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Legacy management an increasingly valuable tool for captives – Ryan Heyrana

Luke Harrison
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Legacy management an increasingly valuable tool for captives – Ryan Heyrana

Brown & Brown launched an in-house captive offering for legacy solutions earlier this year because it identified it as an increasingly valuable risk, balance sheet and capital management tool for captive clients.

Brown & Brown, previously through Beecher Carlson, has long provided captive consulting and management services, across the United States and offshore but Ryan Heyrana joined as vice president of legacy solutions, from run-off specialists DARAG, in March 2023.

“There was value in having the ability to offer this specialisation to customers and prospects as an in-house offering,” Heyrana told Captive Intelligence.

Heyrana said being in a position to not only prospectively place a programme but also look at historical liabilities and the “full breadth of retained exposure to identify opportunities” has been popular with customers.

“Particularly because they did not know that it was available to them to improve their overall risk portfolio,” he said.

He said his primary focus is to bring capital solutions, volatility solutions, and operational management solutions to existing and prospective Brown & Brown retail customers.

Heyrana highlighted that the retail corporate market has always been an underserved market in the legacy space, as the transactions tend to be smaller.

“It is rare to find a retail customer with several billion dollars of liabilities on their books,” he said.

However, he said that nine-figure captive deals are not out of the ordinary for Fortune 500 companies with large amounts of workers’ compensation, general liability or other retained exposures on their books.

“There is an active market for much smaller transactions as well,” he added.

Heyrana said that when in discussions with directors of risk management and the decision makers within retail customers, a vast majority of them are unaware that they can “eliminate or relinquish” their legacy liabilities.

“Since starting in this role in March of this year, it has really been an education campaign, not only for our retail customers but also for our retail brokers whose primary focus is the efficient structuring of insurance programs,” he said.

He noted that one of the misunderstood parts of the legacy space is that it is not an “all-or-nothing” transaction.

“You can take a portion of the risk, whether it’s old risks, a certain set of policies, or a certain kind of business that doesn’t suit you and has negative capital implications and find a solution for those ringfenced liabilities,” he said.

Disaster response fund launched using Guernsey SPV

Luke Harrison
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Disaster response fund launched using Guernsey SPV

The International Federation of Red Cross and Red Crescent Societies (IFRC), in collaboration with Aon, Lloyd’s Disaster Risk Facility and the Centre for Disaster Protection, is launching a disaster response fund.

The transaction has been completed through a Guernsey special-purpose vehicle (SPV) managed by Aon and uses other Guernsey vehicles in its structure. 

The new insurance tool provides the IFRC’s Disaster Response Emergency Fund (DREF) with contingency funding of up to £18m.

Paul Sykes, managing director at Aon Guernsey, said the achievement was the Guernsey insurance industry’s “finest hour yet” as it will allow the Red Cross, potentially, to reach an additional six million people each year. 

“It is another watershed moment for the industry, demonstrating that it can address the protection gap and rising humanitarian needs,” he said.

Once DREF’s allocated funding for natural hazards hits £29m, the reinsurance is triggered to replenish DREF’s reserves to ensure that extra funds are available to provide aid to vulnerable communities, even during periods of increased demand.

IFRC’s ambition is to grow the fund every year to reach £89m in 2025.

Andrew Mitchell, minister of state for development and Africa, UK foreign, Commonwealth and development office, said: “Climate change is devastating the lives of millions around the world.

“With natural disasters on the rise, this innovative new insurance will provide extra funding for life-saving emergency assistance.”

Ogier’s Banking and Finance team in Guernsey provided counsel to the IFRC for the establishment of the Guernsey structure.

Paul Hodgson, his team and Tom Lees from Butterfield Guernsey also provided support around a trust structure. 

Ogier’s team in Guernsey was led by partner Christopher Jones, with managing associate Matthew Macfarlane.

“This is the first time an indemnity-based reinsurance model has been developed within a humanitarian disaster risk finance context,” Jones said.

“We’re delighted to have advised our client alongside Reed Smith on this pioneering, innovative and ambitious project which will provide extra funding for life-saving emergency assistance.”

More clients turning to risk incubation – Matt Latham

Richard Cutcher
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More clients turning to risk incubation – Matt Latham

Utilising a captive to put a more formal structure around previously uninsured risks is becoming more common, according to Matthew Latham, risk transfer leader in the financial solutions group at Marsh.

Latham joined Marsh in December 2021, having previously worked on the captive fronting and global programmes side of the business with AXA XL, AIG and Ace for the past 20 years.

His team works closely with analytics colleagues on risk finance optimization (RFO), assessing a client’s ability to retain risk, their risk tolerance and appetite.

“We do the analytical work on their losses and work with the placement brokers to understand what it would cost to transfer the risk into the market,” Latham said, speaking on episode #94 of the Global Captive Podcast.

“We try and find the optimum point of which risk they would like to retain and which they would want to transfer. That then leads to a programme design discussion and sometimes we’ll suggest some innovative solutions.

“One part of the transaction piece is that we look to place non-traditional insurance, or reinsurance more normally into the market. It’s going to be a combination of lines of business, not just one individual line so multi-line, or it could be multi-year.”

Latham said around 75% of the programmes they work on with clients will have a captive involved in the solution with risk incubation becoming increasingly common. In such cases, he works closely with the Marsh Captive Solutions team.

“They’re wanting to utilise their captives for more risks and they’re wanting to see how they can take a risk which is currently uninsured on their balance sheet and put some more structure around it,” he explained.

“You can gather data, you can bring the company’s focus onto that risk, give it a bit of a spotlight.

“Over a period of time with the captive underwriting that risk, you can get to the point where you could be able to take it to an insurance market to actually start to take some real risk transfer once you understand that risk better and you’ve put in place risk mitigation measures.

“The alternative would be you carry on retaining it on your balance sheet, but you would then have to take the volatility on your balance sheet. Say it was the type of risk where you might have a loss once every 10 years, you have nine years with no hits to earnings, and then you have a hit to your earnings.

“If you’re putting it in your captive, you can have some budget stability over that period of time, build up reserves, and then when the loss happens, the captive takes that rather than have it on the balance sheet of the operating companies. It also provides the captive with a bit of extra diversification.”

Listen to the full interview with Matthew Latham from 27 minutes into episode 94 of the Global Captive Podcast, here on Captive Intelligence or any podcast app. Just search for ‘Global Captive Podcast’ and hit follow or ‘subscribe’.

Regulatory understanding and responsiveness will be key to UK domicile success

Richard Cutcher
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Regulatory understanding and responsiveness will be key to UK domicile success

While London’s leading position as a global risk transfer centre and the insurance expertise already in place will be the unique selling proposition of a UK captive domicile, regulatory understanding and responsive will be the ultimate factor as to whether it succeeds or not.

Captive Intelligence reported last month that the UK government’s City Minister Andrew Griffith MP, also Economic Secretary to the Treasury, hosted a roundtable meeting on 18 September with the London Market Group, regulators, Airmic, captive owners, brokers and insurers to discuss the viability of introducing a captive regime.

The LMG has proposed an ambitious captive regime to ensure it can be viewed as a competitive option alongside established, international domiciles, calling for a new class of ‘captive insurer’ that would not be regulated under Solvency II or its proposed replacement, Solvency UK.

Speaking on episode 94 of the Global Captive Podcast, LMG CEO Caroline Wagstaff explained why the group is lobbying for this initiative, while Charles Winter, head of strategic risk consulting at Aon Global Risk Consulting, noted what made a successful domicile and the potential appeal of the UK.

Wagstaff said that as the world’s leading insurance and risk transfer hub, it felt odd that captives did not have a place in London.

“The driving imperative for us is that London is the global risk transfer centre of the world,” Wagstaff said.

“It writes more premium than any other insurance centre, but there is no captive regime, no captives here in the UK. We feel that if you’re going to be the global centre of risk transfer, you need all the tools in the toolkit.”

She highlighted the LMG’s work with Treasury to introduce an insurance linked securities (ILS) regime in 2017, and once that was “ticked off the risk transfer list”, captives were the next target.

“Captives seemed like a very obvious thing to start looking at, particularly, in the sense that we hit the right bit of the cycle,” she added.

“Prices are rising, demand for risk retention is growing. People are looking at new types of risk and how they manage that. It just seemed like the stars were aligning that should be something we should look at.”

Winter said between 60% and 70% of UK-owned captives are domiciled in Guernsey and the Isle of Man, while jurisdictions such as Bermuda, Ireland and Gibraltar lead the way after the two nearshore financial centres.

“The key starting point is really a regulator that understands that a captive is not a commercial insurance company,” Winter said, in comments similar to those made by Airmic last month.

“Once you have that everything else sort of flows with it, that you don’t have the systemic issues, you don’t have the same consumer protection issues. What that boils down to is the word we’ve mentioned already, and I’m sure we’ll mention again, ‘proportionality’.

“What gets the attention is things like capital regimes, the amount of capital initially required, the solvency regime around it, but in some ways, as important as that, are things like the mechanics of actually making it happen. That would be: what are the reporting requirements, how frequent, how detailed? What are the governance requirements, can we continue to use outsourced staffing models which is key to the way the majority of captives operate.

“Then that feeds through to manageable cost, it feeds through to burden on management time for what is a vehicle to facilitate core business, not core business in itself as it would be for an insurance company.”

Winter also highlighted the importance of regulatory speed and responsiveness.

“Captives have different planning cycles to commercial insurers,” he added. “Their business plans are very specific, usually to a set of policies as opposed to a market.

“Which means when things change into renewal, you’re working to days or weeks to sort things out, not months. So that responsiveness is key. The domiciles that are successful at building captives usually have that.”

The LMG believes primary legislation will not be required to be passed by Parliament to introduce a ‘captive insurer’, meaning their aims can be achieved through secondary legislation.

“We need the rule book to be changed, but mainly we need the Prudential Regulation Authority (PRA), as Charles has said, to understand that these are a completely different class of insurer,” Wagstaff added.

“We want to work really closely with the PRA to help make them comfortable about where the risks may and may not fall, and that they can respond in a way that is going to make this an attractive regime.

“It could be perfect on paper, but of course if the regulatory delivery is not what it needs to be then we’re sort of in a worst of all possible worlds. One of the biggest investments of time that we want to make is to get the PRA to the place that makes them happy.”

GCP #94: Can the UK become a captive domicile?

Richard Cutcher
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GCP #94: Can the UK become a captive domicile?
Caroline Wagstaff, London Market Group
Charles Winter, Aon
Matthew Latham, Marsh

In episode 94 of the Global Captive Podcast, supported by the EY Global Captive Network, Richard debates the potential for the UK to become a captive domicile after the Government hosted a roundtable on the topic.

02.18 – 26.00: Caroline Wagstaff, CEO of the London Market Group, which is lobbying hard for the initiative, and Charles Winter, Head of Strategic Risk Consulting at Aon Global Risk Consulting, discuss the background and analyse its potential for success.

27.25 – 44.00: Matthew Latham, formerly of AXA XL, Risk Transfer Leader in the Financial Solutions Group at Marsh, discusses reinsurance trends and solutions for captives, parametric policies and the legacy environment.

Read the Captive Intelligence coverage of the UK captive domicile developments here, and Airmic’s response here.

Stay up to date with all major developments in the captive market by signing up to the twice-weekly Captive Intelligence Newsletter.

Momentum continues on feasibility studies – Aon’s Elizabeth Steinman

Luke Harrison
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Momentum continues on feasibility studies – Aon’s Elizabeth Steinman

Elizabeth Steinman, managing director of risk finance & captive consulting for the Americas at Aon, is probably involved in twice the number of captive feasibility studies than she was four years ago, with many clients revisiting the captive concept for the second time.

“The last few years have just been really busy,” she told Captive Intelligence.

Steinman said a lot of the studies she is involved in are refresh studies, occurring when the broker has already provided a captive feasibility study for a company a few years prior.

“Now they are coming back and realising they need it,” she said. “We then refreshed that study and the majority of them are moving forward with the captive formation.”

Steinman said the increase in studies is largely because each year for around the past five, there has been an “increase on top of an increase” when it comes to commercial market pricing.

“It’s very frustrating, and our clients feel is unwarranted,” she added.

“They’re also getting their terms and conditions tightened. Some are being required to take higher deductibles, and some markets are leaving the property arena altogether.”

Steinman said that when terms and conditions are being taken away, the captive can write policies to fill the gaps.

“It can also fill in parts of the tower where they feel it is out of whack with the rest of the tower pricing wise, or if they cannot fill the tower because of capacity issues,” she said.

Steinman said that if a company forms a captive regardless of what happens at renewal, they are then in a good position to be “nimble and pivot” to either add coverage or do what they need to do in order to make their renewal “look like they want it to”.

She also said that a client might be “very active” in utilising the captive for a few years, but then they might have a year where they don’t write any new business because they “just don’t need it”.

“Then the business that is in there is still churning along, but then it is there when you need it, and you will inevitably need it it given the fluctuations in the insurance market.”

Steinman said some of the first risks US clients put into a captive include workers’ compensation, general liability, and auto liability.

“They have the more predictable losses, and you get good risk diversification, especially if you are going to put in something like cyber or property, which have a completely different risk profile,” she explained.

Steinman said medical stop-loss is another popular line that works well for clients who have good loss experience.

“We find that if they take a portion or all of the medical stop-loss risk, they can experience savings by not paying premium to the market, and instead just paying for the claims that fall within that layer,” she said.

When it comes to domicile selection, Steinman said she starts by having a discussion with clients to “narrow down the playing field”.

“We come up with around six domiciles based on their objectives, and what’s important to them,” she said.

She highlighted that Aon has a detailed matrix where the broker scores each domicile and their different attributes.

“We also have a client score and that is in importance order, so we take into account what they want,” she said.

The top domiciles usually end up as the preferred choice.

“Other domiciles of choice tend to be the domicile where the parent company is based for potential tax reasons or convenience,” she added.

Hackett returns to captives, Hylant makes four hires

Richard Cutcher
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Hackett returns to captives, Hylant makes four hires

Erin Hackett has joined Hyland Global Captive Solutions as an account executive, with the captive manager making four new appointments.

In addition to Hackett, Tara Albright joins as senior captive account manager, Brandon Casler is a captive account manager, Frank Aubrey joins as a captive underwriter and compliance specialist.

Hackett worked for Crowe in Burlington, Vermont from 2015 to 2021, finishing as an audit senior manager before joining Vermont Mutual Insurance Group as controller.

“I am excited about the continued expansion and growth of our team,” said Anne Marie Towle, CEO of Global Risk and Captive Solutions.

“We are always looking for the best talent in the industry and finding new ways to grow and innovate.”

Albright has more than 20 years of experience in insurance, tax and compliance. She will work with clients to develop strategic solutions to their wide range of complex situations.

Casler joins with accounting experience in full-service resorts, not-for-profit, government and transportation. He will support the accounting for clients’ captive insurance entities and ensure compliance with all legal regulations.

Aubrey has more than 15 years of underwriting experience and will collaborate with clients and internal teams to identify and recommend insurance solutions for captives.

The four additions join a growing Hylant team, which recently promoted Dawn Dinardo to managing director of captive management operations and Amit Hapani to director of India operations.

In August, Hylant promoted Anne Marie Towle to CEO Global Risk Management, where she will lead the Global Risk Management team in addition to her responsibilities as CEO of Global Captive Solutions.

Hylant promotes Dawn Dinardo and Amit Hapani

Luke Harrison
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Hylant has promoted Dawn Dinardo and Amit Hapani to managing director of captive management operations and director of India operations, respectively.

In her new role, Dinardo will oversee the captive management operations business unit, guiding strategy, operations and team development.

She previously held the position of director of captive operations.

In Hapani’s new role, he will guide strategy and oversee the day-to-day operations within the emerging market.

He previously held the position of senior account manager at the company.

“We look forward to seeing more success in Dawn’s and Amit’s future with the Hylant Global Captive Solutions team,” the company said.

In August, Hylant promoted Anne Marie Towle to CEO Global Risk Management, where she will lead the Global Risk Management team in addition to her responsibilities as CEO of Global Captive Solutions.

THG captive “absolutely critical” for cyber renewals, market negotiations

Richard Cutcher
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THG captive “absolutely critical” for cyber renewals, market negotiations

THG Plc’s pure captive formation in Guernsey last year played a key role in ensuring a smooth cyber insurance renewal and has given the fast-growing group more leverage in the commercial market.

Speaking on the Global Captive Podcast Joshua Cryer, director of risk and insurance at the e-commerce retail company, said he was already a big believer in captives from his previous roles as a risk manager and broker, but upon arriving at THG it was clear the hardening cyber market presented an immediate challenge that needed to be addressed.

“I was going to need something else within my arsenal to enable me to negotiate effectively with the cyber insurance market specifically, given the fact that the market was hardening at such a rate of knots,” he said.

“When we talk about insurance enabling the business, at that point it would have potentially hindered our business from operating if we were unable to secure the right levels of cyber insurance that we needed.”

Cryer began work on a feasibility study with RISCS in October 2021 and was able to get the Guernsey captive established in time for a March 2022 renewal which he described as “absolutely critical”.

He said it was important to be in regular contact with RISCS, the captive managers Aon and the reinsurance market throughout the feasibility and formation process to ensure all the pieces fell into place and made the fast formation possible in the timeline required.

“Without Allianz providing that stop loss reinsurance agreement in record time, I wouldn’t have been able to form the captive at that March 2022 renewal,” he added.

“Whilst the captive was formed specifically for that cyber exposure, we knew that we had to diversify the portfolio of the captive to enable us to manage that risk versus having a cyber heavy risk in year one.”

THG Insurance Limited was formed in March 2022 and Cryer explained how the captive is already delivering value to the group.

The captive has reported significant profits in its first 18 months, ahead of expectations, while, more importantly, it has delivered tangible benefits for the enterprise risk management and insurance strategy.

More ownership and focus is put on managing and mitigating risks, while there has also been insurance premium savings.

“It’s significantly helped us, with our new broker Marsh, to achieve a significant reduction in the overall insurance spend at the 2023 renewal,” Cryer said

“So that equated to circa 25% across the whole portfolio. It was that skin in the game that enabled us to speak confidently with the insurers and for them to understand that actually we’re taking the risk and confident in our risk management.

“It enabled us to get significantly better terms than last year, whilst also reducing the actual exposure into the captive.”

Guernsey

When forming the captive Cryer, supported by RISCS, went through a full domicile selection process with Guernsey coming out as the first choice.

Cryer highlighted the level of expertise and availability of captive managers, the solvency and regulatory requirements and proximity to the London (re)insurance market as key attributes that put Guernsey top of the list.

“The fact that the London reinsurance and insurance market recognises Guernsey as being a credible market for captives,” he added.

“Whilst negotiating those reinsurance agreements, it enabled us to speak directly with both the reinsurer and captive manager and for them to have a relationship and understanding of each other. It enabled us to expedite that process in relation to the formation and the actual agreement.”

Alex Symons, associate director at Aon Insurance Managers in Guernsey, said the capital and regulatory regime in the domicile is a real positive with the lack of Solvency II meaning captives can be regulated in a proportional manner.

“The regulator has always had a policy where they want to encourage innovation, but in a controlled manner, which is quite important for a lot of our clients where they want to look at bringing new products to market that perhaps aren’t available in the commercial space,” he said.

“They want to know that the regulator understands that they might be writing something that’s not completely comparable in the commercial market and they’re comfortable with that.”

Going forward, Cryer said they have thought “long and hard” about what role the captive will play in the next 12 months to three years.

He is open to retaining more risk on existing lines, while adding add more lines to the captive to diversify its portfolio with employee benefits one area they are exploring to understand what the profile looks like globally.

Captives writing cyber programmes “emerging as a trend” – AM Best

Luke Harrison
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0

The number of captives writing cyber coverage in their programmes is “emerging as a trend”, according to Fred Eslami, associate director, alternative risk transfer and cyber security leader at ratings agency, AM Best.

“We’ve seen a number of captives including cyber coverage in their programmes but writing cyber in the captive is not widespread,” he told Captive Intelligence.

“However, what we are hearing from those who have included cyber, is that it is emerging as a trend.”

The number of captives writing this coverage is on the rise, with Marsh managed captives writing cyber increasing by 75% between 2020 and 2022, according to a recent Marsh US Cyber Purchasing Trends report.

Eslami said that although the amount of cyber cover in captives is not “huge”, AM Best is seeing large organisations with the financial “wherewithal” and extensive cyber security investment able to put a layer of cyber into the captive.

He said that putting cyber into a captive does not happen “overnight” with the larger organisations doing their due diligence over the past several years.

“Typically, the captive sits within the ERM framework of these large organisations,” he said.

“It’s familiar with every aspect of the organisation, including the IT security investments and the talent that they hire to make sure that the corporation is protected.”

Captive Intelligence reported in May that Belgian chemical company Solvay, is insuring part of its cyber programme through its Luxembourg captive with the insurance team working alongside the chief information security officer (CISO) to fund cyber security initiatives.

Eslami said he has seen corporations spend several $100m a year in the cyber security field alone.

“In addition to that, they could be paying $10-12m buying coverage from commercial market,” he said.

“So, they come and evaluate all the risk and reward and realise it makes sense to keep cyber within the captive.”

Captive Intelligence published a long-read back in March, detailing that a lack of capacity and high pricing in the cyber market is resulting in increasing captive utilisation for cyber risk.

Eslami revealed that AM Best rates about 220 captives globally, with about 150 of those being in the US.

“Bermuda is the biggest domicile outside of the US. Of the 150 US captives, 36 are Vermont captives, and they’re all strong performing captives,” he added.

Last month, the ratings agency published an article that showed captives continue to outperform commercial insurers in both underwriting and operating profitability, according to AM Best’s latest Market Segment Report.

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