The utilisation of existing captives is rising as a consequence of the hard commercial market, according to a recent AM Best Market Segment Report.
In the Report published on 6 November, the rating agency said several captives have increased their participation on existing covers, as well as expanded into new lines of business as their parents have looked to increase captive utilisation and diversify portfolios.
The hardening cyber market has led to more captives writing this risk, with commercial market cover often being expensive and restrictive.
There has been an overall uptick in the number of captives domiciled in Europe, as existing domiciles remain popular, and other jurisdictions put in place legislation to attract new captives.
More captives were licensed in 2022 than closed, and AM Best said there are indications there will be further growth in 2023.
The ratings agency also said that while the hard market provides opportunities for captives, it also presents challenges.
Many captives are dependent on reinsurance capacity to be able to offer large limits required by their parent groups.
The reinsurance market has trailed the commercial market in terms of price increases in recent years, but with significant catastrophe losses and inflation in 2022, reinsurance is now in a hard market.
As a result, captives have faced price increases for their reinsurance programmes in the 2023 renewals and many increased their retentions.
Solvency II
A review of Solvency II enacted by the European Commission (EC) in 2020 is currently on-going, and there is one potential alteration concerning the principle of proportionality which will be of interest to captives.
Under Solvency II, the principle of proportionality is currently applied to ensure that practices taken by supervisory authorities are proportionate to the risk of the insurer and reinsurer.
As captives are often small and lightly staffed operations, this principle of proportionality is supposed to ensure that regulatory requirements do not become overly burdensome.
The EC has acknowledged that this high-level principle has been “insufficient” in reducing the regulatory burden for small insurers.
The EC proposals aim to address this by introducing specific proportionality measures that can be applied by low-risk profile undertakings automatically and by other insurers after supervisory approval.
“This should lead to a more streamlined, proportionate, and risk-based prudential process for captive entities,” AM Best said.
IFRS 17
European captives reporting under International Financial Reporting Standard (IFRS) are currently working to implement the transition from IFRS 4 to IFRS 17, which came into effect on 1 January 2023.
AM Best has noted varying levels of readiness for IFRS 17 implementation among captives.
“Some started the project early and have reported quarterly numbers to their parent under IFRS 17 since the first quarter of 2023, while others started later and are working towards being ready for the year-end 2023 reporting deadline,” AM Best said.
CICA president Dan Towle believes we are living in the “Golden Age” of captive insurance, as we see large numbers of new companies establish captives, greater utilisation than ever before is facilitated and large industrial countries introduce more captive friendly legislation.
Towle made the comments when speaking at the opening address of the European Captive Forum in Luxembourg this morning.
“I have been in captive insurance for nearly thirty years and like many of you have navigated hard and soft market cycles and worked through periods where our industry was constantly under attack,” he said.
Subscribe to the Captive Intelligence newsletter to receive our FREE twice weekly updates with links to news, analysis and podcasts.
“Captive insurance has now proven its business purpose and value over a prolonged period of time. We still have our sceptics and our detractors, but no one can legitimately refer to the captive industry as the alternative market any longer ─ we have reached the Golden Age. A time when captives are thriving.”
Towle noted the “challenges and growing pains” the captive industry has faced during previous decades, including scrutiny and misunderstanding from regulatory authorities and the mainstream media.
“As more businesses turn to captive insurance, the captives are becoming more sophisticated than ever and are more strategic than they were a decade ago,” he added.
“New technology, better data and evolving risk strategies are giving captives the edge in providing coverage ahead of what the commercial market can provide.
“It is exciting to see this growth and expansion. I believe this gives us a unique opportunity to highlight the value of captive insurance to an even wider market. The captive insurance industry is often misunderstood by the mainstream media, governing regulators and others.
“That said, we need to continue to be diligent. As we continue to grow, we attract more attention and we need to consistently educate, lobby and defend the use of captives for better risk management and financial efficiency. Despite our success, we cannot rest on our laurels.”
More French companies are becoming less reluctant to take the “next step” toward captive utilisation following the introduction of the country’s new captive legislation, according to David Vigier, director of captives services and claims strategy at HDI Global.
After numerous delays, the French legislator introduced its new regulatory system in 2023 designed for reinsurance captives and inspired by the regulatory framework in Luxembourg.
In June, the French government confirmed the details of its equalisation reserve, publishing a decree stating the provision can reach 90% of the technical result within 10 times the minimum capital requirement (MCR).
Subscribe to the Captive Intelligence newsletter to receive our FREE twice weekly updates with links to news, analysis and podcasts.
“There are a lot of captive creation studies ongoing in France and we expect captives to expand to some corporations that were previously reluctant, for many reasons, to take that next step,” Vigier said.
“In the past few years French companies did not want to have a captive in Luxembourg, Ireland or some other places. It was perceived to be complex and there might be some reputational risks linked to it.”
He highlighted that corporations across Europe that previously did not own captives are now looking at captive utilisation, particularly for risks such as property and liability.
“These are the classes of risks traditionally written by captives when it comes to working layers and attritional risks,” Vigier said.
For those companies that already have captives, he is witnessing a diversification of portfolios.
“This shows the necessity that corporations have to make up for the commercial market’s lack of appetite for certain classes of business,” he said.
“I have got a crazy example of one captive writing 16 different classes of risks.”
He said companies wanted to diversify their portfolios as it helps provide balance and stability within the captive.
Although there is a growing number of domiciles in Europe, Vigier said competition will not be an issue, with each jurisdiction creating a nuanced captive environment that will attract companies with different priorities.
“In Ireland, it’s mostly about corporate tax, which is low compared to other places,” he said.
“Luxembourg and France, to a certain degree, are more about building insured risks related provisions over time, with a limited tax impact, so they are very different.”
With the current captive activity, Vigier said there is an appetite at HDI to “be in the game”.
“We’ve got very strong qualities when it comes to underwriting and to claims,” he said.
“We are very focused on industry all-risks, and we’re focused on major accounts, but with a growing appetite for middle market accounts.”
Iowa is looking to employ its first captive insurance director, following the passing of its captive legislation in April.
The captive insurance director of the Insurance Division will be responsible for implementation and administration of new regulatory responsibilities enacted by the Iowa State Legislature in Senate File 549.
On April 24, the Iowa Senate unanimously passed Senate File 549 as amended, “a bill for an act relating to captive insurance companies,” which the House passed earlier in April.
Captive Intelligencereported in June that Iowa was likely to become the next US state to embrace captives, making it the 36th US jurisdiction to adopt captive legislation (including the District of Columbia).
SF 549 authorises the formation of pure, association, protected cell, special purpose and industrial insured captives.
When the bill was passed, it was noted that the state will have specified captive insurance regulators, and the Insurance Division will establish a captive insurance bureau.
In October, the Texas Department of Insurance (TDI) re-hired Robert Rudnai as a captive specialist, where he will be responsible for licensing and monitoring Texas-domiciled captives.
The US Department of Labour has “tentatively” granted a United States’ Employee Retirement Income Security Act (ERISA) benefits exemption to Fedeli Group, which would allow the company to utilise its captive to write employee benefits cover.
The exemption would permit the Fedeli Group’s to enter into a fronting contract with THP Insurance Company for its EB cover, which would then reinsure the risk back to Fedeli’s captive, Risk Specialists LLC.
The Fedeli Group is a risk management and insurance firm based in Ohio, and its captive is domiciled in Tennessee.
The firm specialises in property and casualty, employee benefits consulting, workers’ compensation, environmental risk management and surety.
The company had evaluated two different approaches to provide the benefits payable under its benefit plan and the effects on the costs from each.
The first contemplated using a third-party, while the second option was to utilise its captive.
Based on actual values from the benefit plan’s 2023 financial statement, the annual premium under the third-party approach would have been $2.3m compared to the $2.1m annual premium from the captive.
There had previously been four and a half years between successful ERISA applications, but there has been a renewed sense of optimism in the process following approvals of the Comcast and Phillips 66 programmes in early 2022.
Clients are told to expect a timeline of 12 months from start to finish of the process.
Fedeli calculated that the total annual cost savings by utilising the captive would equal a $162 monthly contribution reduction per person.
As of 19 September 2023, the benefit plan covered 64 participants.
“Based on Fedeli Group satisfying the conditions described above and the representations made in its exemption allocation and communications with the Department, the Department has tentatively determined that the relief sought by the applicant satisfies the statutory requirements for an exemption under ERISA section 408(a),” The DoL said.
Captive Intelligence understands the DoL is in the process of reviewing its entire exemption programme, providing a new regulation proposal last year to potentially change the rules that govern the process.
In episode 95 of the Global Captive Network, supported by the EY Global Captive Network, Richard is in Nashville, Tennessee to find out the latest from independent captive manager, Strategic Risk Solutions.
01.55 – 13.27: CEO Brady Young and president Ron Sulisz discuss the firm’s recent inward investment from Integrum Holdings LLP and its future plans for growth.
13.57 – 26.50: Captive owner Tony Sanchez, CEO of OneNexus Environmental, explains his fairly unique captive in Oklahoma, with Andrew Marson, a managing director at SRS. Read more about OneNexus here.
27.20 – End: Our last discussion is with Jeff Fitzgerald, who returned to the firm in August as managing director of a new division, SRS Benefit Partners, and Wendy Dine, an experienced benefits specialist with SRS for 11 years.
SRS announced today it had launched SRS Altitude, a managing general underwriter based out of Zurich. Read that story here.
Independent captive manager Strategic Risk Solutions has launched SRS Altitude, a managing general underwriter (MGU) that will focus on alternative risk transfer solutions, led by Loredana Mazzoleni Neglén.
An experienced Swiss Re executive of more than 20 years, Neglén has joined SRS Altitude as global CEO with several more “seasoned ART and corporate insurance industry experts” expected to join in the coming months.
SRS Altitude will begin operating in the first quarter of 2024 with structured (re)insurance and parametric products at the centre of its offering.
Subscribe to the Captive Intelligence newsletter to receive our FREE twice weekly updates with links to news, analysis and podcasts.
“We are thrilled to introduce Altitude as an integral part of our long-term commitment to providing exceptional client service,” said Brady Young, CEO of SRS.
“The launch of Altitude represents a significant milestone in our ongoing efforts to diversify our offerings and enhance our ability to differentiate and meet the evolving needs of our valued clients, captives and broker partners.”
SRS said Altitude would operate as an “independent entity under the SRS umbrella”, and is a “strategic move aimed at expanding its client services portfolio, offering a comprehensive suite of ART solutions designed to address the growing complex risk management challenges and needs of corporate clients across industries”.
Captive Intelligence understands SRS Altitude is in discussions with several potential capacity partners, including large multinational insurers, while the distribution model will draw on both the SRS portfolio of clients and broker networks.
Ron Sulisz, president of SRS, told Captive Intelligence entering the MGU business had been an ancillary service strategic initiative for SRS, and since the recent investment from Integrum Holdings LLP it has been able to explore more strategic opportunities.
“SRS Altitude will allow us to expand our alternative risk transfer products offering for our more sophisticated clients due to their expertise in structured reinsurance and parametric products,” he said.
“Our clients are exploring the range of insurance offerings, so these high-level solutions are becoming more interesting and relevant to them.
“The structured reinsurance and parametric products have more prevalence in the EMEA market, which is where our initial focus will be, but we will be expanding our geographic footprint in due course with additional offices and hires.”
AM Best has affirmed the financial strength rating of ‘A’ (excellent) and the long-term issuer credit rating of “a” (excellent) of Barbados-domiciled ICM Assurance (ICMA).
ICMA is a single parent captive, wholly owned by CNOOC International, which is in turn wholly-owned by CNOOC Limited (CNOOC), the ultimate parent. The outlook of the credit ratings is stable.
CNOOC Limited is one of China’s largest producers of offshore crude oil and natural gas.
The captive provides global liability and property coverages to its ultimate parent and affiliates.
ICMA is considered a core element of CNOOC’s overall risk management and risk mitigation programme and serves a “critical role” in delivering coverage and access to reinsurance.
The ratings reflect ICMA’s balance sheet strength, which is assessed as strongest, as well as its adequate operating performance, neutral business profile, and appropriate enterprise risk management (ERM).
The ratings incorporate AM Best’s view of ICMA’s exposures diversified globally among countries with predictable or developing legal, business and regulatory environments.
AM Best expects ICMA’s level of risk-adjusted capitalisation, as measured by Best’s capital adequacy ratio (BCAR), to remain at a similar level prospectively.
The balance sheet strength assessment considers ICMA’s low underwriting leverage and liquidity measures.
ICMA’s surplus consists of capital and underwriting profits retained in the captive and loaned back to the parent.
The loan is repayable on demand with counterparty risk curbed due to the affiliation and the aligned interests of the two companies.
The captive’s gross loss potential is elevated as it remains exposed to high severity events, due to the nature of the insurance ICMA provides for CNOOC’s oil and gas exploration.
This risk is partially offset by safety programmes and loss control provided by CNOOC, while reinsurance protection is placed to limit the captive’s net exposure.
ICMA has reported solid operating results, aggregating significant net operating profits recorded over the past five years.
“The captive’s loss experience remains favourable due to infrequent material catastrophic events, management’s knowledge of the business and strong loss control programs at parent level,” AM Best said.
Vittorio Zaniboni is captive and insurance excellence leader at EY Luxembourg. Before joining EY in September 2022, Vittorio was chief insurance officer at General Employee Benefits.
In the intricate world of corporate risk management, Employee Benefits Captives (EBCs) have risen to prominence as essential tools for organisations seeking innovative ways to address the biometric risks of their employees and their families.
Within this framework, disability risks play a central role in providing financial security to employees facing disabilities. In this article we will provide a thorough exploration of EBCs and their approach to disability risks, with a specific emphasis on the complexities linked with disability annuities.
The role and differing structures of disability benefits
Disability annuities, within the realm of EB, serve as the linchpin for effectively managing and mitigating the financial consequences of disability for corporate employees.
These annuities are contractual arrangements that provide periodic payments to employees who have become disabled, thereby replacing a portion of their lost income. By incorporating disability annuities into their EBC structures, organisations can ensure that their workforce receives reliable financial support during times of adversity.
Disability benefits can be provided under different forms, and according to different triggering events: in some cases the benefits are provided as a lump sum (typically in case of total and permanent disability), or an annuity, with different benefit structures in case of short-term or long-term disability.
In some cases the disability benefit is also provided under the form of a premium waiver for the death cover, or the contribution to the old age pension plan.
Subscribe to the Captive Intelligence newsletter to receive our FREE twice weekly updates with links to news, analysis and podcasts.
The structure of the disability benefits provided in the various markets is heavily dependent on the local social security set-up and local market specificities.
In Anglo-Saxon markets there is a prevalence of annuities, while in South American and South European markets the lump sum is more widely present.
While the lump sum form is relatively more straight forward, both in terms of pricing and portfolio management, the annuity form, mixing both morbidity and longevity elements, brings to the risk-taker more elements of uncertainty and volatility.
A key point of attention linked with disability annuities is the mathematical reserves (and the IBNRs) set aside following proper actuarial evaluations, to properly represent these contracts in the balance sheet of the insurer.
Several considerations and assumptions play a crucial role in the assessment of these reserves, namely:
New claims notification timing and pattern
Mortality rates for disabled lives
Return-to-work assumptions
Financial return of assets backing the liabilities
Any change in the evaluations of the points above can determine a major shift in the absolute amount of the disability reserves accounted in the balance sheet.
A snapshot of disability coverage within captive EB portfolios
In terms of size, disability covers represent a significant share within captive EB portfolios.
The EB portfolios managed by captives worldwide have been growing significantly in the last years, with a CAGR close to 20% in the last five years, and the current global EB captive GWP, mediated by the major EB networks, sits at more than €2bn.
Out of this €2bn, around 20% is linked to disability contracts, and within the disability book, disability annuities represent on average 85% in terms of GWP.
These volumes are projected to grow steadily, driven by increasing awareness of the importance of financial protection in the event of disability.
The countries where captives are more exposed to disability annuities are UK, Canada, France and Ireland, which alone contribute typically for more than 50% of the global disability annuity portfolios ceded to captives.
Considerations for establishing a successful disability annuity program in an EBC
In general terms, creating a successful disability annuity programme within an EBC demands meticulous planning and consideration.
Here are practical recommendations for managers seeking to underwrite disability risks within this specialised context:
Thorough Risk Assessment: A disability risk assessment is necessary for EBCs to identify their exposures and develop risk mitigation measures proactively. Disability risk assessments should cover several areas, including the nature of the exposure, the demographics of the workforce, their roles, and the potential financial impact of disabilities.
The assessment process should be conducted regularly to identify any emerging risks. By conducting regular assessments, EBCs can identify trends and adjust their coverage accordingly.
Understand the Nature of Disability Risks: The first step in managing disability risks for EBCs is to understand their nature. The risks of disability can be classified into two categories: the risks of long-term disability (LTD) and the risks of short-term disability (STD).
Long-term disabilities refer to a disability that lasts for an extended period and prohibits an individual from performing their duties permanently or for a prolonged timeframe, whereas short-term disabilities only last for a limited period (typically less than six months).
Understanding the nature of disability risks is essential as it helps in developing effective strategies to manage the risks. EBCs can create a disability risk model to understand the potential impact of these risks.
Customisation is Key: Tailor disability annuity programs to align with your organisation’s unique needs. Ensure that coverage levels and benefit structures are in harmony with the results of your risk assessment.
The involvement of the captive as final risk-taker presents the unique possibility to offer, to the local workforce, insurance conditions which might not be easy to obtain in a standard client/insurer relationship. The captive should capitalise on this opportunity for flexibility.
Engage Actuarial Expertise: Collaborate with actuaries specialised in disability risk modeling to accurately assess and price these risks. Actuarial data is essential for setting appropriate premium rates and reserves, and in general necessary for proper portfolio management.
If not accurately assessed and governed, disability liabilities cumulated over the years can potentially endanger the stability of the captive balance sheet. Considering the significant impact that small changes in the local product design can have on the relevant liabilities (indexation, possibly linked with CPI Indexes; interactions with local Social Security systems; waiting periods etc.), having the possibility to rely on actuaries with specific knowledge of the local markets is key.
Efficient Claims Management: Establish robust claims management processes that are both efficient and empathetic. A streamlined claims process is essential for disabled employees relying on timely benefits, and the direct involvement of the captive (in conjunction with local HRs) plays a fundamental role.
One of the most effective ways to manage disability risks is by implementing return-to-work programmes. Return-to-work programmes encourage employees with disabilities to return to work as soon as possible after an injury or illness.
By implementing and/or supporting such programmes, EBCs can reduce the total cost of claims, provide employees with a sense of purpose, and reduce the risk of long-term disability. Return-to-work programmes should also include physical and psychological rehabilitation, access to modified jobs, and other support services necessary for successful recovery (e.g. Employees Assistance Programmes – EAP).
Offer Health and Wellness Programmes: EBCs should also provide health and wellness programmes to their employees. Such programmes can help reduce the risk of disabilities by promoting preventive measures and encouraging healthy lifestyles.
Programmes could include access to fitness centers, nutrition education, stress management and mental health support. Offering employee incentives for participating in these programmes can also encourage higher participation rates.
Some captives even facilitated the local implementation of H&W initiatives, by setting up a system of “credits” linking these initiatives to discounts on the medical and disability premium rates. This approach must be implemented with caution, as the effects of H&W initiatives tend to impact the financials of the insurance contracts only in the medium/long term, and assuming immediate effects on the local claim ratios, can generate negative impacts on the captive P&L.
Collaborate with Medical Professionals: EB captives should collaborate with medical professionals to ensure that their employees receive excellent healthcare and rehabilitation services. Collaboration with medical professionals can provide valuable insights into different types of disabilities and how to manage them. Medical professionals can help identify potential risk factors, recommend appropriate interventions, and offer guidance on return-to-work programs. Collaboration with medical professionals can also help in identifying options for alternate work arrangements that would help an employee return to work sooner.
Transparent Communication: Effectively communicate the availability and benefits of disability annuities to your employees. Transparent communication fosters trust and ensures that those in need are aware of the support available to them.
Regular Review and Adaptation: Continuously review and adapt your disability annuity programme as your organisation evolves. Changes in workforce demographics or regulatory requirements may necessitate adjustments.
Conclusion
In conclusion, EB captives have emerged as key tools for organisations seeking innovative solutions to manage disability risks effectively. Disability annuities, when incorporated into EB programmes, represent an effective and efficient means to protect employees from financial hardship during times of disability.
The market statistics underscore the rising significance of disability annuities within the realm of EBCs, emphasising their potential for financial security and cost savings.
In an era where safeguarding the financial wellbeing of employees is paramount, disability annuities stand as a beacon of security, offering a win-win scenario for both organisations and their workforce.
It is a testament to the power of innovation and customisation in modern global corporate risk management.
The views expressed are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or any other member firm of the global EY organization.
AM Best has affirmed the financial strength rating of A (excellent) and the long-term issuer credit ratings of “a+” (excellent) of Vermont-domiciled Ameriprise Captive Insurance Company (ACIC).
The captive is a subsidiary of Minneapolis-based Ameriprise Financial.
ACIC provides various coverages to its parent including errors and omissions policies, a workers’ compensation deductible reimbursement policy, fidelity bonds and property terrorism (conventional and nuclear, biological, chemical or radiological).
The ratings of ACIC reflect its balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, limited business profile and appropriate enterprise risk management (ERM).
ACIC benefits from rating enhancement due to its importance as a single parent captive to the parent.
AM Best assesses ACIC’s business profile as limited due to its narrow market focus as a single parent captive serving only its parent for a limited amount of exposure.
The captive has a strong operating performance as demonstrated by its five-year average pre-tax return on revenue and equity ratios that compare favourably with the averages for AM Best’s commercial casualty composite.
