More Captives Profiting from Third-party Risks in Digital Era: Marsh Report

New York, NY (June 4, 2019) – The number of captive insurance companies writing third-party business is growing at double-digit pace as the digital era expands the ways that organizations deliver insurance solutions, according to a new report by Marsh, the world’s leading insurance broker and risk adviser.

Technology advances, including mobile applications, are making it easier for organizations to offer insurance to their customers and suppliers today, Marsh notes in its 2019 Captive Landscape Report, which examines trends among 1,100 captives managed by Marsh Captive Solutions globally. By underwriting those third-party risks in a captive, parent companies can bring in additional premium and generate profits should the captive perform well.

According to the report, 22% of Marsh-managed captives wrote some form of third-party business in 2018, representing a year-over-year increase of 12% and a 62% increase over the last five years. In particular, coverage for contractor, vendor, and customer risk continued its steep growth trajectory, increasing 138% among Marsh managed captives in the past five years. In 2018, Marsh captives writing such third-party risk generated a total of US$162 million in net premiums.

Likewise, Marsh-managed captives wrote more than US$3 billion of net premiums for extended warranty coverage in 2018. The number of Marsh captives writing such coverage, which protects a variety of assets from computers to automobiles, increased 22% over the last five years.

“More risk professionals today are embracing captives as a tool to secure their organization’s futures, whether it’s generating profits by underwriting third-party risks, accessing reinsurance, or providing cost efficiencies, ” said Ellen Charnley, President of Marsh Captive Solutions. “No matter the structure or premium volume, captives offer flexibility to access and protect capital, accelerate business objectives, and facilitate the funding of programs that promote employee health, well-being, and safety.”

Other key findings from the report include:

  • Over the past five years, the number of Marsh-managed captives writing multinational employee benefits increased 243% and those writing cyber liability coverage increased 95%.
  • Among regions where captive parents are based, growth over the past five years has been robust: Asia-Pacific, up 24%; Middle East, up 33%; Caribbean, up 18%; and Latin America, up 17%.
  • Financial institutions remain the largest user of captives, representing nearly 23% of Marsh- managed captives.
  • Emerging technologies like blockchain represent opportunities for captives to not only insure new risks, but to also reduce operating expenses by facilitating the distribution of policy information, proof of insurance, and claims payment.

The 2019 Captive Landscape: Securing Your Future With a Captive

The number of organizations and risk professionals embracing captives as a tool to secure their future continues to grow, according to Marsh’s latest Captive Landscape Report.

Captives in all their forms — including single-parent entities, group captives, protected cell captives, and special purpose vehicles — prove their value every day for a wide variety of industry sectors and types of risks. No matter their structure or premium volume, all captives offer flexibility for their parent organizations’ stakeholders to access and protect capital, accelerate business unit objectives, and protect human capital.

Organizations see multiple value drivers for maintaining captives, including acting as formal funding vehicles for self-insured risks, accessing alternative capital, and designing customized insurance coverage. Organizational stakeholders — chief financial officers, treasurers, chief information officers, chief technology officers, human resources executives, and risk managers — all have their own views on captive value propositions. In the context of a risk management program, placing a captive at the center facilitates value drivers and offers support to different stakeholders. Each of these offers specific advantages for an organization.

The financial benefits afforded by captives are one side of the coin. On the other, captives can facilitate the funding of employee benefits and programs that promote a culture of well-being and safety, thus supporting employee engagement, recruitment, and talent retention.

Putting a captive at the core of a risk management program offers agility in funding risks and support for business operations (Marsh)

Putting a captive at the core of a risk management program offers agility in funding risks and support for business operations (Marsh)

Full Report

Access the full report: The 2019 Captive Landscape: Securing Your Future With a Captive.

About Marsh

Marsh is the world’s leading insurance broker and risk adviser. With more than 35,000 colleagues operating in more than 130 countries, Marsh serves commercial and individual clients with data-driven risk solutions and advisory services. Marsh is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With annual revenue of more than US$15 billion and 75,000 colleagues worldwide, MMC helps clients navigate an increasingly dynamic and complex environment through four market-leading firms: Marsh, Guy Carpenter, Mercer, and Oliver Wyman.

Source: Marsh


The Captive Landscape in Canada

New York, NY (Oct. 19, 2018) – Canadian companies are facing an abundance of opportunities and challenges in the always-changing risk landscape. The uncertainty around what the new North American Free Trade Agreement replacement, known as the United States-Mexico-Canada Agreement (USMCA), means for the future of Canadian trade deals, the November changes to the Personal Information Protection and Electronic Documents Act (PIPEDA), and the revelation that Canadian insured losses from catastrophic events exceeded US$1 billion for the fifth time since 2010 are just some of the challenges they face.

While commercial insurance offers solutions to manage some of these risks, companies may also choose to self-fund part, or all, of their risks. Typically, organizations will build their pre-loss funding strategy on a pay-per-claim method. This approach can lead to financial volatility in cash flow and inefficiencies in tracking loss causes and payment of claims.

A frequently overlooked self-financing option for Canadian companies is a captive insurance company. A captive can introduce structure and protect the company’s balance sheet while maintaining flexibility in program design and providing potential savings.

Canadian companies that understand the value of captives are typically motivated by the following common drivers:

  • Market pressures: A captive can alleviate market pressures, capture potential underwriting profit for expensive insurance placements, and provide access to reinsurance to fill capacity. Some companies even use their captive to strategically replace commercial insurance capacity on excess placements and evidence their strong risk management approach in negotiations with insurers.
  • Bridging risk appetites: Captives can help in balancing the varying risk appetites of corporate and business units through deductible buy-downs and reducing volatility for the units.
  • US operations:  Given that Canada and the US have one of the largest trading relationships in the world, it’s natural for many Canadian companies to have US operations. If these operations are significant, it may be a viable opportunity to use a US-based captive to access the reinsurance backstop offered under the US Terrorism Risk Insurance Act (TRIA) and Terrorism Risk Insurance Program Reauthorization Act (TRIPRA). These Acts provide insurance coverage for nuclear, biological, chemical, and radiological (NBCR) exposures, which traditional insurers are not able to offer.
  • Multinational operations: Captives can potentially generate tax efficiencies on non-Canadian premiums and tax deferral on Canadian premiums.
  • Group captives: Not every Canadian company is an ideal candidate to form a captive. A significant scale is often required for a single parent captive, especially for those with a local or small geographic footprint. However, a captive can become more feasible when companies group together through professional associations, franchise associations, or industry groups. These group captives can add value by merging gaps in risk appetite, providing better coverage, and lowering rates for individual members.
  • Third-party risks: Companies can use captives to insure third-party risks such as franchise operations, employee benefits, and extended warranties. For example, companies in the automotive, manufacturing, and telecommunications sectors have profitably utilized their captives to generate a competitive edge in the marketplace by providing their customers with additional value while earning underwriting profit.

While the majority of Canadian company or association owned captives are domiciled in Barbados and Bermuda for their innovations and positive regulatory environments, some companies that don’t have foreign risks may want to consider maintaining a captive locally in Canada. The only province with captive legislation is British Columbia (BC), which as of 2017 supports 21 captives (March 2018, Business Insurance). A BC captive has reasonable capitalization requirements, a favorable regulatory environment, and no “mind and management” issue for Canadian organizations.

As Canadian companies continue to become more sophisticated in managing their risks and exploring captive solutions, they should be aware of several regulatory and market trends, including:

  • Recent US tax cuts: With the overall reduction of the US corporate tax rate to 21% (in addition to state taxes) from 35%, the impact on US-domiciled captives and offshore captives has been a mixed bag (learn more about the Impact of US Tax Reform on Captive Insurance Companies).
  • Large flood and fire losses in Canada: In 2017, catastrophic events, including record breaking wildfires, led to approximately CAN$1.33 billion in insurable losses in Canada (Canadian Underwriter interview with CatIQ Inc.). These high-severity events resulted in greater volatility in the insurance market, leading some companies to restructure their property risk placements. Increasing premiums and coverage limitations in commercial insurance caused some large companies to pay greater attention to their risk management strategies, including exploring options for higher self-retentions and alternative risk solutions, such as catastrophe bonds and insurance-linked securities (ILS).
  • Growth in captives writing non-traditional risks: Captives offer flexible options to finance non-traditional and high-severity risks, such as cyber liability, supply chain, and environmental liability. For example, from 2012 to 2017, there was a cumulative growth of 240% in Marsh-managed captives writing cyber liability.
  • Employee benefits (EB). Multinational companies with large number of employees dispersed across geographies may look to finance portions of their EB programs through a captive. Pooling of EB can result in greater market strength, paving the way for savings on a consolidated basis and providing a centralized view for rewarding risk-reducing behaviors, enhancing safety programs, and gaining control over costs.

The flexibility and innovation in solutions offered by captives and the growing number of domiciles available is expanding the captive market for Canadian companies of all sizes, especially those looking to accelerate corporate risk management objectives.

See also: The Six Cs of Captive Value

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