This article was produced in partnership with Alternative Risk Management Limited (ARM)
Mia Wallace, of Insurance Business, sat down with Neil Brennan, finance and operations director at Alternative Risk Management Limited (ARM), to discuss what’s happening in the captives insurance market.
As finance and operations director at Alternative Risk Management Limited (ARM), the largest independent captive manager in Europe, Neil Brennan (pictured) has a front-row seat to what’s happening across the captives market – and it has a fascinating parallel with popular culture.
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“The Beatles White Album included a song called “Helter Skelter”, at the time Paul wanted to show that he could write a song louder, with a grittier sound, than The Who’s “I Can See for Miles”,” he said, contextualising the space. “For the longest time the soft insurance market allowed the industry to predict premium well into the future but the Helter Skelter of an unpredictable world really hit home in 2020.”
He noted that the general insurance market has experienced increased competition, escalating claims costs and turbulent investment returns. This, he said, has resulted in a marked decline in its profitability. The last number of years has seen increasing market rates, the imposition of progressively more onerous terms and conditions and a reduction in market capacity, with some insurers exiting the market completely.
“This can be evidenced by the stratospheric rate increases applied to professional indemnity cover, if you were fortunate enough to even get a quote. This trend is expected to continue well into 2023,” he said. “In this climate, the captive sector often comes to the rescue in the form of additional capacity.
“The 2023 captive space will no doubt continue to be fast-paced and increasingly evolving, with both existing and new clients seeking to find dynamic and creative solutions to their insurance procurement dilemmas, which have been brought on by the more volatile, less stable global insurance market.
Assessing the implications of a hard market on the market, Brennan highlighted how necessity is so often to be the mother of invention. Clients, and by extension policyholders, have appreciated that in order to obtain the cover they require, he said, they need to reconsider how they view their risk. In the last few years, ARM has seen a significant increase in captive enquiries as clients are realising that the same tried and tested route may no longer be an option.
By redirecting some of the risk to their own insurance vehicle and thereby creating a formalised self-insurance model, he said, new captive owners have benefited from:
As to how he’s seeing captive owners react to the hard market, Brennan highlighted that the recent uncertainty surrounding the commercial insurance industry has seen many companies turn to the strategy of the captive.
“Captives as a concept are nothing new to the insurance world,” he said. “They have existed in Guernsey for over 100 years and are an intrinsic tool within the insurance industry. They account for in excess of 10% of the industry’s overall premium. Between 2020 and 2021, annual captive premiums have grown from $54 billion to $61 billion.
“A lot of captive owners appreciate that the insurance industry is cyclical and when you get to the bottom you don’t always know when you’re likely to get back to the top, only to do it all again…. The attraction of a captive is your fate is more in your own hands.”
Assessing some of the key challenges facing captives at this time, Brennan emphasised that a “captive is not just for Christmas”. In truth, he said, it is rare that it is used as a short-term solution to say, an inability to obtain cover in a hard market. That’s not to say that it will not do the job but to get the best out of a captive it should be viewed as a longer-term prospect within an overall insurance programme.
“An additional consideration is capital,” he said. “The minimum capital requirements will flex with the premiums, risk written and the captive structure chosen e.g. standalone company or a cell within a Protected Cell Company. However, one aspect that may be overlooked when considering setting up a captive is the projected return on capital employed. Our experience is, that more often than not, this will exceed that of other market investments, some considerably so.”
Alongside these challenges, opportunities also abound. A critical opportunity is presented by having skin in the game, he advised, as having a captive in your armoury, irrespective of the market conditions, will play to your advantage. If you have faith in your business and a robust risk management approach, it is far easier for insurers to get on board and work with you. If a market insurer sees that you are willing to take some exposure, your interests will become aligned and you will become less of a risk.
“Self-insuring the attritional layer of a programme, which may include high volume and lower value claims, can result in a disproportionally higher saving in market premium,” Brennan added. “In a hard market this could be considerable and can be the difference between obtaining full cover and no cover at all.
“In addition to the “Pure Captives” where the entity insures the parent’s risk, we have seen large growth in third-party insurance and reinsurance vehicles. A number of our clients have seen the opportunity to earn underwriting profits which have outweighed the profits commission they were receiving through previous arrangements.”
As an insurance manager, ARM actively works to support captive owners irrespective of market conditions, he said, and the team are happy to discuss a client’s overall insurance requirements and establish whether a captive is appropriate and feasible for anyone who is curious. Sharing how this process works, he noted that it generally involves analysing a company’s current insurance programme, risk management, claims history and premium spend, and suggesting how they might structure an insurance programme to their best advantage.
“A captive entity will need to make several decisions including what lines of cover best fit it, how much risk should it retain, what levels of reinsurance are appropriate and what is its long-term strategy,” he said. “As time progresses these needs also develop, and we see it as our role to help flex the programme in line with the parent’s requirements. Additionally, we assist with the day-to-day operating of the captive which includes underwriting, accounting, secretarial, compliance and administrative functions.
“ARM is Europe’s largest independent captive manager. By independent, we mean we are not affiliated with any broker or insurer. We are not beholden to any insurance group dictate, we are free to provide our clients with the best advice tailored purely to their needs alone.”
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Neil Brennan gained his BA in Accounting and Finance in 1994 and qualified as an accountant in 2001. He has worked with the ARM Group and its predecessors since 1994. Over this time he has developed a wealth of experience in managing, accounting and administrating captives, PCC and non-regulated companies.
