Marsh Captive Solutions
Michael Serricchio of Marsh Captive Solutions breaks down the 9th Captive Benchmarking Report to reveal how the captive market has changed
The latest Marsh Captive Benchmarking report. What does it aim to achieve?
The 9th edition of Marsh’s Captive Benchmarking Report examines the role captives are playing in insurance and risk management, using data and analytics to draw conclusions and predict trends. Based on data from 1,139 of the 1,250 captives Marsh manages worldwide, this year’s report identified trends and changes in captive use, providing insights to help our clients manage risk as their exposures grow in number, complexity, and severity.
Why did the number of captives writing non-traditional risks see an increase in 2015?
Captives are more mature. Captive managers are thinking outside the box and looking at coverages that make sense for their organisation that 10 years ago weren’t even on the map. Examples of some of these non-traditional risks include employee benefits, cyber, supply chain, and trade credit. Companies are looking at their current insurance span against what is going on in the world, identifying the gaps in their insurance and reinsurance coverage exposures, and using their captives to create security for some of these uncertainties.
What was meant by control and discipline? How would that work in practice?
Control and discipline was one of the value drivers that our clients cited as a reason for forming a captive and/or keeping a captive. By control and discipline, we mean that a captive can not only provide economic drivers and cost savings, but it can also provide risk management and business benefits such as more control over insurance programmes. For example, a large institution may control its defence of claims by not allowing the third-party carrier to get too involved. Instead, it may allow them to have the first layer of control and checks and balances with the general counsel of the company for a product liability claim, as opposed to losing that control to a large carrier that may sell that claim. Or it may take a really tough stance on controlling the claim through to the dismissal of the suit.
An example of discipline might be where a not-for-profit entity sets up a captive to house all of its risks in one entity, which allows it to have more discipline over the audit function, the reserves and the actuarial function.
The number of captives using multinational employee benefits programmes more than doubled. Why? And do you think that number will continue to rise?
There are three main reasons why we are seeing such an increase over the last year or two. Firstly, clients already have captives and they’re looking to diversify and put other risks in the captive that have the potential to smooth it a little more, so that peaks and values are taken out of the equation. For example, employee benefits is a cash flow venture whereby clients can reinsure a large pool of benefit money which then sits in the captive until it needs to be paid out.
The second reason is human resource cost savings. If you can take a pool and extract out some of the profit and administration by putting it into your captive, you’re going to save some cost from a human resources perspective.
The third reason relates to third-party business in your captive. In the US, although not in Europe, a company may want multinational reinsurance pool benefits to bring in some profitable third-party business and to assist with some of the tax efficiencies that captives can derive.
How are cyber risks increasing in complexity? Would you say that control and discipline are important here as well, to keep down costs?
Some firms are putting cyber into their captives because they have an uninsured exposure and are trying to get their arms around what funding for it might look like, so it is a part of that control and discipline.
Cyber risk is extremely complex and carriers struggle with the lack of actuarial data. Cyber insurance is still immature relative to other traditional lines of coverage. It continues to evolve at the same time that property and casualty markets seek to clarify or exclude cyber risk from their forms. This has resulted in gaps in coverage, as traditional lines of coverage shy away from cyber risks, while at the same time the cyber insurance market struggles to meet demand driven by the policyholder’s increasing awareness of cyber risks. Cyber is certainly going to grow in captives.
How important does TRIA remain as a means of financing risks?
We saw how important the Terrorism Risk Insurance Act (TRIA) was in 2015 when it was allowed to expire after 1 January. TRIA captives allow clients to insure risks that may be expensive or uninsurable in the commercial market. Examples include conventional terrorism, nuclear biological chemical radiological, and cyber terrorism, so it is important to the insurance industry as a whole and very important for captives that rely on government reinsurance.
Without having the TRIA backstops that’s in place for them now, a lot of large institutional companies that include TRIA coverage in their captives would be obligated to insure these risks from first dollar.
Risks including cyber, political risk, and terrorism are all evolving fast. Do you think insurance markets are starting to struggle when it comes to finding a solution to address them? And are captives the answer?
All cyber, political and terrorism risks are all evolving fast but there is a market for all those risks. Most insurance companies offer terrorism to clients for conventional risks, and in Europe they offer it through national pools. For certain industries cyber might be prohibitively expensive or insurers are unable to offer the limits that companies need, for example, in the healthcare or retail sectors.
A combination or commercial versus captive utilisation and finding the right balance is key to coming up with the optimal solution which may be include both the commercial and captive component to it.
