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Unbundled fronting more prevalent, plays to AGCS’ strengths – Brian McNamara

Richard Cutcher
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Unbundled fronting more prevalent, plays to AGCS’ strengths – Brian McNamara

The rising popularity of unbundled fronting services for captive insurance companies is playing to the strengths of Allianz Global Corporate & Specialty, according to Brian McNamara, regional head of multinational, North America and global head of captive solutions at the carrier.

Speaking in an interview on GCP #88, McNamara outlined AGCS’ recent investment and further expansion into the captive space aligned with the group’s broader efforts to be a bigger player in the multinational market.

The insurer has had a significant presence in the captive market for the past decade or so through Allianz Risk Transfer (ART) and AGCS in both fronting and structure reinsurance programmes, but the rise in demand for captive services during the hard market has called for further investment and reorganisation.

AGCS has made a string of high-profile hires to lead multinational and provide captive services over the past 12 months, including Guy Money as global head of multinational business.

The carrier also brought in Salil Bhalla as a global captive fronting manager in Europe, added Nick Troxell, formerly global risk financing manager for Nike, to the fronting team and moved Jayesh Patel internally to global head of multinational market practice.

McNamara said the reduction in capacity and appetite in certain lines from the commercial market had pushed large multinationals “against the wall”, which has led to a greater utilisation for captives and more demand for unbundled fronting on global programmes.

“The unbundled fronting has been around for many years,” he added.

“It started really with the energy companies with established captives in Bermuda 50 years ago.

“I think what we are promoting and some of our competitors are promoting is the fact that you can unbundle the captive fronting services. If you’ve got a global franchise, it doesn’t necessarily mean that your main capacity provider is actually the best at providing those global services.

“It’s becoming more prevalent now, and obviously we want to capitalize on that and provide those services.

“Obviously there’s a high barrier to entry for doing it on a global basis, there’s probably five companies that can do it globally. We believe we’ve got the largest franchise, which includes our network partners globally of over 200, and I think we’ve got the biggest owned network as well. So that obviously plays to a strength that we’ve got.”

With the rise in demand for unbundled fronting, meaning the front is retaining no risk and ceding 100% to the captive, there is also increased possibility for bespoke wordings and more innovative coverage.

Although not a fronted programme, Captive Intelligence revealed in December that AGCS had worked with Meta on a Side A ‘Laser DIC’ policy backed by its captive.

“Traditionally, we have specialised in basically manuscript customized wordings for our clients,” McNamara added.

“We will essentially provide a multi-line policy and that’s not stapling five or six policy wordings together. It’s actually crafting a multi-line policy.

“We also try to have a global aggregate limit on that policy, and then also we’ll do it over a multi-year period. Generally, three to five years.

“It gives the risk manager some security that there’s continuity there. We have one client where we have seven lines of business in over 80 countries. Obviously putting together and crafting that programme initially is not easy, there’s a lot of work that goes into it, but once it’s up and running it’s a very effective programme for the risk manager to have.”

Listen to the full interview with Brian McNamara, regional head of multinational, North America and global head of captive solutions at AGCS, on GCP #88, either on the Captive Intelligence website or on any podcast app

National Grid captive rated Excellent

Luke Harrison
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AM Best has affirmed the financial strength rating of A- (Excellent) and the long-term issuer credit rating of “a-” (Excellent) of Isle of Man-domiciled National Grid Insurance Company Limited (NGICL). The ratings outlook is stable.

NGICL is the captive owned by National Grid, with AM Best saying the company is well-integrated into the group’s overall risk management framework, providing a broad range of property damage business interruption (PDBI), casualty and cyber cover to meet the company’s insurance needs.

NGICL has a track record of adequate operating performance, generating positive net results in seven of the past 10 years (2014-2023), underpinned by good underwriting performance over the cycle.

However, the captive reported significant losses on its PDBI book in financial years 2021 and 2022, which is reflected by the deteriorated five-year (2019-2023) weighted average combined ratio of 106%.

AM Best expects the captive’s underwriting performance to be robust over the longer-term, albeit subject to potential volatility given its high net line sizes relative to its premium base, supported by corrective actions taken by management following recent losses.

The captive’s balance sheet strength is underpinned by its risk-adjusted capitalisation at the strongest level, as measured by AM Best’s capital adequacy ratio (BCAR).

The ratings agency expects the captive’s BCAR scores to remain comfortably above the minimum required for the strongest assessment, reflecting its strategy to maintain sufficient capital buffers to absorb potential volatility from its exposure to low frequency, high severity losses.

A partially offsetting balance sheet strength factor is the captive’s reinsurance dependence, driven by the large policy limits needed by National Grid.

Counterparty credit risk is mitigated partly by the good credit quality of NGICL’s reinsurance panel.

Oklahoma calls on IRS to drop proposed 831(b) rules and form joint task force

Luke Harrison
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Oklahoma calls on IRS to drop proposed 831(b) rules and form joint task force

Oklahoma’s Insurance Commissioner Glen Mulready has called on the Internal Revenue Service to withdraw its Notice of Proposed Rulemaking (NPR) concerning micro captives and form a joint task force consisting of the IRS, regulators and representatives of the captive insurance industry.

Captive Intelligence reported in April that the IRS had proposed new regulations for “micro captives” at the same time as obsoleting Notice 2016-66, having had it struck down by the courts in March 2022.

The proposed regulations for 831(b) captives have divided opinion across America’s captive landscape, with some saying they could destroy the industry, while others have branded it a refreshing change.

The call from Oklahoma came in a letter to IRS Commissioner Danny Werfel, written by captive regulator Steve Kinion on behald of by Commissioner Mulready, as part of the State’s comments in response to the NPR.

One mission of the task force proposed by Oklahoma would be to enhance the IRS’ knowledge on captives and why they are important for risk transfer.

“Once a level of mutually enhanced knowledge exists, the task force’s next mission will be to consider the feasibility of the NPR’s proposals as those proposals relate to captive insurance,” the letter, penned by Kinion, stated.

Under the Notice, the IRS proposed regulation which would see certain micro-captive transactions deemed “listed transactions” and other micro-captive transactions labelled “transactions of interest”.

The majority of captives that record a loss ratio under 65% would be considered a “listed transaction”.

The 65% loss ratio calculation and limit has attracted the attention of many across the US captive market since it is not uncommon for captives, whether taking the 831(b) tax election or not, and commercial insurers to perform at or better than that level.

The Oklahoma insurance Department (OID) said it opposes the NPR for the reason that captive insurance transactions, which insure low frequency but high severity risks, will be “needlessly” designated listed transactions or transactions of interest.

“Low frequency risks will very likely fail the 65% loss ratio test applied to the captive insurer’s most recent nine taxable years,” Kinion said.

“Legitimate insurance coverages like terrorism or pandemic risks thankfully have few claims meaning they are low frequency. However, when claims occur, they are severe in dollar amounts.”

Kinion said that captive insurers that insure such risks for legitimate reasons should not be burdened with the administrative and legal expenses associated with being in the category of tax evasion or avoidance by failing the loss ratio test.

The letter noted that Commissioner Mulready is willing and ready to engage with the IRS to find agreeable solutions to the IRS’ concerns with captive insurance.

The comments from the OID follow those provided by the Tennessee Captive Insurance Association (TCIA) last week.

“The IRS should not attempt to impose a 65% loss ratio on micro-captive transactions as only Congress has the authority to impose loss ratios on the insurance industry under the McCarran Ferguson act,” The TCIA said.

The letter also follows comments from The Self-Insurance Institute of America (SIIA), which said the proposals will “severely limit access to captive insurance programs for small- and medium-sized businesses in the US”.

PSI only the start of ESG journey for International SOS captive

Richard Cutcher
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PSI only the start of ESG journey for International SOS captive

Becoming a signatory of the United Nations’ Principles for Sustainable Insurance (PSI) should only be the start of the captive journey in contributing to the group’s ESG objectives, according to Franck Baron, group deputy director of risk management and insurance at International SOS.

Captive Intelligence reported in March that the healthy and security service firm’s Singapore-domiciled Odeon Insurance Re Pte Ltd had become the third captive to sign the PSI, and the first from Asia.

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Lemonade establishes Bermuda cell to retain windstorm exposure

Luke Harrison
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Lemonade, the technology driven insurance carrier, has established a captive cell in Bermuda, which it plans to utilise in order to retain most of its windstorm exposure.

The cell was formed as part of the company’s reinsurance renewal programme, which Lemonade said was “in good time and on good terms.”

Although windstorm reinsurance capacity was available, Lemonade said the cell structure was determined to offer a materially better cost and benefit profile.

The company has also formed Lemonade Re in the Cayman Islands, where it plans to hold some of its retained risk.

Lemonade is a B Corp that offers renters, homeowners, car, pet, and life insurance and is powered by artificial intelligence and social impact.

The centrepiece of the reinsurance programme is 55% quota share protection, the same level as the expiring coverage, and covers all Lemonade businesses globally.

“It says a great deal when some of the world’s largest and most respected reinsurers choose to stake their capital on the performance of our business,” said Daniel Schreiber, Lemonade co-CEO and cofounder.

“These partners allow us to operate in a very capital light mode and focus our resources on expanding our customer base across all of our products and geographies, while harnessing our technologies to get ever more efficient, and ever better at matching rate to risk.”

The existing reinsurance programme expires at midnight on 30 June 2023, at which time the new programme will go into effect for a standard 12-month term.

Willie Forsythe to retire from IMAC, Kevin Poole retained as consultant

Luke Harrison
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Willie Forsythe to retire from IMAC, Kevin Poole retained as consultant

William “Willie” Forsythe will retire as general manager of the Insurance Managers Association of Cayman (IMAC) after nearly 15 years of service to the jurisdiction’s captive insurance industry.

Forsythe has supported the executive committee and has touched every aspect of IMAC, including finance, marketing, fund raising and IMAC events.

He has also played a key role in planning IMACs signature event, the annual Cayman Captive Forum.

IMAC is retaining Kevin Poole as a consultant to assist the Association during the transition period following Willie Forsythe’s retirement.

“Willie has been integral to the growth of IMAC for more than a third of its existence and deserves enormous credit for the success we have had in promoting the Cayman Islands captive insurance industry,” said Lesley Thompson, IMAC Chairperson.

“Professionals across the industry have come to depend on the phrase ‘just call Willie’ to get the information and action we needed and that expertise and reliability will be greatly missed.”

Forsythe relocated to the Cayman Islands as a senior auditor with Coopers & Lybrand in 1981.

After 22 years in senior professional roles with other industry associations and companies, Willie joined IMAC as general manager in 2008.

“Willie’s familiar face, helpful attitude and extensive experience will be missed by everyone at IMAC and throughout the industry,” Thompson added.

 “The entire IMAC membership and Cayman captive insurance industry wish Willie the very best in his well-earned retirement and for the extended travels he has planned.”

Connecticut legislation permits captive parametric contracts

Luke Harrison
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Connecticut legislation permits captive parametric contracts

Connecticut Governor Ned Lamont has signed Public Act 23-15, legislation designed to strengthen the state’s captive market including new regulation that permits captives to accept and transfer risks through parametric contracts.

The Bill introduces several changes to Connecticut’s captive insurance laws, offering increased support and flexibility for captives, owners, and service providers, which will become effective on 1 October 2023.

“The bill, championed by Commissioner Andrew Mais of the Connecticut Insurance Department (CID), marks a significant milestone in advancing a business-friendly regulatory environment that encourages innovation and supports the growth of captives to provide more options for businesses to manage their risk,” the CID said.

The new legislation allows captives to accept and transfer risks through parametric contracts, providing businesses with a more efficient method to mitigate risks that are challenging to insure through the commercial market.

The CID noted that its “innovative” parametric approach offers businesses coverage for unique and hard-to-place risks.

The Bill also provides greater flexibility to protected cells by enabling them to establish separate accounts to address businesses’ specific insurance needs.

This enhanced structure provides a solution that aligns with the risk management needs of cell participants, while protecting the assets and liabilities within each account.

A third change is the introduction of a certificate of dormancy for captives that have stopped doing business and have no remaining liabilities. A successful application for dormancy means an exemption from paying Connecticut’s minimum premium tax.

This exemption reduces the financial burden during inactive periods, while allowing captives to be easily reactivated when market conditions or insurance needs change.

“With the signing of P.A. 23-15 Connecticut reaffirms its commitment to maintaining a supportive and competitive captive insurance landscape,” said Commissioner Mais.

“The new legislation, combined with the state’s recognized expertise, competence, and innovation, solidifies Connecticut’s position as a premier domicile for captives.”

The new bill builds upon previous legislative changes enacted in 2022, when the state implemented other pro-captive laws.

GCP #88: Brian McNamara, Franck Baron and Pierrick Livet at RISKWORLD 2023

Richard Cutcher
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Brian McNamara, AGCS
Franck Baron, IFRIMA & International SOS
Pierrick Livet, KPMG Bermuda

In episode 88 of the Global Captive Podcast, supported by the EY Global Captive Network, Richard brings listeners three more interviews conducted at RISKWORLD 2023, in Atlanta in May.

1.40 – 10.50: Bermuda-based Brian McNamara, Regional Head of Multinational, North America and Global Head of Captive Solutions at Allianz Global Corporate & Specialty, discusses AGCS’ continued expansion into the captive sector and the trends he and his team are experiencing.

11.30 – 23.55: Franck Baron, President of the International Federation of Risk and Insurance Management Associations (IFRIMA) and Group Deputy Director of Risk Management & Insurance at International SOS, gives his reaction to the new captive regime in France, shares details of a new Asian captive association, and, with his day job hat on, explains why the International SOS captive has become a signatory of the United Nations’ Principles for Sustainable Insurance (PSI).

24.37 – 34.58: Pierrick Livet, Senior Manager in Advisory at KPMG Bermuda, discusses a range of trends he is seeing in the most mature captive market in the world.

Ensure you are kept up to date with the most relevant news, analysis and thought leadership from the global captive sector by signing up to the Captive Intelligence twice-weekly newsletter.

View cyber as high frequency, low severity, suitable for captives

Richard Cutcher
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View cyber as high frequency, low severity, suitable for captives

The sheer volume of cyber-attacks taking place without corporations knowing lends itself to understanding cyber as a high frequency, low severity risk, thus opening the door for more captive involvement, according to Ryan Dodd, CEO and founder of Intangic.

Intangic was launched in March this year offering a parametric product targeted at large corporates.

It is a technology company – as well as an MGA and captive owner in Guernsey – that has built an approach to cyber based on measuring the volume of attacks on public corporations.

The parametric policy, which has a limit of $15m and is backed by AXA XL, is triggered when Intangic’s data-stack recognises an uptick in malicious cyber activity coupled with the insured’s financial indicators.

It is designed as an early warning system in advance of a large breach, with Dodd envisaging claim pay-outs being used to supplement existing cyber security budgets.

“Traditionally, and correctly so, corporations were interested in answering the question ‘how many attacks did we block?’ especially when it comes to reporting to the board or reporting across different verticals within the company,” Dodd said in an interview on GCP #87.

“But the question I think that should be asked is, ‘how many did you not block?’ and that has certain implications.

“One of them is that we think that cyber actually, based on the data and the facts, when you look at any sort of major cybersecurity company when they release figures on the number of attacks that are taking place on a given day, and when you talk to chief information security officers (CISOs) at large corporations, which is our target market, they will tell you that cyber is happening every day. Attacks are happening every day. This is a high frequency risk.

“And so when we ask the question, how many are you not blocking, then the answer is it’s a high frequency risk.”

Although the number of captives writing cyber risk continues to rise in tough commercial market conditions, there is often debate as to its suitability because of it traditionally being viewed as a low frequency, high severity risk.

Captive Intelligence reported in May how Belgian chemical company Solvay is using a captive in its cyber programme, while also building capacity from the commercial market and being a member of cyber mutual MIRIS.

Mark Heath, head of insurance and chief underwriting officer at Intangic MGA, joined the podcast discussion and said he felt the flexibility of captives in terms of coverage, wordings and attachment points meant they could be utilised alongside the Intangic parametric product.

The parametric pay-out is also seen as complimentary to the large indemnity policies multinationals are already buying in the commercial market.

“When you’ve got a board of a captive who is already decided that they need to take some more control and they’re looking at lots of different risks, as well as emerging risks, going into the captive and they’re flexible in the wording they use, then our cover can be very effectively used as a reinsurance for that captive,” Heath said.

“Why we like captives is it’s built to be a cybersecurity risk management tool and risk transfer and therefore we are helping companies to get, if you like, to the left of things earlier to see those pre-events so the captive has got a capability to inform the parent company and then there’s a very quick trigger.”

Finally, Intangic has also established its own insurance vehicle in Guernsey, similar to a captive, so it can participate in the risk transfer of the product.

“Most of my career has been in taking risk and so it was very important that we gave ourself the ability and the vehicle for us to take a risk alongside our partners,” Dodd added.

“I believe that we have a technology that gives us quite an advantage and allows us to do a lot of things. Being able to monetize that technology in various ways, including taking risk, that’s really the reason why.”

Listen to the full interview with Ryan Dodd and Mark Heath, of Intangic, on GCP #87. Listen on the Captive Intelligence website or on any podcast app, by searching for ‘Global Captive Podcast’.

TCIA takes aim at 65% loss ratio in IRS comments

Luke Harrison
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0
TCIA takes aim at 65% loss ratio in IRS comments

The Tennessee Captive Insurance Association (TCIA) has provided a detailed response to the most recent IRS Notice which proposed new “micro-captive” regulations.

Captive Intelligence reported in April the IRS had proposed new regulations for “micro captives” at the same time as obsoleting Notice 2016-66, having had it struck down by the courts in March 2022.

The proposed regulations for 831(b) captives have divided opinion across America’s captive landscape, with some saying they could destroy the industry, while others have branded it a refreshing change.

Under the Notice, the IRS proposed regulation which would see certain micro-captive transactions deemed “listed transactions” and other micro-captive transactions labelled “transactions of interest”.

The TCIA believes that under the current listed transaction proposals, a micro-captive could meet all four parts of the framework established by federal case law and still qualify as a listed transaction.

“If a micro-captive meets the four parts of the framework established by federal law, it is an insurance company under federal law and entitled to make an election under IRC § 831(b) by act of congress,” the TCIA said.

“The IRS does not have the authority to overturn federal case law precedent via IRS regulations.”

The full comments from the TCIA can be found here.

65% loss ratio

As part of the IRS Notice, the majority of captives that record a loss ratio under 65% would be considered a “listed transaction”.

The 65% loss ratio calculation and limit has attracted the attention of many across the US captive market since it is not uncommon for captives, whether taking the 831(b) tax election or not, and commercial insurers to perform at or better than that level.

The TCIA noted that under the McCarran Ferguson act, states have the authority to regulate insurance unless Congress specifically passes a law stating otherwise, and therefore, only an act of Congress can establish a loss ratio requirement.

“The IRS should not attempt to impose a 65% loss ratio on micro-captive transactions as only Congress has the authority to impose loss ratios on the insurance industry under the McCarran Ferguson act,” the TCIA said.

The TCIA also said that the proposed regulation presents a situation whereby a micro-captive will always be severely restrained in its ability to charge actuarially sound rates in order to build adequate reserves to weather any catastrophic claims events.

“Under the proposed regulation, micro-captives, in order to be non-abusive, will be impaired from charging actuarially sound premiums by the 65% loss ratio requirement, severely limiting in micro captives’ ability to build reserves and surplus.”

The TCIA believes that by setting a minimum loss ratio, the IRS is disregarding the primary risk management purpose of a captive insurance company and is indirectly encouraging captive policyholders to engage in more risky behavior in order to justify the 65% loss ratio.

“The IRS should recognise the risk management value of captive insurance companies,” the TCIA said.

Discriminatory

The TCIA argue that the proposed regulation unfairly discriminates between similarly situated companies simply because an election is made, and two insurance companies, operating identically, will receive vastly different treatment if one elects to be taxed as an 831(b) and the other does not.

“If both companies have a 20% owner and loss ratios [lower] than 65%, but only one insurance company makes an 831(b) election, then just by checking a box, one company will be a listed transaction and the other will not.”

The response from the TCIA follow comments from The Self-Insurance Institute of America (SIIA), which said the proposals will “severely limit access to captive insurance programs for small- and medium-sized businesses in the US”.

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