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Lemonade establishes Bermuda cell to retain windstorm exposure
Lemonade, the technology driven insurance carrier, has established a captive cell in Bermuda, which it plans to utilise in order to retain most of its windstorm exposure.
The cell was formed as part of the company’s reinsurance renewal programme, which Lemonade said was “in good time and on good terms.”
Although windstorm reinsurance capacity was available, Lemonade said the cell structure was determined to offer a materially better cost and benefit profile.
The company has also formed Lemonade Re in the Cayman Islands, where it plans to hold some of its retained risk.
Lemonade is a B Corp that offers renters, homeowners, car, pet, and life insurance and is powered by artificial intelligence and social impact.
The centrepiece of the reinsurance programme is 55% quota share protection, the same level as the expiring coverage, and covers all Lemonade businesses globally.
“It says a great deal when some of the world’s largest and most respected reinsurers choose to stake their capital on the performance of our business,” said Daniel Schreiber, Lemonade co-CEO and cofounder.
“These partners allow us to operate in a very capital light mode and focus our resources on expanding our customer base across all of our products and geographies, while harnessing our technologies to get ever more efficient, and ever better at matching rate to risk.”
The existing reinsurance programme expires at midnight on 30 June 2023, at which time the new programme will go into effect for a standard 12-month term.
Willie Forsythe to retire from IMAC, Kevin Poole retained as consultant
William “Willie” Forsythe will retire as general manager of the Insurance Managers Association of Cayman (IMAC) after nearly 15 years of service to the jurisdiction’s captive insurance industry.
Forsythe has supported the executive committee and has touched every aspect of IMAC, including finance, marketing, fund raising and IMAC events.
He has also played a key role in planning IMACs signature event, the annual Cayman Captive Forum.
IMAC is retaining Kevin Poole as a consultant to assist the Association during the transition period following Willie Forsythe’s retirement.
“Willie has been integral to the growth of IMAC for more than a third of its existence and deserves enormous credit for the success we have had in promoting the Cayman Islands captive insurance industry,” said Lesley Thompson, IMAC Chairperson.
“Professionals across the industry have come to depend on the phrase ‘just call Willie’ to get the information and action we needed and that expertise and reliability will be greatly missed.”
Forsythe relocated to the Cayman Islands as a senior auditor with Coopers & Lybrand in 1981.
After 22 years in senior professional roles with other industry associations and companies, Willie joined IMAC as general manager in 2008.
“Willie’s familiar face, helpful attitude and extensive experience will be missed by everyone at IMAC and throughout the industry,” Thompson added.
“The entire IMAC membership and Cayman captive insurance industry wish Willie the very best in his well-earned retirement and for the extended travels he has planned.”
Connecticut legislation permits captive parametric contracts
Connecticut Governor Ned Lamont has signed Public Act 23-15, legislation designed to strengthen the state’s captive market including new regulation that permits captives to accept and transfer risks through parametric contracts.
The Bill introduces several changes to Connecticut’s captive insurance laws, offering increased support and flexibility for captives, owners, and service providers, which will become effective on 1 October 2023.
“The bill, championed by Commissioner Andrew Mais of the Connecticut Insurance Department (CID), marks a significant milestone in advancing a business-friendly regulatory environment that encourages innovation and supports the growth of captives to provide more options for businesses to manage their risk,” the CID said.
The new legislation allows captives to accept and transfer risks through parametric contracts, providing businesses with a more efficient method to mitigate risks that are challenging to insure through the commercial market.
The CID noted that its “innovative” parametric approach offers businesses coverage for unique and hard-to-place risks.
The Bill also provides greater flexibility to protected cells by enabling them to establish separate accounts to address businesses’ specific insurance needs.
This enhanced structure provides a solution that aligns with the risk management needs of cell participants, while protecting the assets and liabilities within each account.
A third change is the introduction of a certificate of dormancy for captives that have stopped doing business and have no remaining liabilities. A successful application for dormancy means an exemption from paying Connecticut’s minimum premium tax.
This exemption reduces the financial burden during inactive periods, while allowing captives to be easily reactivated when market conditions or insurance needs change.
“With the signing of P.A. 23-15 Connecticut reaffirms its commitment to maintaining a supportive and competitive captive insurance landscape,” said Commissioner Mais.
“The new legislation, combined with the state’s recognized expertise, competence, and innovation, solidifies Connecticut’s position as a premier domicile for captives.”
The new bill builds upon previous legislative changes enacted in 2022, when the state implemented other pro-captive laws.
GCP #88: Brian McNamara, Franck Baron and Pierrick Livet at RISKWORLD 2023
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.
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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
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
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Captive Intelligence provides high-value information, industry analysis, exclusive interviews and business intelligence tools to professionals in the captive insurance market.
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
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.”