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Captives can play “crucial role” in absorbing parametric basis risk

Richard Cutcher
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0
Captives can play “crucial role” in absorbing parametric basis risk

Captives could be key to taking parametric insurance more mainstream with large corporates by playing a “crucial role” in absorbing the basis risk of the policy and providing direct indemnification the insured parent, according to Thomas Keist and Jan Bachmann at Swiss Re Corporate Solutions.

Captive Intelligence published a long read on parametric insurance in September where Keist and Bachmann touched on their approach to parametrics and captives.

In a GCP Short released today, they expanded further on the concept with Adrien Norulak, head of risk analytics and director of innovation & technology at Swiss Re.

Keist said captives are currently “not in the centre” of the discussion with corporates on parametrics.

“There might be various reasons for that,” he added. “One could be that it’s mainly treasury and CFO level involved as soon as it gets to parametric insurance.

“However, I clearly believe that, in future the role of captive in the entire parametric insurance discussion should be much, much higher.”

Bachmann added that while more corporates are growing comfortable with parametrics, the risk profile of most policies – low frequency, high severity – does not match the classic utilisation of captives, which is usually designed around high frequency, low severity risks.

Keist and Bachmann believe there is a role for captives to play, however, particularly those which are well established and well capitalised, to support its corporate parent in absorbing the basis risk inherent in all parametric structures.

Basis risk materialises when the economic losses of the insured differ from the amount of coverage that is triggered, or the insured experiences losses without the parametric being triggered.

The downside to the insured is it does not receive a payout, but there is also an upside risk, that the policy and payout is triggered by the event but there is no loss, or a much smaller loss than anticipated.

“Basic risk is naturally present in parametric insurance and is comparable to other difficult to insure risks,” Bachmann said.

“And with all of those difficult to insure risks, the captive might be a good home for it.”

Keist explained that while some see the basis risk as another deterrent to using the captive, he believes it presents the captive with an opportunity to play a “crucial role” in enabling an effective parametric policy for the corporate.

“If the captive is the entity to pay the parametric insurance or reinsurance in the case of a captive, they could then use their, hopefully, strong capital base to keep the basis risk within the captive and provide coverage to their entities on a traditional indemnification basis,” he said.

“By doing that, they would transform a basis risk into a normal indemnification coverage. And that, of course, could be the decisive piece or element in the contemplation of parametric insurance for a corporate.”

Keist believes that classic natural catastrophe risks such as windstorm and earthquake are likely to be the best place to start for captives engaging in parametric structures, but any risk which can have an independent third-party data provider that proves an event has occurred or not could be addressed.

“Since captives themselves often lack knowledge or resources on transforming risks into parametric insurance, specialists like us are filling the need for risk modelling and solution design,” Bachmann added.

“This is then usually combined with our fronting capabilities to bring the risk into the captive.”

Modelling and minimising basis risk

Although a captive can be used to absorb the basis risk, the ultimate target of any parametric policy should be to minimise the range of basis risk, even if impossible to remove entirely.

“Having the highest possible correctness and accuracy of your exposure data is paramount to decreasing the basis risk, and this means having the highest precision of your locations, underlying values but also understanding the vulnerability,” Norulak said.

“In Risk Data Services (RDS) we provide, for example, a data readiness report, which assesses the completeness of data and guides the user to increase the overall score, coming to a highly accurate data set and enhance representation of the risk, which then, in something like a parametric policy, decreases the overall basis risk.”

Keist believes that the captive, being part of the corporate group, can have access to the data required to then work with the commercial market and risk modelling experts on structuring the most effective coverage.

“The captive is best suited to provide the necessary data analysis to minimise the basis risk, given that it has access and knows all the details of the company’s exposure and has tools available, such as RDS for example, to collect and analyse the data in a very, very precise way, such that it can minimise the basis risk,” he added.

Listen to the full discussion on utilising captives in parametric policies to minimuse basis risk on the Global Captive Podcast here, or on any podcast platform. Just search for ‘Global Captive Podcast’.

GCP Short: Can captives absorb basis risk & transform parametric policies?

Richard Cutcher
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0
GCP Short: Can captives absorb basis risk & transform parametric policies?
Thomas Keist, Swiss Re Corporate Solutions
Jan Bachmann, Swiss Re Corporate Solutions
Adrien Norulak, Swiss Re

In this GCP Short, produced in partnership with Swiss Re Corporate Solutions, Richard explores the viability of more captive adoption of parametric policies.

Thomas Keist, Global Captive Solutions Leader, and Jan Bachmann, Head of Innovative Risk Solutions, explain how a captive can be utilised to absorb that basis risk that usually exists in a parametric policy.

Adrien Norulak, Head of Risk Analytics and Director of Innovation & Technology at Swiss Re, discusses how Risk Data Services (RDS) can also be used to minimise the basis risk and contribute to more accurate modelling and parametric triggers.

Adrien will be presenting on this topic at the European Captive Forum alongside client Fabien Couillard, insurance manager at TetraLaval, from 4.15pm on Wednesday, 8 November.

Read the Captive Intelligence long read on parametric insurance and captives here.

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

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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0

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.

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