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Airmic updates Captive Governance guide for iNEDs
A rapidly changing captive environment, driven by regulatory trends and greater utilisation due to the hard market, has prompted Airmic to update its Captive Governance Guide, primarily targeted at independent non-executive directors (iNEDs).
The UK’s risk management association originally published the guide in 2019, in partnership with Aon Captive & Insurance Management, as a useful resource for existing and prospective iNEDs, as well as captive managers and captive owners.
The update was announced at the Airmic Conference in Manchester today, and includes additional sections on cyber, ESG and D&O.
“A lot has changed for captives over the past four years,” Julia Graham, Airmic CEO, said. “The hard insurance market has re-emphasised the relevance and value of captives, seeing them grow in premium size and enter new business lines.”
“Trends in ESG, cyber and D&O have also presented new challenges and questions for captive boards to get to grips with. We hope this update helps iNEDs to understand this new environment and equips them to ask the right questions and fulfil their governance duties effectively.”
As well as input from Aon, the updated Guide includes contributions from iNEDs Kate Storey and Malcolm Cutts-Watson in Guernsey, Andrew Bradley in Switzerland, and Francoise Carli in Luxembourg.
It also has a new section containing information for independent directors concerning their own directors and officers insurance.
“For iNEDs, it is important to ensure appropriate directors’ and officers’ (D&O) insurance has been bought, either by the captive itself or, more commonly, by the corporate group with the policy including coverage for the captive’s directors,” the Guide states.
“A certificate of insurance should be provided confirming level of cover, level of the deductible and who covers it, and the name of the D&O insurer. This should be confirmed annually.
“iNEDs should always ask and ensure, where possible, that they are afforded the same level of D&O cover and protection as other board members.”
Download and read the full Captive Governance Guide on the Airmic website here.
Samphire keen to support captives writing malicious, hostile risks
Samphire Risk, a London-based managing general agent, is targeting captives interested in writing political violence type cover, so it can provide malicious and hostile risk expertise in corporates’ moment of need, according to Charlie Hanbury, CEO of the MGA.
Hanbury was joined by Andy Hulme, director of underwriting at Strategic Risk Solutions, on GCP #87 that also featured a discussion with cyber MGA Intangic.
Traditionally, captives have not written a great deal of political violence but global instability and increased rates has prompted more discussion on captives having a role to play.
Hanbury said: “We feel that ability to give access to crisis response in the moment of need, whether that be driven through political violence, kidnap & ransom, high risk travel, political risk or business integrity, potentially has the ability to act to protect other underlying capital within the captive.”
Samphire is an agency focused on providing cover for malicious and hostile risks, such as terrorism, political violence, kidnap & ransom and other broader crisis response products.
Hanbury said that when it comes to the type of risks that Samphire is involved in, captives are thinking more comprehensively than the traditional aims of risk and reward or in-house premium retention.
Hulme also noted that captive owners are now taking a more holistic approach to risk, with increasing requests for captives to look at lines of business that wouldn’t have traditionally been part of a captive’s makeup.
“Captives are moving away from that kind of risk and reward focus to a more holistic management of risk for the corporate, either in the absence of commercial markets or because the commercial market isn’t providing the flexibility that the corporate requires,” he added.
Instability
Hanbury noted that the current macro environment for malicious and hostile risks in terms of lower capacity and higher rates is providing “ripe ingredients” for making captives start to look like an attractive proposition.
“It starts to bring a little bit more certainty to the organisation,” he said. “The war in Ukraine and the global inflationary environment is driving a lot of instability in developing nations.
“You’ve seen places like Sri Lanka where the social contract between government and population of being able to subsidise essential staples like fuel and food.”
He also highlighted Egypt and Pakistan as places to watch out for.
“That that kind of macro instability will filter through into the marketplace,” he said.
In December last year, Captive Intelligence published an article exploring how global instability, largely caused by Russia’s invasion of Ukraine, could lead to insurance buyers seriously assessing the feasibility of writing political violence risks (PV) through their captives for the first time.
Hulme noted that the current instability in the commercial market is “not an option” for some of the companies needing cover for these types of risks.
“By having their captive in play even for modest retentions allows them to have the discipline within the captive to deploy more capital when needed,” he said.
“It also allows them to fill in that uncertainty when markets or macro events dictate that the commercial market may step away or provide reduced terms or provide uncompetitive terms for the commercial placements.”
Europe’s captive market has been rejuvenated – Paul Eaton
The European captive market has been rejuvenated over the last four years, having “levelled off” during much of the 2010s, according to Paul Eaton, CEO of Artex International.
The captive manager, owned by Arthur J. Gallagher & Co, appointed Eaton as its International CEO at the start of the year, with Nick Heys transitioning to the role of chairman of the company.
Eaton spoke to Captive Intelligence in an exclusive interview following Artex’s acquisition of Irish captive manager Allied Risk Management in May.
“We were really nicely positioned with our business development team and received a large amount of inquiries and proceeded with a good number of formations,” he said.
“It’s been great to see such a rejuvenation in the captive industry. I think most practitioners in Europe would agree that captive formations had levelled off during the 2010s.”
Eaton highlighted that new business is deriving from a number of regions.
“Historically, the UK has been the natural home market for Guernsey, and we had some interesting formations from that region, but also from EMEA and Australasia,” he said.
“We’ve had success in those regions before, but particularly in relation to Australia, we saw some strong demand for cell business as a result of the distressed market.”
He noted that a lot the new formations were single-parent structures.
“Though the majority of these were more interested in the cell option, which is not a huge surprise given the cost and operating efficiencies cells provide,” he said.
“We have also seen a number of limited company formations.”
As Artex International CEO, Eaton serves on the company’s executive leadership team and drives Artex’s strategy on talent, organic growth, M&A, and operational efficiency for its international operations, including Guernsey, Gibraltar, Malta, London and Singapore.
“It is a wonderfully challenging role, which I’m really enjoying,” he added.
“Having worked for a long time with my predecessor Nick Heys, I felt pretty well placed given the variety of roles I’d previously covered from business development and account management to running parts of the European business.”
Lines of business
Eaton revealed there has been an expansion in the lines of business clients are looking to write though captives, with Artex seeing a growing number of cyber and D&O enquiries, for example.
“The other area where we’ve had some impact in the past, and where we’re seeing renewed interest is employee benefits,” he said.
“It’s exciting to think of these new coverage options that clients are considering for their captives, and I guess that’s been partly brought about by the more challenging market conditions and also a desire to diversify captive retained risk.”
He highlighted that cyber in particular can generate substantial losses, so it is important that clients balance the ability to retain risk within their captive, while also accessing risk transfer options in order to prevent a disproportionate net risk being retained in the captive.
“Cyber as a coverage for captives is still a fairly new and developing market,” he added.
“I believe clients will start to use their captives more to incubate risk and to grow risk retention in this class.”
Group captives
Eaton highlighted that there are some notable distinctions between the US and European markets when it comes to attitudes towards group captives.
“Generally speaking, the US premium spend is much higher, there’s much more exposure to catastrophe risk, and importantly I think culturally, risk sharing is more acceptable than it has been in Europe,” he said.
He noted that Artex has received a number of inquiries over the years about group captive formations in Europe “and we’ve worked on potential solutions to show how we could manage risk more effectively”.
“In many cases I believe what holds this back is the willingness of people to collaborate and needing to convince a number of stakeholders that some risk sharing doesn’t mean that you’re sharing any of your trade secrets or your USPs, so perhaps there is a cultural issue,” he said.
Singapore
Eaton noted that although there has not been much activity of late, Artex has an interest in working with clients who currently have captives in Singapore or are wanting to launch new captives in the region.
“From our perspective, it makes sense for us to have an offering where Gallagher has a presence as we can work alongside each other as sister companies,” he said.
“Gallagher has a strong presence in Australia, New Zealand and a growing presence in Asia, so, we think it’s a domicile that could attract more captive business.”
He noted that within Singapore, Artex is currently focussed on feasibility studies and captive health checks.
“But that could convert into captive management quickly,” he said.
“My understanding is that there has not been much growth in Singapore captives over the last few years. I’m sure market conditions have encouraged some increased captive retentions, but I don’t think we’ve seen growth in numbers.”
GCP #87: MGAs and captives – political violence and cyber
In episode 87 of the Global Captive Podcast, supported by the EY Global Captive Network, we share two interviews with MGAs that are particularly interested in providing unique underwriting expertise and capacity to captive owners.
1.40 – 14.14: Senior reporter Luke Harrison is joined by Charlie Hanbury, CEO of Samphire Risk, and Andy Hulme, director of underwriting at captive manager Strategic Risk Solutions. Samphire is an agency focused on providing cover for malicious and hostile risks, such as terrorism, political violence, kidnap & ransom and other broader crisis response products.
14.15 – end: Ryan Dodd, CEO and founder at Intangic, and Mark Heath, head of insurance and chief underwriting officer at Intangic MGA, outline their unique take on cyber being underwritten as a high frequency, low severity product and the role of the capacity, backed by AXA XL, they are providing as a parametric product, for corporates in supporting the CISO and cybersecurity budgets.
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Actuarial expertise and cat bond potential part of Allied attraction for Artex
Artex International CEO Paul Eaton has said the acquisition of Dublin-based Allied Risk Management and the addition of Ireland as a domicile option for its clients was a “natural progression” for the captive manager.
Captive Intelligence reported in May that Artex had completed the acquisition of Allied, bringing across Frank Coyle and his team with seven captives under management in the jurisdiction.
“We already have operations in Malta, Gibraltar and Guernsey, so adding Ireland complements our European business and offers another excellent choice of domicile for our existing and new clients,” Eaton told Captive Intelligence.
“We were delighted to acquire the Allied business as not only is it a fantastic team with a great client base, but also, it’s an excellent cultural fit which is vitally important in any expansion.”
Eaton believes that the combined expertise of the two companies will deliver greater value for their joint client base.
He also revealed that Artex is keen to build out its actuarial and analytics capabilities, and the addition of Allied will add another five actuaries with strong captive expertise to the team.
“We’re confident that this is an area that’s going to grow for Artex significantly over the next few years, so being able to add that talent to our team was part of the attraction, as it will help us grow that part of the business,” Eaton said.
He also highlighted that the Allied acquisition will allow the company to make the most of Ireland’s active catastrophe bond market.
“There have been some cat bonds that have been launched and managed in Ireland and this acquisition will also help support our Capital Solutions business should any of our clients decide to use Ireland in the future,” Eaton added.
Artex Capital Solutions already provides ILS, fund administration and reinsurance management in Bermuda and Guernsey.
SIIA labels proposed 831(b) rules “over-regulation”, renews call for guidance
The Self-Insurance Institute of America (SIIA) has submitted its comments in response to the Internal Revenue Service’s latest proposed rules for captives making the 831(b) tax election.
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.
Proposed Rule 109309-22 has prompted extensive debate across America’s captive industry with it threatening to label a wide range of 831(b) captives “listed transactions” or “transactions of interest”.
The deadline for submitting comments in response to the proposed rule was 12 June, with a public hearing scheduled for 19 July.
SIIA has engaged with the IRS on the topic of micro captives since 2014 and has now published its submitted comments, saying the proposals will “severely limit access to captive insurance programs for small- and medium-sized businesses in the US”.
In a release accompanying the circulated comments, Ryan Work, SIIA senior vice president of government relations, said the IRS is seeking to “over-regulate certain § 831(b)-electing captives by creating untenable loss ratio requirements (65%), loan back limitations, and 10-year retroactive provisions”.
The 65% loss ratio calculation and limit, outlined in the IRS’ proposed rule, has particularly caught 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.
In the submitted comments, SIIA writes on the issue: “Treating electing captives differently than other captives or commercial insurance companies is arbitrary and capricious, where similar loan-backs or less than 65% loss ratios exist.
“This discrimination and singling-out of a federally-enacted statute is not only wrong, but lacks an understanding of how the insurance market and risk mitigation works. The IRS cannot pick and choose criteria among different groups within a larger captive insurance marketplace.”
In SIIA’s accompanying release, Work emphasised that the rule was trying to “legislate through regulatory action”, contrary to congressional intent and would “prevent middle market American companies from mitigating against critical and evolving legitimate business risk”.
“None of the four criteria identified by the IRS in the proposed regulations are abusive, either separately or in their own right, nor should they be used under the proposed criteria to label a transaction as a listed transaction or transaction of interest unless they are always tax avoidance,” he added.
Work repeated SIIA and other’s previous calls for the IRS to develop and issue criteria for industry to follow that is in line with the existing 831(b) law, arguing that the Service has access to documents concerning thousands of captives that complied with data requests.
“Treating § 831(b)-electing captives differently than other larger captives or commercial insurance companies is harmful and an over-reach,” he said.
“For these reasons, SIIA continues to recommend that the IRS engage with the captive insurance industry and business owners to more appropriately craft regulations that combat abuse, while further understanding the intent, the need, and the appropriateness of risk mitigation.”
AM Best affirms ratings of NextEra Energy captives
AM Best has affirmed the financial strength rating (FSR) of A (Excellent) and the long-term issuer credit rating (Long-Term ICR) of “a” (Excellent) of Cayman Islands-domiciled Palms Insurance Company (Palms).
AM Best has also affirmed the FSR of A- (Excellent) and the long-term ICR of “a-” (Excellent) of Delaware-domiciled Palms Specialty Insurance Company (Palms Specialty).
Both companies are owned by NextEra Energy Capital Holdings, which, in turn, is owned by NextEra Energy (NextEra). The outlook for all ratings is stable.
Palms is a single-parent insurer, providing specialised direct and assumed property, casualty, workers’ compensation, automobile liability and employers’ liability coverages to NextEra and his affiliates.
Palms Specialty was formed in 2022 as a specialty insurer focusing on the US E&S lines accounts, providing coverage for specialty property, professional lines and other specialty lines with manageable gross limits.
The ratings of Palms reflect its balance sheet strength, which AM Best assesses as strongest, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).
The ratings of Palms Specialty reflect its balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate ERM.
The very strong balance sheet assessment is based on Palms Specialty’s supportive risk-adjusted capital that meets AM Best’s guidelines for newly formed organisations.
AM Best expects that Palms Specialty will continue to maintain supportive risk-adjusted capital levels throughout its start-up phase, based on balance sheet projections provided by Palms Specialty’s management.
The ratings agency assesses Palms Specialty’s operating performance as adequate, based on its clear business plan and income statement projections that contemplate a level of implementation and execution risk for a newly formed entity.
AM Best views Palms Specialty’s business profile as limited, given the execution risk associated with a start-up entity and the degree of competition in its selected market.
This risk is mitigated by the management team’s experience in the targeted business class, along with the parent company’s brand and record of success.
Negative rating action could occur if Palms Specialty’s actual operating performance or balance sheet strength materially differ to the downside from its initial business plan.