 Luxembourg 200 Isle of Man 150 Ireland 120 Singapore 49 Vermont 270 Colorado 30 Hawaii 46 Other US domiciles 51 Other US states 200 All other non-US 240 Total 3,400
These captives are located across a growing number of domiciles:
GRAPH B
Top Twelve Countries of Captive Sponsor Origin
US 1,922 Netherlands 49 UK 512 Japan 46 Canada 147 Switzerland 35 Sweden 107 Belgium 31 France 65 Germany 29 Austria 50 Norway 23
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information contact Jenny Hill tel: +44 (0) 171 488 8866, fax: +44 (0) 171 488 8968 or visit the Willis Corroon web site, at Click Contact Link
For further information on Captive Insurance in Europe enter a text search "Willis Corroon" and "Business Monitor".
Business briefing Publishing Ltd, 1997 Tel +44 (0) 171 820 7733
