Captive insurance market booms as firms eye profits

It's not just the Fortune 500 looking to hold their own risk

Captive insurance market booms as firms eye profits

Risk Management News

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The global risk landscape continues to evolve. New socio-economic and political risks are emerging all the time and the worldwide marketplace is being disrupted by technological innovation. These uncertainties are driving more and more businesses towards captive insurance as part of their risk management strategies.

Captive utilisation comes with benefits in three key areas: organisational, financial and strategic. From an organisational standpoint, a captive insurance company is a formalised risk management infrastructure. It’s a vehicle that can drive increased discipline in corporate risk management – something that large corporations and middle-market organisations can benefit from in today’s complex marketplace.

On the financial side, the captive vehicle enables companies to carry out long-term risk management and risk retention, and it also serves to stabilise and reduce the cost of insurance over the long run. Captives are generally cost-efficient over time because companies save money on insurance premiums as they take on more of their own risk, and there’s more internal transparency about the costs associated with coverage needs.

“Strategically, there are lots of companies taking captives to an ever further level of operation and using their captive as a profit centre. They’re monetising potential risks and using their captive to enhance their own product offering,” explained Steve Bauman, XL Catlin head of global programs and captive practice, North America.

“Another growing trend in the captive industry is the prevalence of captive cell companies (sometimes called protected cell or segregated cell companies) which are captive-like vehicles that can be cheaper to establish and operate. This means captive capabilities have trickled down the food chain from just the largest corporations to smaller middle-market companies.”

XL Catlin has been fronting captive insurance companies worldwide for many years. The global (re)insurer has license to handle policies in over 217 countries and a comprehensive understanding of the insurance governance and compliance issues in those countries.

“The trend of compliance being a risk for captives is increasing,” Bauman told Insurance Business. “The regulatory infrastructure around the world is growing and it’s putting pressure on insureds, captives and service providers to ensure their captive programs are fully compliant. That’s why it’s important for companies using captives to forge good partnerships and align with a solid front partner like XL Catlin. A front company can negotiate the different regulatory apparatus around the world and help the captive deliver a fully compliant program.”

As captive utilisation grows among different sized companies and business lines, there are opportunities for insurance intermediaries like brokers and independent agents to forge better relationships with clients. If clients want to invest in themselves and take on more of their own risk, they’re likely to make better business clients with more effective risk management strategies, according to Bauman.

“Organisations need to be captive-savvy,” he added. “Brokers with captive experience are going to gain favour with bigger clients looking to take on some of their own risk. Captive utilisation is growing worldwide, and it’s a win-win for all parties.”

 

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