In this GCP Short, produced in collaboration with Friends of the Podcast the State of Vermont, Richard is joined by Sandy Bigglestone, Director of Captive Insurance at the State, and others to discuss the recent surge in formation activity.
Dan Youngs, CFO at Lancaster County Solid Waste Management Authority (LCSWMA), explains why they formed a captive earlier this year. Sustainable Assurance Company actually became the 1,200th captive licensed by Vermont in its 40 year history as a domicile.
Steve McElhiney, of Artex, expands upon what made LCSWMA an ideal case for a new pure captive and the wider trends driving new formations.
In episode 47 of the Global Captive Podcast, supported by legacy specialists R&Q, Richard is joined by guest co-host Stuart Herbert, Practice Leader for Marsh Captive Solutions in Asia Pacific, for an episode focused on the region.
Stuart discusses the obstacles in the way of captive utilisation, the recent surge in new formations and captive enquiries, and the premier domiciles in the region.
The captive owner interview is with Nigel Jones, Insurance Manager at Australian freight and rail company Aurizon, and Juliet Kwek, Regional Director for MAXIS Global Benefits Network, discusses employee benefits trends in the region.
In this GCP Short, produced with Friends of the Podcast RISCS, Richard is joined by Oliver Schofield, Founder and Managing Partner of RISCS, and Glenn Ellis, a risk and insurance professional with more than 30 years of captive experience.
The trio discuss what the term ‘uninsurable’ means, how captives can such problematic areas and how to bring regulators and the reinsurance market along with you.
Season three of the Global Captive Podcast, supported by legacy specialists R&Q, kicks off with Pete Kranz, Captive Practice Leader at Beecher Carlson, joining Richard Cutcher as guest co-host.
Pete discusses the impact of the pandemic and hardening market on existing and new captive business over the past 12 months, as well as providing his views on the impact Washington State’s new premium tax on captives may have.
The captive owner interview sees a return for Carl Leeman, Chief Risk Officer of Katoen Natie, who reacts to the news several large European countries are considering introducing a new captive framework, the potential changes to Solvency II and how his own captive has responded to the hard market and pandemic.
Steven Beeghly, a Seattle-based corporate and regulatory insurance attorney, helps us make sense of the developments and new legislation coming out of Washington State.
The hardening insurance market dominated most conversations on the Global Captive Podcast in 2020, so how are existing captives meeting the challenge and what formation activity can we realistically expect as a direct result?
Aside from the pandemic, the hard insurance market has been the dominant conversation topic for the captive world over the past 12 months. Plenty of platitudes are shared as to it being a “good time for captives,” but captives are ultimately owned by insurance buyers. This is not a good time for them.
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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.
29 Years ago Mark became an Insurance and Reinsurance broker, working in London and Madrid.
In 2005 Mark became an Insurance and Reinsurance journalist. In 2008 he joined The Insurance Insider, which grew to be the most successful and influential insurance publication in the industry.
He is the only Insurance journalist to have had a career transacting international insurance and reinsurance business.
Well, that was fun. I’m glad I trousered all those exorbitant fees the stock arbitrageurs were offering while it lasted – such a situation will never happen again in my lifetime. Aon and Willis Towers Watson (WTW) have been reminded that two’s company and three is definitely a crowd. Now they have to go back to competing with each other for a living, instead of deciding who gets the corner office.
No-one can blame Aon CEO Greg Case or Willis boss John Haley for trying. It was a once-in-a-lifetime chance to cement a permanent place at broking’s top table and they embraced it. And it came within a whisker of happening.
Frankly no-one saw the US competition authorities coming because the US big client retail market is more competitive than anywhere else in the world. But for a few electoral college votes in the presidential election, there could so easily have been a different outcome.
The massive loser is Willis. Aon couldn’t lose. Imagine the war-gaming exercise it would have gone through years ago?
Scenario one – the deal goes through: you get to be the undisputed number one broker in the world, forever. You kill one of only two global broking competitors and you gain effective control over your clients. You synergise Willis into having the same margins as you do. The shareholders will love you.
Scenario two: the deal gets blocked. You destroy morale at one of only two competitors. Bits of it fall off. Willis people who thought they were an integral part of a global team find out that they are “remedy assets” to be discarded for the greater good. Human beings tend to react badly to finding out that they are disposable. Would you like to come into work one day to find you have been labelled “remedial”?
Scenario two also instigates a succession crisis. Practically the whole WTW board now has to go. Who will replace them? And who owns Willis stock today? Do they want to stick around or would they prefer a fire sale?
Marsh and everyone else can’t believe their luck. They have had the best possible outcome. Chaos and instability sowed in the hearts of rivals and opportunities opening up left right and centre – all at absolutely zero cost to themselves.
Willis is paying the price for its own defeatism. If you plan for failure, that’s what you get. We often gasp at the size of breakup fees, but a billion dollars doesn’t come close to the damage done to the Willis franchise. It’s chump change for Aon in the long term.
For example, selling Willis Re to Gallagher would have been unthinkable before all this kicked off. Willis Re is not a replaceable asset. Its slightly higher sale price does not reflect its utter uniqueness. It takes two generations and huge commitment to build a major reinsurance broker from scratch.
Yet the day the two-year non-compete is up on the deal, Willis will have to start doing just that. Even if every Willis Re executive had resigned I still wouldn’t have sold for any price. I would have defended the business to the death.
Willis is a unique broking asset that has been undervalued by its own leaders. It is a matter of perspective.
They saw being third in a global race of only three participants not as an opportunity to outgrow the other two and catch them up, but as a poisonous combination of a fixed global cost base with lower revenues and therefore permanently lower margins.
Each to his own. But there is no way anyone with the surname Lockton, Gallagher, Howden, McGill or indeed Plumeri would allow themselves to think in such a negative way! They would want to grow and innovate their way out of the problem. Successful broking CEOs are all eternally bullish, entrepreneurial and aggressive in equal measure. Yet somehow Willis lost its mojo and gave up.
Now it is like a boxer in a three-way contest that has tried and failed to concede. It threw in the towel and fell to the canvas, expecting to be counted out. Yet it somehow finds itself in the bizarre situation where the referee has pulled it to its feet, refused to ring the bell and is telling it to “get out there and fight, for the good of all of us!”.
Willis may not have believed in its ultimate value but the competition authorities certainly did. And you did too. In the last issue I implored you to give one last heave and ask regulators to block this deal. It worked, they listened.
Sometimes in life you simply have greatness thrust upon you. Now is one of those times for Willis. I implore you to re-engage with what is left of the broker and stick with it. Willis is punch-drunk, dazed, damaged and confused. It needs to rediscover some self-esteem.
It really needs a lift from the crowd and you can provide that boost with your loyalty. If you help it through this rough patch your reward will be a nimble and responsive alternative to the big two. You will be the ultimate winner.
But we don’t know what will happen, further leakage is inevitable and a break up of WTW and its remaining broking assets are distinct possibilities.
It all depends on how incoming CEO Carl Hess views the world. For me the job ad for John Haley’s successor should have comprised one simple sentence: “Wanted: someone who really believes in Willis.” We’ll see what Hess is made of soon enough.
Some captive insurers domiciled in European Union member states may be set for greater proportionality under Solvency II after the European Insurance and Occupational Pensions Authority (EIOPA) published its opinion in the latest stage of review of the insurance directive.
Fabrice Frere, Aon
Solvency II came into effect across the EU on 1 January, 2016 with the captive insurance market largely disappointed in their efforts to achieve a significant degree of proportionality for the self-insurance vehicles. This latest review by EIOPA has provided an opportunity for further progress to be made and the first responses are relatively positive.
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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.
29 Years ago Mark became an Insurance and Reinsurance broker, working in London and Madrid.
In 2005 Mark became an Insurance and Reinsurance journalist. In 2008 he joined The Insurance Insider, which grew to be the most successful and influential insurance publication in the industry.
He is the only Insurance journalist to have had a career transacting international insurance and reinsurance business.
London’s Covid-restricted Christmas provided a rare chance to get to know one’s neighbours a little better. I don’t mean in the sense of a renewed social covenant where we returned to an idealised version of the 1950s in which we all looked out for each other, arriving gaily on doorsteps unannounced, proffering baked goods and sage counsel.
No, my opportunity for fact-finding fell firmly into the nosy neighbour category. Being forced to celebrate the Holiday season alone left nowhere to hide.
Recycling boxes do not lie. Gone were the apocryphal fathers-in-law and their insistence on drinking hosts out of house and home. Banished were the maiden aunts and their addiction to pungent liqueurs with strange names.
As the refuse collectors wearily began their New Year’s clean-up, neither the flash nor the frugal had any excuses to hide. It was wonderful sport. And what holds true for suburban snooping also applies to global wholesale specialty and reinsurance renewals in 2020-21.
This year we found out exactly what the market’s true appetites were. I am happy to report that a thorough inspection of the global (re)insurance street’s refuse shows that these appetites are healthy.
The soft market excess has long gone. The pavement has not been littered with discarded jeroboams of vintage champagne since at least 2016, but there is early evidence that austerity will soon be coming to an end. Three years of rate rises, mostly in the primary insurance business, have begun to restore confidence in the underlying profitability of the overall book.
The net result is that on a global aggregated basis we are now at overall rating levels that most would be happy to maintain indefinitely. Meanwhile capital levels have recovered and are ahead of where they were a year ago.
We can also learn much from the fact that a long-flagged crunch in retro – the reinsurance that reinsurers themselves buy – was largely avoided. Some reinsurers bought less and instead sold catastrophe bonds, while some raised new capital and opportunistically switched from buyer to seller. Supply and demand managed to rebalance themselves incredibly quickly.
The only pockets of hardness that remain are the ones you already know very well about in the tough end of casualty insurance. Here it will still take time for capacity crunches to ease, but the core news is good.
After running scared to reinsurers for capital relief, readily swallowing harsh terms in previous renewals, the better insurers in these classes were finally happy to retain more of these risks unless reinsurers gave them sweeter deals. They are starting to regain confidence that after doubling prices and restricting cover, what they are writing now is very likely to be profitable.
A path to recovery
It cannot be long from here to recovery. When fear ends, greed is never far away! But there is one fly in the ointment. And it’s a big fat one. Ongoing Covid cover has disappeared, never to return.
Indeed, this renewal was far more about making sure that everyone was on the same page on this existential question than it was about remediating pricing levels. The industry took a look at a global systemic exposure of US$ trillions and swiftly concluded that this was not a commercially insurable risk. The bins on the street are overflowing with discarded disease exposure.
This renewal reinsurers inspected original wordings like a lottery winner frantically searching the laundry basket for a lost jackpot ticket. Except they weren’t looking for winners, but were on a mission to cut out potentially fatal covers hidden in underlying wordings. Only insurers that had never given original communicable disease cover avoided exclusions on their reinsurance treaties, but this was a moot point.
The assumption was that as 2021 works through, any underlying Covid exposure on insurance policies will expire and that all new and renewal insurance will be applying an appropriate exclusion. Like with the disease itself the strategy is one of containment and inoculation. If you want this cover you will need to fund this yourself. It is never coming back.
However, for the Covid losses already in the system from contracts on the books in 2019 and 2020 the news is somewhat better. Whilst still almost entirely comprising theoretical, incurred but not reported (IBNR), entries, the overall numbers look much more manageable than they looked before massive government aid packages and rapid vaccine development made a big dent in the most pessimistic loss assumptions.
Today Covid looks like costing the equivalent of a medium-sized ($US30-50bn) US landfalling Hurricane and one that the market expects to pay for very slowly over many years. Industry cashflows are likely to stay positive. The healthy capitalisation and relative vigour of the market also bodes well for disputes. In a beauty parade for newly profitable business in a cashflow-positive world, no-one will want to be known as the reinsurer who didn’t pay their Covid losses. The bill will be quietly eked out of profits for years to come.
The odd rumble of litigation is still going to be possible, particularly if aggressive cedants get creative about trying to aggregate business interruption claims into catastrophe excess of loss programmes, but this is unlikely to be a systemic problem. Stick to players with sensible proportional protections whose fortunes will be fully followed by their reinsurers and you shouldn’t be in for any nasty surprises.
So, should you be inviting yourselves around and looking for new long-term (re)insurance partners in 2021? By all means. The market is in good health and the best incumbents have further differentiated themselves. They are here for you now and have increased appetites at these more sustainable pricing levels. 2021 and 2022 should be years of continuity and increased pricing stability for consistent buyers.
And without exception the new class of 2020 neighbours who have just moved in are actually very seasoned players who know exactly what they are doing. Their pristine balance sheets may come in useful, so it is worth inviting them round soon to check them out. Lockdowns permitting, it will be time to meet the neighbours in 2021.
France’s Ministry of the Economy and Finance is developing a legislative and legal framework to create a more welcoming environment for captive insurers domiciled in France.
Historically, French organisations have typically utilised Ireland, Luxembourg, Switzerland and Malta for their captive insurers with the former two regulating the majority.
Five existing captives are thought to currently be domiciled in France, including AXA Global Re and a captive formed in early 2020 for payment services giant Worldline Group.
The French Association for the Management of Corporate Risk and Insurance (Amrae) has long campaigned for a more captive friendly regulatory environment in France and GCP Insights understands the Association is optimistic about the latest signals from the government.
Speaking on GCP #45 in December Fabrice Frere, managing director within global risk consulting for Aon in Luxembourg, said he would welcome the addition of France to the options of domiciles in Europe, but the French Prudential Supervision and Resolution Authority would have to prove itself as a reliable, long term partner of captives.
“The approach of the regulator, the proportionality given to captives, the facility given to captives to have an outsourced model and the governance framework that will be imposed,” Frere said.
“All of those elements will be key to determine how competitive France is as a captive domicile and how easy it is for French clients to set up their captives in France.”
Any French captive regime would have to follow Solvency II as all EU jurisdictions do, but the ability to build up equalization reserves could be adopted making it more comparable to Luxembourg as a captive domicile.
Regarding the potential for existing French-owned captives domiciled elsewhere to consider re-domesticating in the future, Frere said he did not believe there would be a rush to do so.
“Some of the clients are in specific domiciles for specific reasons. For example, in Dublin being able to write direct across Europe and access to the United States is driving a lot of the activity there, in Luxembourg being able to build eligible capital when you have very high catastrophe risk exposures,” he added.
“France will be on the list in the domicile comparison and when clients are assessing their strategic options, depending on what they want to do from a risk management and insurance underwriting perspective, we will have to compare France to some of the other options to make a decision.”
Guernsey has significantly reduced the set-up time for mono-line insurance cells in an effort to facilitate the growing demand for captive solutions.
The Guernsey Financial Services Commission (GFSC) introduced the preauthorisation for the creation of new cells within existing protected cell companies in December 2020. The pilot is expected to run until the end of 2021.
Artex was the first manager to complete a new cell formation under the scheme and Captive Intelligence understands several other managers are set to utilise the pilot in the coming months.
The Guernsey International Insurance Association (GIIA) contributed to the consultation with the GFSC to introduce the scheme.
“Because we’re coming out of this period where captives haven’t necessarily been flavour of the day, people are going through what is quite an educational process at the same time they start their renewal process,” Pete Child, head of European operations and managing director at Artex, said on GCP #45 in December.
“Quite often there was not sufficient time to be able to grasp what the captive concept meant, be able to allocate the finances and the time to set up a captive vehicle and then take advantage of that at renewal.”
Child said as a result often the client would run out of time and have to put off formation for 12 months or not complete at all.
“What we wanted was a solution that made the cell captive a fundamental and realistic alternative to the traditional, whole risk transfer renewal all the way up to as close to the renewal as possible,” he added.
The scheme is only open for protected cells within an existing PCC that is owned by a licensed insurance manager. Only cells that are writing a single line of insurance qualify.
“Insurance managers in Guernsey are licensed,” Child said. “Therefore if a manager was to go through this process and there were some unwanted ramifications then that insurance manager is putting the whole of its business in jeopardy, because the GFSC, if it chose to do so, could impose restrictions on its licence or remove its licence.”
