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GCP #88: Brian McNamara, Franck Baron and Pierrick Livet at RISKWORLD 2023

Richard Cutcher
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Brian McNamara, AGCS
Franck Baron, IFRIMA & International SOS
Pierrick Livet, KPMG Bermuda

In episode 88 of the Global Captive Podcast, supported by the EY Global Captive Network, Richard brings listeners three more interviews conducted at RISKWORLD 2023, in Atlanta in May.

1.40 – 10.50: Bermuda-based Brian McNamara, Regional Head of Multinational, North America and Global Head of Captive Solutions at Allianz Global Corporate & Specialty, discusses AGCS’ continued expansion into the captive sector and the trends he and his team are experiencing.

11.30 – 23.55: Franck Baron, President of the International Federation of Risk and Insurance Management Associations (IFRIMA) and Group Deputy Director of Risk Management & Insurance at International SOS, gives his reaction to the new captive regime in France, shares details of a new Asian captive association, and, with his day job hat on, explains why the International SOS captive has become a signatory of the United Nations’ Principles for Sustainable Insurance (PSI).

24.37 – 34.58: Pierrick Livet, Senior Manager in Advisory at KPMG Bermuda, discusses a range of trends he is seeing in the most mature captive market in the world.

Ensure you are kept up to date with the most relevant news, analysis and thought leadership from the global captive sector by signing up to the Captive Intelligence twice-weekly newsletter.

View cyber as high frequency, low severity, suitable for captives

Richard Cutcher
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View cyber as high frequency, low severity, suitable for captives

The sheer volume of cyber-attacks taking place without corporations knowing lends itself to understanding cyber as a high frequency, low severity risk, thus opening the door for more captive involvement, according to Ryan Dodd, CEO and founder of Intangic.

Intangic was launched in March this year offering a parametric product targeted at large corporates.

It is a technology company – as well as an MGA and captive owner in Guernsey – that has built an approach to cyber based on measuring the volume of attacks on public corporations.

The parametric policy, which has a limit of $15m and is backed by AXA XL, is triggered when Intangic’s data-stack recognises an uptick in malicious cyber activity coupled with the insured’s financial indicators.

It is designed as an early warning system in advance of a large breach, with Dodd envisaging claim pay-outs being used to supplement existing cyber security budgets.

“Traditionally, and correctly so, corporations were interested in answering the question ‘how many attacks did we block?’ especially when it comes to reporting to the board or reporting across different verticals within the company,” Dodd said in an interview on GCP #87.

“But the question I think that should be asked is, ‘how many did you not block?’ and that has certain implications.

“One of them is that we think that cyber actually, based on the data and the facts, when you look at any sort of major cybersecurity company when they release figures on the number of attacks that are taking place on a given day, and when you talk to chief information security officers (CISOs) at large corporations, which is our target market, they will tell you that cyber is happening every day. Attacks are happening every day. This is a high frequency risk.

“And so when we ask the question, how many are you not blocking, then the answer is it’s a high frequency risk.”

Although the number of captives writing cyber risk continues to rise in tough commercial market conditions, there is often debate as to its suitability because of it traditionally being viewed as a low frequency, high severity risk.

Captive Intelligence reported in May how Belgian chemical company Solvay is using a captive in its cyber programme, while also building capacity from the commercial market and being a member of cyber mutual MIRIS.

Mark Heath, head of insurance and chief underwriting officer at Intangic MGA, joined the podcast discussion and said he felt the flexibility of captives in terms of coverage, wordings and attachment points meant they could be utilised alongside the Intangic parametric product.

The parametric pay-out is also seen as complimentary to the large indemnity policies multinationals are already buying in the commercial market.

“When you’ve got a board of a captive who is already decided that they need to take some more control and they’re looking at lots of different risks, as well as emerging risks, going into the captive and they’re flexible in the wording they use, then our cover can be very effectively used as a reinsurance for that captive,” Heath said.

“Why we like captives is it’s built to be a cybersecurity risk management tool and risk transfer and therefore we are helping companies to get, if you like, to the left of things earlier to see those pre-events so the captive has got a capability to inform the parent company and then there’s a very quick trigger.”

Finally, Intangic has also established its own insurance vehicle in Guernsey, similar to a captive, so it can participate in the risk transfer of the product.

“Most of my career has been in taking risk and so it was very important that we gave ourself the ability and the vehicle for us to take a risk alongside our partners,” Dodd added.

“I believe that we have a technology that gives us quite an advantage and allows us to do a lot of things. Being able to monetize that technology in various ways, including taking risk, that’s really the reason why.”

Listen to the full interview with Ryan Dodd and Mark Heath, of Intangic, on GCP #87. Listen on the Captive Intelligence website or on any podcast app, by searching for ‘Global Captive Podcast’.

TCIA takes aim at 65% loss ratio in IRS comments

Luke Harrison
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TCIA takes aim at 65% loss ratio in IRS comments

The Tennessee Captive Insurance Association (TCIA) has provided a detailed response to the most recent IRS Notice which proposed new “micro-captive” regulations.

Captive Intelligence reported in April the IRS had proposed new regulations for “micro captives” at the same time as obsoleting Notice 2016-66, having had it struck down by the courts in March 2022.

The proposed regulations for 831(b) captives have divided opinion across America’s captive landscape, with some saying they could destroy the industry, while others have branded it a refreshing change.

Under the Notice, the IRS proposed regulation which would see certain micro-captive transactions deemed “listed transactions” and other micro-captive transactions labelled “transactions of interest”.

The TCIA believes that under the current listed transaction proposals, a micro-captive could meet all four parts of the framework established by federal case law and still qualify as a listed transaction.

“If a micro-captive meets the four parts of the framework established by federal law, it is an insurance company under federal law and entitled to make an election under IRC § 831(b) by act of congress,” the TCIA said.

“The IRS does not have the authority to overturn federal case law precedent via IRS regulations.”

The full comments from the TCIA can be found here.

65% loss ratio

As part of the IRS Notice, the majority of captives that record a loss ratio under 65% would be considered a “listed transaction”.

The 65% loss ratio calculation and limit has attracted the attention of many across the US captive market since it is not uncommon for captives, whether taking the 831(b) tax election or not, and commercial insurers to perform at or better than that level.

The TCIA noted that under the McCarran Ferguson act, states have the authority to regulate insurance unless Congress specifically passes a law stating otherwise, and therefore, only an act of Congress can establish a loss ratio requirement.

“The IRS should not attempt to impose a 65% loss ratio on micro-captive transactions as only Congress has the authority to impose loss ratios on the insurance industry under the McCarran Ferguson act,” the TCIA said.

The TCIA also said that the proposed regulation presents a situation whereby a micro-captive will always be severely restrained in its ability to charge actuarially sound rates in order to build adequate reserves to weather any catastrophic claims events.

“Under the proposed regulation, micro-captives, in order to be non-abusive, will be impaired from charging actuarially sound premiums by the 65% loss ratio requirement, severely limiting in micro captives’ ability to build reserves and surplus.”

The TCIA believes that by setting a minimum loss ratio, the IRS is disregarding the primary risk management purpose of a captive insurance company and is indirectly encouraging captive policyholders to engage in more risky behavior in order to justify the 65% loss ratio.

“The IRS should recognise the risk management value of captive insurance companies,” the TCIA said.

Discriminatory

The TCIA argue that the proposed regulation unfairly discriminates between similarly situated companies simply because an election is made, and two insurance companies, operating identically, will receive vastly different treatment if one elects to be taxed as an 831(b) and the other does not.

“If both companies have a 20% owner and loss ratios [lower] than 65%, but only one insurance company makes an 831(b) election, then just by checking a box, one company will be a listed transaction and the other will not.”

The response from the TCIA follow comments from The Self-Insurance Institute of America (SIIA), which said the proposals will “severely limit access to captive insurance programs for small- and medium-sized businesses in the US”.

French equalisation provision “quite powerful”, new captives could reach double figures

Luke Harrison
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French equalisation provision “quite powerful”, new captives could reach double figures

There is optimism in France that new captive formations could reach double figures in 2023 or 2024 as momentum continues behind the country’s new regime, but there is also concern a bottleneck could develop at the regulator if it struggles to keep up with demand for new licences.

Further details of the country’s new captive regime were published by government earlier this month, including confirmation that a 90% equalisation reserve can be utilised by captive reinsurance companies.

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Airmic updates Captive Governance guide for iNEDs

Luke Harrison
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Airmic updates Captive Governance guide for iNEDs

A rapidly changing captive environment, driven by regulatory trends and greater utilisation due to the hard market, has prompted Airmic to update its Captive Governance Guide, primarily targeted at independent non-executive directors (iNEDs).

The UK’s risk management association originally published the guide in 2019, in partnership with Aon Captive & Insurance Management, as a useful resource for existing and prospective iNEDs, as well as captive managers and captive owners.

The update was announced at the Airmic Conference in Manchester today, and includes additional sections on cyber, ESG and D&O.

“A lot has changed for captives over the past four years,” Julia Graham, Airmic CEO, said.  “The hard insurance market has re-emphasised the relevance and value of captives, seeing them grow in premium size and enter new business lines.”

“Trends in ESG, cyber and D&O have also presented new challenges and questions for captive boards to get to grips with. We hope this update helps iNEDs to understand this new environment and equips them to ask the right questions and fulfil their governance duties effectively.”

As well as input from Aon, the updated Guide includes contributions from iNEDs Kate Storey and Malcolm Cutts-Watson in Guernsey, Andrew Bradley in Switzerland, and Francoise Carli in Luxembourg.

It also has a new section containing information for independent directors concerning their own directors and officers insurance.

“For iNEDs, it is important to ensure appropriate directors’ and officers’ (D&O) insurance has been bought, either by the captive itself or, more commonly, by the corporate group with the policy including coverage for the captive’s directors,” the Guide states.

“A certificate of insurance should be provided confirming level of cover, level of the deductible and who covers it, and the name of the D&O insurer. This should be confirmed annually.

“iNEDs should always ask and ensure, where possible, that they are afforded the same level of D&O cover and protection as other board members.”

Download and read the full Captive Governance Guide on the Airmic website here.

Samphire keen to support captives writing malicious, hostile risks

Luke Harrison
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Samphire keen to support captives writing malicious, hostile risks

Samphire Risk, a London-based managing general agent, is targeting captives interested in writing political violence type cover, so it can provide malicious and hostile risk expertise in corporates’ moment of need, according to Charlie Hanbury, CEO of the MGA.

Hanbury was joined by Andy Hulme, director of underwriting at Strategic Risk Solutions, on GCP #87 that also featured a discussion with cyber MGA Intangic.

Traditionally, captives have not written a great deal of political violence but global instability and increased rates has prompted more discussion on captives having a role to play.

Hanbury said: “We feel that ability to give access to crisis response in the moment of need, whether that be driven through political violence, kidnap & ransom, high risk travel, political risk or business integrity, potentially has the ability to act to protect other underlying capital within the captive.”

Samphire is an agency focused on providing cover for malicious and hostile risks, such as terrorism, political violence, kidnap & ransom and other broader crisis response products.

Hanbury said that when it comes to the type of risks that Samphire is involved in, captives are thinking more comprehensively than the traditional aims of risk and reward or in-house premium retention.

Hulme also noted that captive owners are now taking a more holistic approach to risk, with increasing requests for captives to look at lines of business that wouldn’t have traditionally been part of a captive’s makeup.

“Captives are moving away from that kind of risk and reward focus to a more holistic management of risk for the corporate, either in the absence of commercial markets or because the commercial market isn’t providing the flexibility that the corporate requires,” he added.

Instability

Hanbury noted that the current macro environment for malicious and hostile risks in terms of lower capacity and higher rates is providing “ripe ingredients” for making captives start to look like an attractive proposition.

“It starts to bring a little bit more certainty to the organisation,” he said. “The war in Ukraine and the global inflationary environment is driving a lot of instability in developing nations.

“You’ve seen places like Sri Lanka where the social contract between government and population of being able to subsidise essential staples like fuel and food.”

He also highlighted Egypt and Pakistan as places to watch out for.

“That that kind of macro instability will filter through into the marketplace,” he said.

In December last year, Captive Intelligence published an article exploring how global instability, largely caused by Russia’s invasion of Ukraine, could lead to insurance buyers seriously assessing the feasibility of writing political violence risks (PV) through their captives for the first time.

Hulme noted that the current instability in the commercial market is “not an option” for some of the companies needing cover for these types of risks.

“By having their captive in play even for modest retentions allows them to have the discipline within the captive to deploy more capital when needed,” he said.

“It also allows them to fill in that uncertainty when markets or macro events dictate that the commercial market may step away or provide reduced terms or provide uncompetitive terms for the commercial placements.”

Europe’s captive market has been rejuvenated – Paul Eaton

Luke Harrison
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Europe’s captive market has been rejuvenated – Paul Eaton

The European captive market has been rejuvenated over the last four years, having “levelled off” during much of the 2010s, according to Paul Eaton, CEO of Artex International.

The captive manager, owned by Arthur J. Gallagher & Co, appointed Eaton as its International CEO at the start of the year, with Nick Heys transitioning to the role of chairman of the company.

Eaton spoke to Captive Intelligence in an exclusive interview following Artex’s acquisition of Irish captive manager Allied Risk Management in May.

“We were really nicely positioned with our business development team and received a large amount of inquiries and proceeded with a good number of formations,” he said.

“It’s been great to see such a rejuvenation in the captive industry. I think most practitioners in Europe would agree that captive formations had levelled off during the 2010s.”

Eaton highlighted that new business is deriving from a number of regions.

“Historically, the UK has been the natural home market for Guernsey, and we had some interesting formations from that region, but also from EMEA and Australasia,” he said.

“We’ve had success in those regions before, but particularly in relation to Australia, we saw some strong demand for cell business as a result of the distressed market.”

He noted that a lot the new formations were single-parent structures.

“Though the majority of these were more interested in the cell option, which is not a huge surprise given the cost and operating efficiencies cells provide,” he said.

“We have also seen a number of limited company formations.”

As Artex International CEO, Eaton serves on the company’s executive leadership team and drives Artex’s strategy on talent, organic growth, M&A, and operational efficiency for its international operations, including Guernsey, Gibraltar, Malta, London and Singapore.

“It is a wonderfully challenging role, which I’m really enjoying,” he added.

“Having worked for a long time with my predecessor Nick Heys, I felt pretty well placed given the variety of roles I’d previously covered from business development and account management to running parts of the European business.”

Lines of business

Eaton revealed there has been an expansion in the lines of business clients are looking to write though captives, with Artex seeing a growing number of cyber and D&O enquiries, for example.

“The other area where we’ve had some impact in the past, and where we’re seeing renewed interest is employee benefits,” he said.

“It’s exciting to think of these new coverage options that clients are considering for their captives, and I guess that’s been partly brought about by the more challenging market conditions and also a desire to diversify captive retained risk.”

He highlighted that cyber in particular can generate substantial losses, so it is important that clients balance the ability to retain risk within their captive, while also accessing risk transfer options in order to prevent a disproportionate net risk being retained in the captive.

“Cyber as a coverage for captives is still a fairly new and developing market,” he added.

“I believe clients will start to use their captives more to incubate risk and to grow risk retention in this class.”

Group captives

Eaton highlighted that there are some notable distinctions between the US and European markets when it comes to attitudes towards group captives.

“Generally speaking, the US premium spend is much higher, there’s much more exposure to catastrophe risk, and importantly I think culturally, risk sharing is more acceptable than it has been in Europe,” he said.

He noted that Artex has received a number of inquiries over the years about group captive formations in Europe “and we’ve worked on potential solutions to show how we could manage risk more effectively”.

“In many cases I believe what holds this back is the willingness of people to collaborate and needing to convince a number of stakeholders that some risk sharing doesn’t mean that you’re sharing any of your trade secrets or your USPs, so perhaps there is a cultural issue,” he said.

Singapore

Eaton noted that although there has not been much activity of late, Artex has an interest in working with clients who currently have captives in Singapore or are wanting to launch new captives in the region.

“From our perspective, it makes sense for us to have an offering where Gallagher has a presence as we can work alongside each other as sister companies,” he said.

“Gallagher has a strong presence in Australia, New Zealand and a growing presence in Asia, so, we think it’s a domicile that could attract more captive business.”

He noted that within Singapore, Artex is currently focussed on feasibility studies and captive health checks.

“But that could convert into captive management quickly,” he said.

“My understanding is that there has not been much growth in Singapore captives over the last few years. I’m sure market conditions have encouraged some increased captive retentions, but I don’t think we’ve seen growth in numbers.”

AM Best affirms ratings of Shell captives

Luke Harrison
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AM Best has affirmed the financial Strength Ratings of A (Excellent) and the long-term issuer credit ratings of “a+” (Excellent) of Switzerland-domiciled Solen Versicherungen AG (SVAG) and Texas-domiciled Noble Assurance Company. The ratings outlook is stable.

The ratings agency said SVAG’s business profile assessment reflects its role in supporting its ultimate parent’s overall risk management framework, as Shell’s principal captive.

The captive’s non-life business mostly consists of offshore and onshore property and liability risks, as well as the associated business interruption cover.

SVAG also writes a small book of life business derived from reinsurance of the group’s pension liabilities.

As a captive domiciled in Texas, Noble underwrites Shell’s US business and cedes 100% of its risks to SVAG, its sister company, through a quota share reinsurance agreement.

The ratings reflect SVAG’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management.

The ratings of Noble reflect its status as a member of the SVAG rating unit and a subsidiary of Shell.

SVAG’s balance sheet strength is underpinned by its risk-adjusted capitalisation, which recovered from the very strong level at year-end 2021 to the strongest level at year-end 2022, as measured by AM Best’s capital adequacy ratio (BCAR).

The improvement in risk-adjusted capitalisation was supported by organic capital generation arising from the full retention of earnings in 2022.

The balance sheet strength assessment also factors in a concentration of assets in intragroup investments and the large gross and net line sizes offered by the captive, relative to its capital base.

However, AM Best expects capital to be managed to a level that is sufficient to absorb a series of large losses, in line with the captive’s capital management strategy.

AM Best said SVAG has a track record of strong operating performance, underpinned by robust underwriting results, as demonstrated by a five-year (2018-2022) weighted average combined ratio of 27%.

Prospective operating performance is subject to potential volatility due to the captive’s exposure to high-severity, low-frequency losses, given its large net line sizes relative to its premium base.

The captive is also exposed to elevated market risk through its management of the Shell group’s foreign currency warehousing activities, which drives a level of variability in overall earnings.

Nissan captive has Excellent AM Best rating affirmed

Luke Harrison
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AM Best has affirmed the financial strength rating of A (Excellent) and the long-term Issuer credit rating of “a” (Excellent) of the Bermuda-domiciled Nissan captive, Nissan Global Reinsurance (NGRe). The outlook for the ratings is stable.

In its role as a single-parent captive for Nissan, NGRe provides Nissan with a host of insurance coverages in the United States and abroad, including, but not limited to, extended service contracts, product liability and inland marine.

AM Best said the ratings reflect NGRe’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

The ratings agency said the neutral business profile considers NGRe’s strategic role as a captive insurer for its parent, Nissan Motor Co.

Favourable cash flows provide ample liquidity for the captive’s selected risks and exposures, while NGRe’s adequate operating performance reflects its profitable results through the last decade, with its combined ratio improving year over year during the last five-year period.

The primary drivers of NGRe’s profitability are its global product liability and extended service contract lines. The captive continues to penetrate its current market with fresh product offerings.

As a member of the Nissan family of companies, NGRe benefits from the group’s proprietary data warehouse, extensive risk management practices and loss control programmes.

GCP #87: MGAs and captives – political violence and cyber

Richard Cutcher
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Ryan Dodd, Intangic
Mark Heath, Intangic
Charlie Hanbury, Samphire Risk
Andy Hulme, SRS

In episode 87 of the Global Captive Podcast, supported by the EY Global Captive Network, we share two interviews with MGAs that are particularly interested in providing unique underwriting expertise and capacity to captive owners.

1.40 – 14.14: Senior reporter Luke Harrison is joined by Charlie Hanbury, CEO of Samphire Risk, and Andy Hulme, director of underwriting at captive manager Strategic Risk Solutions. Samphire is an agency focused on providing cover for malicious and hostile risks, such as terrorism, political violence, kidnap & ransom and other broader crisis response products.

14.15 – end: Ryan Dodd, CEO and founder at Intangic, and Mark Heath, head of insurance and chief underwriting officer at Intangic MGA, outline their unique take on cyber being underwritten as a high frequency, low severity product and the role of the capacity, backed by AXA XL, they are providing as a parametric product, for corporates in supporting the CISO and cybersecurity budgets.

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