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Is the increase in captive formation a long-term trend?

By Robert Geraghty ,

International Captive Consulting and Sales Leader

28/09/2023 · 4 minute read

The boom in captives is not simply a reaction to the cost element of a challenging market, but an understanding and utilisation of all quantitative and qualitative advantages that a captive can bring, according to Robert Geraghty, International Sales Leader, at Marsh Captive Solutions.

Though countries like France are now opening their doors to captives and growing the space, multinational companies are still likely to turn to tried and tested captive hubs with a familiar regulatory environment, he said at the “Global Programmes — Europe 2023 conference” in London on September 13.

Reputation, knowledge, and the regulator are key — clients “feel very comfortable when they see a domicile that has developed, knows what it is doing, and can get things done well,” he added.

For example, many US companies — outside of their home state — would feel most comfortable setting up a captive in Vermont, the country’s leading onshore captive insurance domicile that has more than 40 years of experience of working with the captive insurance industry.

Benefits of setting up a captive

The panellists also discussed the advantages of setting up a captive. In the last three years, a record-breaking 370 new captives have been set up by Marsh, attracting $70 billion in overall premium for all Marsh managed captives.

Captives can be useful to companies for many reasons. They enable a company to gain independence from the market or prove to the market that it is taking risk seriously — as it has skin in the game — enabling more advantageous insurance terms.

The pooling of risks, alternative risk transfer, and use of multi-line and multi-year covers within a captive can reduce the volatility of a company’s risk portfolio.

New captive insurance regimes

During the session, Philippe Cotelle, Head of Insurance Risk Management and Cyber Insurance Management at Airbus Defence and Space and board member of the Federation of European Risk Management Associations (FERMA) described the French experience of opening the door to captive formation.

The French government recently passed legislation to facilitate the creation of captives in the country for several reasons. Captives were seen as a tool to avert risk exposure following COVID-19 and improve French sovereignty of insurance coverage. Additionally, French companies were being forced to build reserves to manage risk that could not be transferred to the market because of hardening rates and lack of capacity. Tax controls on French captives located abroad had also increased over the past few years.

The French captive model still needs to be tested and the costs associated with the structure computed, he said.

However, the new regimes currently being established would certainly help build a “captive community” and inspire dialogue. They will be more “complementary than competitive” and, ultimately, result in more choice for companies, Geraghty added.

Discussions on the benefits that a captive regime could bring to the UK are also worth following. The London Market Group (LMG) recently convened a roundtable with City Minister Andrew Griffith to discuss the benefits of introducing a UK captive insurance regime, under the group’s five-point plan.

Incubating difficult-to-place risks

The question of using captives to incubate risks that are hard to insure was also raised during the session.

Whether it makes sense to set up a captive to cover difficult-to-insure risks depends on the company and the risk, Geraghty continued. It may make sense, for example, to incubate non-traditional risks such as cyber, trade credit, excess liability, and non-damage business interruption.

Few companies start their captive journey by incubating challenging risks, but many eventually include them at a later stage.

In many cases, companies move quickly from incubating risk, to building some data and premium on it, to then using the insurance market in conjunction with the captive to transfer that risk, he added.

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