Captive Reflections

Author:Labuan IBFC Inc.
Profession:Labuan IBFC Inc
 
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Article by Malcolm Cutts-Watson

The start of a new year is always a good time to reflect on the previous year and assess the opportunities and challenges that might arise in the forthcoming year. Following a year of severe natural disasters and highly publicised cyber breaches, it is understandable that organisations are reviewing their risk financing strategies and in particular the role their own captive (re)insurance company can play in managing risk.

Review of 2017

2017 year end captive statistics were not available at the time of writing, but I predict the trends of 2016 will have continued into 2017. So we can expect new captive formations to be on a par with 2016's number of 616 (disappointingly only eight of these are Asian owners). This will bring the total number of captive vehicles worldwide to around 6,750, albeit many of entities contain cells (effectively mini captives) so the true number is closer to 7,500. So, there is continued steady growth despite the insurance market remaining soft (which anecdotally is an inhibitor to captive formations).

Interestingly, the majority of owners of newly formed captives fall outside the Fortune 1000 and is dispelling the myth that captives are only for large corporations. My assessment is that captives are formed for strategic reasons rather than purely arbitraging the insurance market.

The number of territories offering bespoke captive legislation continued to increase, with over 70 domiciles now in play. More choices for the consumer but this increased competition could lead to a risk of lowering regulatory standards and inadequate local business infrastructure.

The off (and mid) shore jurisdictions continue to demonstrate greater innovation and flexibility to deliver new products and services. The role of captive technology in the insurance-linked securities (ILS) and longevity risk space continues to grow and we are witnessing the evolution of captives beyond simple risk retention. Currently ILS structures provide 10% of the global reinsurance capacity, and this is expected to reach 15% in 2018.

Any review of the year would not be complete without consideration of regulatory and fiscal regimes! Globally there is a shift to risk-based regulatory regimes and captives have not been immune. The upside is increased confidence in the resilience of the captive model through improved solvency (i.e. capital) and an enhanced governance and management of business risk. The downside has been...

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