At the 2017 Advisen Casualty Insights Conference, a panel discussed the role of captives in today’s casualty risk marketplace.
The panel included:
- Joseph Peiser – Executive Vice President, Head of Casualty Brokering, Willis Towers Watson (moderator)
- Mike Serricchino – Senior Vice President, Marsh
- Jim Barbuti – Senior Vice President Global Risk Management, XL Catlin
- Soraya Wright – Risk Management Professional
- Barry Martin – Executive Vice President, Old Republic Risk Management
Given the current soft pricing marketplace, why are companies still going through the effort to form and utilize captives?
- Captives are insurance market proof and recession proof. The number of captives worldwide has been increasing for years and this trend is expected to continue. The number of captives has doubled since 1991. There is much flexibility around what you can do with a captive and they can be used by companies from a variety of sizes.
- Captives are extremely useful for insuring exposures that either cannot be insured in the commercial marketplace or such coverage is cost prohibitive.
- Forming a captive gives you access to more marketplaces for coverage of your risks because you can access the front line carriers and the reinsurance marketplace.
- The captive is a tool used to achieve a solution for a broader problem. This includes achieving consistent coverage across exposures in different countries and insuring exposures that are challenging to insure in the marketplace.
Are captives more useful on the international side than the domestic side?
- Carriers in the United States have responded to risks that were being insured in captives by providing coverage solutions in the traditional marketplace. In international marketplaces, the carriers have not done as good a job with this. Thus, captives can certainly be more useful on the international side.
From a risk management perspective, who should be involved in decisions to utilize a captive?
- It is important to involve risk management, legal and finance in this analysis. There could be tax implications to a captive arrangement that need to be considered. Outside actuaries and consultants were also utilized in the analysis.
Could you achieve your risk management goals with a deductible program as you did with a captive?
- No. The captive provided coverages that were excluded under their other insurance contracts. Without the captives, these exposures would have been uninsurable.
Where is the growth in the captive industry?
- The growth in the captive industry is now in the middle-market space, public entities and smaller companies. Most Fortune 500 companies already have a captive in place, but smaller companies are realizing they can benefit from them as well.
An an underwriter, does a captive change your view of the risk?
- Yes. It shows a level of sophistication in our risk management program. In addition, having a captive means there are many different people evaluating the risk from a variety of viewpoints.
What types of captives are you seeing?
- The vast majority of captives are single parent. However, the next-largest segment of the industry is consumed by special-purpose vehicles focused on a very-narrow area of insurance. There are also group captives and risk retention groups.
How important are tax advantages in considering a captive?
- There are tax advantages to pre-funding losses under a captive, however, only about half the companies we have worked with on captives did so for tax reasons. Captives focused on taxes are subject to more IRS scrutiny. Recent court decisions have gone against the IRS in disputes over this issue.
- Tax was a consideration when our company formed a captive, but the bigger considerations were the strategic advantages in utilizing a captive.
Does a captive facilitate or inhibit M&A activity?
- The captive formalizes the run-off of the self-insured portion of the risks, so in this way it can facilitate M&A.
- If the parties do not fully understanding the functioning of the captive that can inhibit M&A activity. As a general rule, private equity investors do not like captives but they work with them because of the frequency in which they are utilized.
Does it matter if the captive is set up as a direct insurer versus being fronted by a carrier?
- A large reinsurer is going to be more comfortable working with a carrier subject to regulatory oversight than they are with a company who sets up their captive as a direct insurer.
How does the captive impact collateral?
- If the client is using their captive to buy down their deductible, this can have a positive impact because the funds in the captive can be utilized as collateral. The client does not have to fund the losses both at the captive and with a letter of credit with the carrier.
- In a reinsurance program, this is not the same because the reinsurers will not be as flexible in the form and amount of collateral they require.
If the Trump administration lowers the corporate tax rates, does that take away some of the tax advantages of the captive?
- It could. But taxes should not be the only reason you form a captive because tax laws can always change, which would impact the tax advantage.