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International programme pain points still top of the agenda – Jayesh Patel

Richard Cutcher
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International programme pain points still top of the agenda – Jayesh Patel

Ensuring the smooth running of an international programme remains a key priority for captive owners, despite new lines and bespoke policies becoming increasingly important, according to Jayesh Patel, global head of market practice management for multinational at Allianz Global Corporate & Specialty (AGCS).

Speaking in an extensive interview on GCP #83, Patel discussed the new role he took on last year, AGCS’ renewed focus on and organisation concerning captives and what he is hearing from the market.

While AGCS has been involved in some new, innovative captive structures over the past 18 months, including supporting Meta’s captive being deployed alongside a Side A ‘Laser DIC’ D&O policy, Patel said compliance and operational efficiency remains a big focus.

“What I’ve heard from captive owners with multinational programmes, their big bug bear is just making it run smoothly,” he said.

“And it links to what we said before about bringing local policies together, making sure premium payment is paid on time, ensuring that all of the pieces in the chain work well.

“A lot of people are saying, you know, apart from the cool complex topics, please just make my programme run smoothly.”

As captive owners continue to grapple with the hard market, there has been an increasing demand for 100% fronting programmes and more bespoke wordings in policies written by captives.

While previously some commercial carriers were reluctant to engage in pure fronting, the landscape has changed with customer demand forcing a different approach.

This can lead to the (re)insurer playing multiple roles with the captive.

“It’s important first of all to understand what the needs are of the customer at different elements of that captive chain,” Patel explained.

“We’ve got fronting, which is all about making sure you’ve got the right partner in place locally, your right partner in place centrally to cede premium through as quickly as possible.

“What else can we do for that customer within the tower structure? Is the captive retention set correctly? Can we manage those retentions is a better way?

“And then on the aggregate side and on the layers above, is that structure the most effective way as well when we’re talking about cross cost solutions?”

Listen to the full interview with Jayesh Patel in GCP #83 here, or on any podcast app. Just search for the ‘Global Captive Podcast’.

Over reliance on commercial market prompts GEODIS US captive formation

Luke Harrison
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Over reliance on commercial market prompts GEODIS US captive formation

An over reliance on the commercial insurance market led to the Americas region of GEODIS to establish its own single parent captive, according to Justin Bahorik, director of insurance & risk management.

GEODIS is a world leader in transport and logistics with expertise in all aspects of the supply chain. Globally, GEODIS is headquartered in Paris, France with the Americas Region based out of Brentwood, Tennessee.

In April 2022, GEODIS launched its first single parent captive domiciled in Tennessee and is being managed by Aon.

Bahorik explained the motivation and plans for the captive in GCP #83.

 “When you’re fully reliant on commercial markets, you have to pay what they tell you you’re going to pay with no other options,” he said.

He gave the example that their workers’ compensation premiums had continued to rise despite always outperforming the industry and losses never breaching the retention.

Bahorik explained: “We weren’t being fully rewarded for our hard work in safety and innovation and with a captive, our rates are determined using our own experience and not the industry as a whole.”

Bahorik said it’s been a very positive first year of operation and the company is looking to expand the captive in the near future.

“We definitely want to expand,” he added. “So far we’ve taken a crawl, walk, run approach to ensure we are building a strong base and all stakeholders are comfortable with the process.”

He highlighted that the captive first began by writing a deductible reimbursement policy for workers’ compensation and auto, but has recently added a truck broker liability policy that is written specifically to address the unique needs that GEODIS has in this area.

“Not only can you reduce dependence on the commercial markets, but you can also write policies that benefit the policyholder which in this case is GEODIS,” Bahorik said.

“We were able to include language that filled a gap that we were not able to find commercially.

“The benefit of a captive is not realized in the short term. This is a long term investment. 

“We want to position our captive for success by carefully adding coverages that provide value to the business while also protecting and building the captive’s balance sheet.

“Our hope is that in 5 or 10 years we will have a sizeable surplus that we can utilize to provide even greater stability to the business.”

Listen to the full interview with Justin Bahorik in GCP #83, which also features interviews with Jayesh Patel, Global Head of Market Practice Management for Multinational at Allianz Global Corporate & Specialty (AGCS), and Olga Collins, CEO of the Worldwide Broker Network, and John Harris, Group Business Development Director at Robus Group.

GCP #83: Jayesh Patel, the GEODIS captive and WBN’s Olga Collins

Richard Cutcher
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Olga Collins, Worldwide Broker Network
John Harris, Robus Group
Jayesh Patel, AGCS
Justin Bahorik, GEODIS

In episode 83 of the Global Captive Podcast, supported by the EY Global Captive Network, Richard is joined by a four guests. Time stamps below:

Start – 13.50: Jayesh Patel, Global Head of Market Practice Management for Multinational at Allianz Global Corporate & Specialty (AGCS), and Richard discuss the commercial insurer’s restructuring and focus of captive business globally.

13.50 – 26.22: Recorded at the CICA International Conference in March, Senior Reporter Luke Harrison interviews Justin Bahorik, Director of Insurance and Risk Management at Geodis in the US, about the Tennessee captive formed by the transport and logistics company last year.

26.24 – End: Richard is joined by Olga Collins, CEO of the Worldwide Broker Network, and John Harris, Group Business Development Director at Robus Group, to discuss the growing importance and value of captives to WBN members.

For the latest global captive news, analysis and though leadership, visit Captive Intelligence.

Ascot US appoints Mark Totolos to lead new captive solutions unit

Luke Harrison
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Ascot US appoints Mark Totolos to lead new captive solutions unit

Ascot has appointed Mark Totolos to a newly created role of senior vice president for captive solutions at Ascot US.

The appointment marks the (re)insurance underwriting group’s entrance into America’s booming captive market.

Totolos, who joins from Skyward Specialty Insurance where he was head of captives and programmes, will be a part of the portfolio solutions group, reporting into Tony Lyons, head of portfolio solutions.

Matt Kramer, CEO at Ascot US, said: “With Mark’s deep experience and extensive knowledge in the captive marketplace, I am confident that we will be well-positioned to capitalise on strategic captive opportunities, expanding our portfolio to best serve our clients both now and in the future.”

Totolos will be responsible for setting and communicating the vision, value proposition, and long-term business strategy for Ascot’s new captive solutions portfolio.

“As companies continue to seek alternative risk transfer with increasing frequency, Ascot is committed to responding to the dynamic market by offering clients new capabilities that meet their evolving needs,” Totolos said.

“In this role, I look forward to developing Ascot’s captive business to both drive growth and profitability, and to provide creative solutions to address our clients’ risk management challenges.”

Totolos has previously worked for AIX Group, a subsidiary of Hanover Insurance Group, and Harleysville Insurance Company in underwriting and captive roles.

IRS obsoletes Notice 2016-66, proposes new “micro-captive” regulations

Luke Harrison
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The United States Treasury and Internal Revenue Service (IRS) have obsoleted Notice 2016-66 and confirmed they will not enforce the disclosure requirements or penalties that are dependent upon the procedural validity of the Notice.

In March 2022, the District Court of Eastern Tennessee struck down the IRS’ controversial Notice 2016-66. The Court also held that the IRS acted arbitrarily and capriciously based on the administrative record.

The Service has now issued proposed regulations identifying certain micro-captive transactions as “listed transactions” and certain other micro-captive transactions as “transactions of interest”.

The full proposed rules have been published on the Federal Register here.

“The IRS previously identified certain micro-captive transactions as transactions of interest in Notice 2016-66,” the Service stated on 10 April.

“Recent court decisions in the Sixth Circuit and the U.S. Tax Court ruled that the IRS lacks authority to identify listed transactions and transactions of interest by notices, such as Notice 2016-66, and must instead identify such transactions by following the notice and public comment procedures that apply to regulations.

“Treasury and the IRS disagree with these decisions that the IRS lacks authority to identify listed transactions by notice and continue to defend listing notices in litigation except in the Sixth Circuit.

“Treasury and the IRS will, however, no longer take the position that transactions of interest can be identified without complying with notice and public comment procedures. Treasury and the IRS issued the proposed regulations to ensure that these decisions do not disrupt the IRS’ ongoing efforts to combat abusive tax shelters throughout the nation.”

Micro-captives, as labelled by the IRS, are captive insurance companies that take the 831(b) tax election and have long been under scrutiny from the Service.

To qualify for the election, annual premium must now be below $2.65m. By taking the election the insurer is only taxed on investment income and not underwriting profit.

The Treasury Department and IRS intend to finalise the regulations, after reviewing public comments, this year and issue proposed regulations “identifying additional listed transactions in the near future”.

“The obsoletion of the notice, however, has no effect on the merits of the tax benefits claimed from the transactions themselves and related litigation, or income tax examinations and promoter investigations relating to micro-captive transactions,” the IRS states in its notice of proposed rulemaking.

Trisura impairment a cautionary tale for captive fronting business

Richard Cutcher
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Trisura impairment a cautionary tale for captive fronting business
  • Trisura sees 30% share price fall after fronting failure
  • Growth in MGA fronting prompts fears of race to the bottom
  • Pure and group captive fronting viewed as less risky
  • Competitive marketplace requires additional due diligence from captive owners
  • Gross cession and 100% fronting becoming increasingly popular for captives

News of Trisura Group’s multi-million dollar write-down and subsequent stock drop has caught the fronting, and wider commercial market’s attention, but fears of a “race to the bottom” are not expected to impact traditional pure and group captive programmes.

In March, AM Best revised its outlook for Trisura Group to negative from stable, after the Canadian insurer had revealed a CAD 81.5m one-time write-down of reinsurance recoverables in Q4 resulting from its fronting of a US property and casualty captive programme.

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Reviewing credit risk on gross cessions and pure fronting

Emma Sansom
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Reviewing credit risk on gross cessions and pure fronting
Emma Sansom is group head of captives at Zurich Insurance Company, based in Zurich, Switzerland.

Following Captive Intelligence’s report on what lessons, if any, there are to learn from Trisura Group’s multi-million dollar write-down, Zurich’s Emma Sansom shares her thoughts on recent changes in fronting trends and the considerations for captive owners.

As we’ve seen a rise in gross cession structures and requests for pure fronting, the issue of credit risk is becoming more of a critical one, and there are some additional considerations for captives looking to benefit from using gross structures to access reinsurance markets.

Reinsurance overriders from these transactions can be seen as ‘risk-free’ income, but it’s not: aside from reputational risk at the front end if there are disputes with the claims handling process, then there’s operational risk, and of course credit risk.

Typically we tend to think of insolvency when we think of credit risk, but it can come from a variety of sources: insolvency of the counter-party, coverage disputes, or potentially even legal reasons (see Side A D&O).

Managing counter-party credit risk

Whilst diversification across a portfolio of risk is generally a good thing, with counter-party credit risk, having a large panel of reinsurers brings with it a host of additional considerations.

Concurrency of reinsurance agreements is key to ensuring there is back-to-back coverage for a captive, but negotiations with a large panel of reinsurers can be time consuming.

Contracts will need to be negotiated with the individual carriers, and potentially, subsequent changes to the underlying policies will also need to be negotiated with the panel, or at least the leading reinsurers. Small changes to claims cooperation clauses for example can have potentially far-reaching impacts. 

Ensuring you understand the financial position of each carrier is important, as is ensuring you are making a provision in your pricing structure to cover counter-party credit risk.

Having highly rated capacity of say A- as a minimum is a good place to start. However, as we have seen, these ratings can change so it is important to be able to monitor the whole panel, and have provisions within the reinsurance contract enabling replacement of carriers where there is significant downgrade.

Other credit risk mitigants such as Letters of Credit (LoCs) are an option, but these also involve operational considerations and risks.

For example, an LoC is often a physical document that needs to be stored in a safe. If it needs to be drawn down on, then this means presenting it at the specified branch, which may mean physically going to the branch with the LoC.

So you need to make sure that firstly, the LoC is on demand and evergreen so that it can’t just be cancelled at renewal by the provider, and you have systems in place to respond at pace when you do receive a notification of cancellation or when you need to drawn down.

And then there’s the credit risk of the LoC provider itself. If you happen to be having an issue with a counter-party and the LoC provider is no longer there to provide the cash, then you may be left with outstanding reinsurance recoveries.

Tail risk

Finally a comment of the tail of risk. Predicting long tail risk is difficult to get right – and claims costs are only rising. Where reinsurance is aggregated, such as with mutli-year-multi line structured reinsurance solutions, this potentially leaves gaps in cover for captives where long-tail claims start making themselves known.

Ensuring reinsurance coverage in your excess layers is dovetailed with these types of insurance is critical – for example, if the SS capacity is completely eroded, do the excess layers drop down or stretch down? A drop down of the excess layers will likely be cheaper, but can potentially leave you exposed in the event this capacity is also eroded.

It can be time consuming so if you are considering switching to a gross cession form a net cession, then counter-party credit risk, concurrency, and a robust, gap-free structure should be the focus of the exercise, but this might not be the cheapest capacity.

There is a balance to be struck and if the risks are minimised, a gross cession can reap many benefits.

SRS appoints Ron Sulisz as president of global company

Luke Harrison
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SRS appoints Ron Sulisz as president of global company

Strategic Risk Solutions (SRS) has appointed Ron Sulisz president of the global firm, a position he will assume from 15 May 2023.

Sulisz has been with SRS for 18 years and is currently CEO of SRS Cayman, having helped establish SRS as one of the leading captive managers in the domicile.

Jenny Pooley will be assuming the role of CEO in Cayman.

“I’m excited for this new chapter at SRS, and although I will be shifting responsibilities to Jenny, I’m remaining in the Cayman office, and available to my clients and the relationships that I’ve built over my years at SRS,” Sulisz said.

In his new role he will report to Brady Young, who will remain as CEO of the company. Sulisz will also serve on the board of SRS.

“As we continue to grow and expand, I recognised we needed more focus and resources to support operations and Ron will be perfect to lead this effort and focus on the corporate side of SRS, heading up the internal financial, operations, human resources, and information technology teams,” Young said.

“It will allow me to focus more on strategy and supporting our operating units and ensuring we maintain our customer focus.”

Captive Intelligence reported in February that New York-based private equity firm Integrum Holdings LLP had bought a significant stake in SRS.

Post investment, we understand SRS is looking to expand into new markets, both within and related to the captive management business, and is evaluating further acquisition targets.

Florida bill could have “devastating impact” on RRGs

Luke Harrison
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A Florida bill that would harden certain financial standards for risk retention groups (RRGs) and surplus lines carriers could cause a “devastating” impact on most of the RRGs doing business in the state, the executive director of the Risk Retention Group Association (NRRA), Joseph Deems has said.

RRGs are regulated differently from captives and commercial insurers because they come under the Federal Liability Risk Retention Act (LRRA) of 1986.

Deems highlighted that by imposing a requirement of an AM Best “A” rating and a minimum financial size of $100M in capital surplus in order for an RRG to write commercial auto liability in Florida, the Bill unlawfully seeks to regulate RRGs, and unlawfully discriminates against those RRGs that do not obtain such ratings.

“If passed, Florida Bill 516 will have a devastating impact on not only trucking and transportation risk retention groups registered in Florida, but actually every RRG writing commercial liability, including auto,” Deems said.

“Hundreds, if not thousands of RRG owner-insureds could lose their coverage.”

The Bill’s passing may also open the door to significant threats to RRGs in other states.

If passed, starting 1 July 2023, Bill 516 will potentially impact 96% of the 140 risk retention groups registered in Florida from continuing their business, according to NRRA.

“If history is any example, regulatory intervention calculated in response to the bill could actually disqualify or interfere in a number of ways with RRG commercial liability insurance,” Deems said.

The Florida House Commerce and Senate Appropriations Committee hearings are set to take place 10 April and 12 April respectively.

“We need to stop this bill before it passes because, if it passes, suing the state will take years and will be too late to help these impacted RRGs,” Deems said.

Captives “booming”, EB trending away from global underwriting – Ludovic Bayard

Richard Cutcher
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Captives “booming”, EB trending away from global underwriting – Ludovic Bayard

Businesses have become more likely to go straight into a captive structure when centralising international employee benefits programmes, rather than pursuing global underwriting first, according to Ludovic Bayard, CEO of Generali Employee Benefits.

Bayard was guest co-host of GCP #82, in which he discussed GEB’s own portfolio, where he sees most growth and the opportunities for captive EB programmes to contribute to group ESG and DE&I initiatives.

He also reflected on GEB’s move to Luxembourg to become a regulated reinsurance company in 2018.

Generali Employee Benefits has had a focus on captive business for more than 20 years and Bayard said it’s portfolio today totals approximately €1.6bn in gross written premium across captive, pooling and global underwriting structures.

Of the €1.6bn, 50 captives programmes account for around €700m in annual premium, while €500m is from pooling clients and €400m is from global underwriting and reinsurance only clients.

Bayard said the captive segment is the fastest growing of the three.

“It’s fair to say that we see a bit of decreasing of interest in the global underwriting,” he explained.

“We start to see again an increase of interest in the pooling. It was flat in the last two, three years, but it’s starting again, while on captives it’s really booming. I would say it’s double-digit growth since at least five years.

“On global underwriting, there was a huge interest 10 years ago. Those who started from the very beginning are now ready for the captive. So in the recent two, three years, many of these global underwriting clients have switched to the captive concept.

“The most recent ones are still, let’s say, discovering the world and the difficulties of EB. But we don’t see many new requests on the global underwriting.”

It was previously expected, and often experienced, that clients would go through the full journey of first pooling international employee benefits, before participating in global underwriting for a more centralised buying approach and ultimately ending up with global EB in a captive.

Bayard said, however, that nowadays it is more common for companies to head straight for the captive approach but it still varies from case to case.

“It really depends on the DNA, on the culture of the company,” he added.

“You can have companies who jump to the captive directly, maybe because they already have the P&C mindset and the structure. You have clients who shift from pool to captive.

“There is no average pattern. It’s really about the culture, also the people involved in the programme that make the difference.”

In the full podcast interview, Bayard also discussed some of the challenges businesses must overcome to pursue and implement a captive-backed international employee benefits programme, how GEB is tackling data management and the opportunity for captives to contribute to group ESG and DE&I initiatives.

Listen to the full GCP #82 episode here, or on any podcast app. Just search for ‘Global Captive Podcast’.

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