Wednesday, July 24, 2024

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Captives are no longer an ‘alternative market’ – Paul Phillips

Captives should no longer be considered an ‘alternative market’, with the volume of premium and assets under management carried by self-insurance subsidiaries demanding they be viewed as a market in their own right, according to Paul Phillips, partner and global captive network co-leader at EY.

Speaking on a GCP Short with Lisa Wall, executive vice president and risk finance practice leader at Lockton, Phillips discussed the growing prevalence and sophistication of captives, pushing the envelope further with clients and how they may be used to insure ESG-related risks.

“One of the things I’ve been saying on my stump speeches is captives are no longer an alternative market,” Phillips said. “They are in their own right, a market.”

According to data collected by Captive Intelligence, there is more than $100bn in premium written through captives domiciled in the United States alone, while it is estimated 90% of the Fortune 500 own at least one captive insurance company.

Phillips said he is seeing captive owners increasingly explore and push the boundaries of the types of risks they insure through a captive.

“There’s no doubt that we’re seeing new product getting deployed into captives routinely, no doubt that people are becoming more creative around what types of business risks may be insurable, that they can drop into their captive,” he explained.

“Part of that was driven due to the state’s adopting new laws, part of that was driven due to federal tax court cases going in favour of the taxpayer. And the biggest part of that is driven by the hard market and the CFOs looking for alternatives, not to use the same word, but looking for alternatives on ways to finance the risk.”

Lockton, although not a captive manager, does provide risk financing and captive consulting to clients and Lisa Wall said the number of strategic reviews of captives her team have been requested to do has “taken a sharp increase” over the past three years.

“I think it might have been some of the retrenching after Covid, just coming up with what is the best thing for our organisation now in light of where we are,” she said.

“It’s definitely been hard market driven too, but I think it is this view of ‘we’ve got this captive, what else can we do? Can we make it something more and is it going to be more valuable for us?’”

Third party risk continues to be a significant topic in captive circles, with an increasing number of companies keen to explore if they can use their established captive to provide consumer, warranty or affinity types insurances to their customers, contractors or suppliers.

Phillips said this remains industry specific, with some lending themselves more to the opportunity of participating in third party risk programmes.

“In different sectors we do see people who are looking for different revenue streams and seeking opportunities to expand out to third party coverage and basically open their own insurance company,” he added.

“In other sectors, not so much. Other sectors are more conservative, looking at only the first party risk. They’re not very interested in true third-party acceptance of outside risk.”

Wall said entering third party risk programmes does require careful consideration from the captive owner because it can change the profile and purpose of the captive.

“We start every discussion with what are the opportunities here? And put it in the buckets; third party, first party,” she added.

“And if there is a natural fit for the industry sector, then that’s the initial conversation. Is this something that you want to get in to? Is this a business risk?

“Because you’re underwriting. You’re trying to determine is this the appropriate risk that we should take and do we know enough about it to do it? I think it’s just more in the industry sectors where it hits that it is an active conversation.”

You can listen to the full discussion between Richard, Paul and Lisa on the Global Captive Podcast here, or on any podcast app. Just search for ‘Global Captive Podcast’ and hit subscribe.