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The captive market is being heard – Udo Kappes

Richard Cutcher
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The captive market is being heard – Udo Kappes

Udo Kappes, chairman of the European Captive Insurance and Reinsurance Owners Association (ECIROA), believes players in the captive market are being heard by regulators and the wider insurance market.

Speaking at the opening of the European Captive Forum on Wednesday, Kappes said the expected 900 participants at the event “clearly shows that topics related to captives are on the rise”.

Commenting on the hoped-for Solvency II reforms that could lead to a greater level of proportionality applied to captives domiciled within the European Union, Kappes said this was a sign of greater understanding by insurance supervisors.

“After almost eight years of practical experience with Solvency II regulation and the specific challenges for captives, we can see that the strategic benefits of captives are increasingly understood by regulators,” Kappes said.

“After many years of joint efforts by various organizations, the EU Parliament is now proposing to further exempt captives in part from the oversized Solvency II rules and treat them as “low risk undertakings” by default. This means that captives should be exempt from certain regulatory burdens.”

Captive Intelligence understands the final text for the proposed reforms to Solvency II should be ready by the end of the month.

Kappes also recognised the development of a new captive regulatory environment in France and similar efforts at an early stage in the United Kingdom.

“All these developments show that the voices of the captive players have been heard and are being understood more and more,” he added.

Cayman pure captives continue to increase

Luke Harrison
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The Cayman Islands Monetary Authority has published its captive figures for the third quarter of 2023, showing a further rise in pure captives compared to its 2022 year-end figures.

The number of pure captives domiciled in Cayman is now 284, an increase of seven compared to 2022.

There were 155 Segregated Portfolio Companies (SPCs) in Cayman at the end of 2022, with this number dropping to 153 during the first quarter of 2023.

A further two were then added in Q2 to bring the total back to 155, before declining to 154 this quarter.

The number of group captives has remained steady at 127.

Pure captives in Cayman are now writing $5.3bn in total premium, while group captives are writing $4.2bn. SPCs are responsible for $4.4bn in premium.

Assets under management (AuM) totals $21.2bn for pure captives, $12.5bn for groups and $14.9bn for SPCs.

Captive Intelligence’s data on the number of captives shows that there was a total of 33 captive formations in the Cayman Islands in 2022, which took the total number of captives in the domicile to 559 at year-end.

AM Best acknowledges increased European captive utilisation

Luke Harrison
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The utilisation of existing captives is rising as a consequence of the hard commercial market, according to a recent AM Best Market Segment Report.

In the Report published on 6 November, the rating agency said several captives have increased their participation on existing covers, as well as expanded into new lines of business as their parents have looked to increase captive utilisation and diversify portfolios.

The hardening cyber market has led to more captives writing this risk, with commercial market cover often being expensive and restrictive.

There has been an overall uptick in the number of captives domiciled in Europe, as existing domiciles remain popular, and other jurisdictions put in place legislation to attract new captives.

More captives were licensed in 2022 than closed, and AM Best said there are indications there will be further growth in 2023.

The ratings agency also said that while the hard market provides opportunities for captives, it also presents challenges.

Many captives are dependent on reinsurance capacity to be able to offer large limits required by their parent groups.

The reinsurance market has trailed the commercial market in terms of price increases in recent years, but with significant catastrophe losses and inflation in 2022, reinsurance is now in a hard market.

As a result, captives have faced price increases for their reinsurance programmes in the 2023 renewals and many increased their retentions.

Solvency II

A review of Solvency II enacted by the European Commission (EC) in 2020 is currently on-going, and there is one potential alteration concerning the principle of proportionality which will be of interest to captives.

Under Solvency II, the principle of proportionality is currently applied to ensure that practices taken by supervisory authorities are proportionate to the risk of the insurer and reinsurer.

As captives are often small and lightly staffed operations, this principle of proportionality is supposed to ensure that regulatory requirements do not become overly burdensome.

The EC has acknowledged that this high-level principle has been “insufficient” in reducing the regulatory burden for small insurers.

The EC proposals aim to address this by introducing specific proportionality measures that can be applied by low-risk profile undertakings automatically and by other insurers after supervisory approval.

“This should lead to a more streamlined, proportionate, and risk-based prudential process for captive entities,” AM Best said.

IFRS 17

European captives reporting under International Financial Reporting Standard (IFRS) are currently working to implement the transition from IFRS 4 to IFRS 17, which came into effect on 1 January 2023.

AM Best has noted varying levels of readiness for IFRS 17 implementation among captives.

“Some started the project early and have reported quarterly numbers to their parent under IFRS 17 since the first quarter of 2023, while others started later and are working towards being ready for the year-end 2023 reporting deadline,” AM Best said.

Dan Towle procliams the “Golden Age” of captive insurance

Richard Cutcher
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Dan Towle procliams the “Golden Age” of captive insurance

CICA president Dan Towle believes we are living in the “Golden Age” of captive insurance, as we see large numbers of new companies establish captives, greater utilisation than ever before is facilitated and large industrial countries introduce more captive friendly legislation.

Towle made the comments when speaking at the opening address of the European Captive Forum in Luxembourg this morning.

“I have been in captive insurance for nearly thirty years and like many of you have navigated hard and soft market cycles and worked through periods where our industry was constantly under attack,” he said.

“Captive insurance has now proven its business purpose and value over a prolonged period of time. We still have our sceptics and our detractors, but no one can legitimately refer to the captive industry as the alternative market any longer ─ we have reached the Golden Age. A time when captives are thriving.”

Towle noted the “challenges and growing pains” the captive industry has faced during previous decades, including scrutiny and misunderstanding from regulatory authorities and the mainstream media.

“As more businesses turn to captive insurance, the captives are becoming more sophisticated than ever and are more strategic than they were a decade ago,” he added.

“New technology, better data and evolving risk strategies are giving captives the edge in providing coverage ahead of what the commercial market can provide. 

“It is exciting to see this growth and expansion. I believe this gives us a unique opportunity to highlight the value of captive insurance to an even wider market. The captive insurance industry is often misunderstood by the mainstream media, governing regulators and others. 

“That said, we need to continue to be diligent. As we continue to grow, we attract more attention and we need to consistently educate, lobby and defend the use of captives for better risk management and financial efficiency. Despite our success, we cannot rest on our laurels.”

French captive regime prompting new entrants – David Vigier

Luke Harrison
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French captive regime prompting new entrants – David Vigier

More French companies are becoming less reluctant to take the “next step” toward captive utilisation following the introduction of the country’s new captive legislation, according to David Vigier, director of captives services and claims strategy at HDI Global.

After numerous delays, the French legislator introduced its new regulatory system in 2023 designed for reinsurance captives and inspired by the regulatory framework in Luxembourg.

In June, the French government confirmed the details of its equalisation reserve, publishing a decree stating the provision can reach 90% of the technical result within 10 times the minimum capital requirement (MCR).

“There are a lot of captive creation studies ongoing in France and we expect captives to expand to some corporations that were previously reluctant, for many reasons, to take that next step,” Vigier said.

“In the past few years French companies did not want to have a captive in Luxembourg, Ireland or some other places. It was perceived to be complex and there might be some reputational risks linked to it.”

He highlighted that corporations across Europe that previously did not own captives are now looking at captive utilisation, particularly for risks such as property and liability.

“These are the classes of risks traditionally written by captives when it comes to working layers and attritional risks,” Vigier said.

For those companies that already have captives, he is witnessing a diversification of portfolios.

“This shows the necessity that corporations have to make up for the commercial market’s lack of appetite for certain classes of business,” he said.

“I have got a crazy example of one captive writing 16 different classes of risks.”

He said companies wanted to diversify their portfolios as it helps provide balance and stability within the captive.

Although there is a growing number of domiciles in Europe, Vigier said competition will not be an issue, with each jurisdiction creating a nuanced captive environment that will attract companies with different priorities.

“In Ireland, it’s mostly about corporate tax, which is low compared to other places,” he said.

“Luxembourg and France, to a certain degree, are more about building insured risks related provisions over time, with a limited tax impact, so they are very different.”

With the current captive activity, Vigier said there is an appetite at HDI to “be in the game”.

“We’ve got very strong qualities when it comes to underwriting and to claims,” he said.

“We are very focused on industry all-risks, and we’re focused on major accounts, but with a growing appetite for middle market accounts.”

Iowa to hire captive insurance director

Luke Harrison
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Iowa is looking to employ its first captive insurance director, following the passing of its captive legislation in April.

The captive insurance director of the Insurance Division will be responsible for implementation and administration of new regulatory responsibilities enacted by the Iowa State Legislature in Senate File 549.

On April 24, the Iowa Senate unanimously passed Senate File 549 as amended, “a bill for an act relating to captive insurance companies,” which the House passed earlier in April.

Captive Intelligence reported in June that Iowa was likely to become the next US state to embrace captives, making it the 36th US jurisdiction to adopt captive legislation (including the District of Columbia).

SF 549 authorises the formation of pure, association, protected cell, special purpose and industrial insured captives.

When the bill was passed, it was noted that the state will have specified captive insurance regulators, and the Insurance Division will establish a captive insurance bureau.

In October, the Texas Department of Insurance (TDI) re-hired Robert Rudnai as a captive specialist, where he will be responsible for licensing and monitoring Texas-domiciled captives.

Fedeli “tentatively” granted ERSIA benefits exemption

Luke Harrison
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The US Department of Labour has “tentatively” granted a United States’ Employee Retirement Income Security Act (ERISA) benefits exemption to Fedeli Group, which would allow the company to utilise its captive to write employee benefits cover.

The exemption would permit the Fedeli Group’s to enter into a fronting contract with THP Insurance Company for its EB cover, which would then reinsure the risk back to Fedeli’s captive, Risk Specialists LLC.

The Fedeli Group is a risk management and insurance firm based in Ohio, and its captive is domiciled in Tennessee.

The firm specialises in property and casualty, employee benefits consulting, workers’ compensation, environmental risk management and surety.

The company had evaluated two different approaches to provide the benefits payable under its benefit plan and the effects on the costs from each.

The first contemplated using a third-party, while the second option was to utilise its captive.

Based on actual values from the benefit plan’s 2023 financial statement, the annual premium under the third-party approach would have been $2.3m compared to the $2.1m annual premium from the captive.

There had previously been four and a half years between successful ERISA applications, but there has been a renewed sense of optimism in the process following approvals of the Comcast and Phillips 66 programmes in early 2022.

Clients are told to expect a timeline of 12 months from start to finish of the process.

Fedeli calculated that the total annual cost savings by utilising the captive would equal a $162 monthly contribution reduction per person.

As of 19 September 2023, the benefit plan covered 64 participants.

“Based on Fedeli Group satisfying the conditions described above and the representations made in its exemption allocation and communications with the Department, the Department has tentatively determined that the relief sought by the applicant satisfies the statutory requirements for an exemption under ERISA section 408(a),” The DoL said.

Captive Intelligence understands the DoL is in the process of reviewing its entire exemption programme, providing a new regulation proposal last year to potentially change the rules that govern the process.

GCP #95: Brady Young, Ron Sulisz on SRS’ future growth plans

Richard Cutcher
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GCP #95: Brady Young, Ron Sulisz on SRS’ future growth plans
Brady Young, SRS
Ron Sulisz, SRS
Tony Sanchez, OneNexus
Wendy Dine, SRS

In episode 95 of the Global Captive Network, supported by the ⁠EY Global Captive Network⁠, Richard is in Nashville, Tennessee to find out the latest from independent captive manager, Strategic Risk Solutions.

01.55 – 13.27: CEO Brady Young and president Ron Sulisz discuss the firm’s recent inward investment from Integrum Holdings LLP and its future plans for growth.

13.57 – 26.50: Captive owner Tony Sanchez, CEO of OneNexus Environmental, explains his fairly unique captive in Oklahoma, with Andrew Marson, a managing director at SRS. Read more about OneNexus ⁠here⁠.

27.20 – End: Our last discussion is with Jeff Fitzgerald, who returned to the firm in August as managing director of a new division, ⁠SRS Benefit Partners⁠, and Wendy Dine, an experienced benefits specialist with SRS for 11 years.

SRS announced today it had launched SRS Altitude, a managing general underwriter based out of Zurich. Read that story here.

For the latest captive insurance news, visit ⁠Captive Intelligence⁠ and sign up to our ⁠twice weekly newsletter⁠.

Strategic Risk Solutions launches MGU, SRS Altitude

Richard Cutcher
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Strategic Risk Solutions launches MGU, SRS Altitude

Independent captive manager Strategic Risk Solutions has launched SRS Altitude, a managing general underwriter (MGU) that will focus on alternative risk transfer solutions, led by Loredana Mazzoleni Neglén.

An experienced Swiss Re executive of more than 20 years, Neglén has joined SRS Altitude as global CEO with several more “seasoned ART and corporate insurance industry experts” expected to join in the coming months.

SRS Altitude will begin operating in the first quarter of 2024 with structured (re)insurance and parametric products at the centre of its offering.

“We are thrilled to introduce Altitude as an integral part of our long-term commitment to providing exceptional client service,” said Brady Young, CEO of SRS.

“The launch of Altitude represents a significant milestone in our ongoing efforts to diversify our offerings and enhance our ability to differentiate and meet the evolving needs of our valued clients, captives and broker partners.”

SRS said Altitude would operate as an “independent entity under the SRS umbrella”, and is a “strategic move aimed at expanding its client services portfolio, offering a comprehensive suite of ART solutions designed to address the growing complex risk management challenges and needs of corporate clients across industries”.

Captive Intelligence understands SRS Altitude is in discussions with several potential capacity partners, including large multinational insurers, while the distribution model will draw on both the SRS portfolio of clients and broker networks.

Ron Sulisz, president of SRS, told Captive Intelligence entering the MGU business had been an ancillary service strategic initiative for SRS, and since the recent investment from Integrum Holdings LLP it has been able to explore more strategic opportunities.

“SRS Altitude will allow us to expand our alternative risk transfer products offering for our more sophisticated clients due to their expertise in structured reinsurance and parametric products,” he said.

“Our clients are exploring the range of insurance offerings, so these high-level solutions are becoming more interesting and relevant to them.

“The structured reinsurance and parametric products have more prevalence in the EMEA market, which is where our initial focus will be, but we will be expanding our geographic footprint in due course with additional offices and hires.”

AM Best affirms ratings of CNOOC captive

Luke Harrison
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0

AM Best has affirmed the financial strength rating of ‘A’ (excellent) and the long-term issuer credit rating of “a” (excellent) of Barbados-domiciled ICM Assurance (ICMA).

ICMA is a single parent captive, wholly owned by CNOOC International, which is in turn wholly-owned by CNOOC Limited (CNOOC), the ultimate parent. The outlook of the credit ratings is stable.

CNOOC Limited is one of China’s largest producers of offshore crude oil and natural gas.

The captive provides global liability and property coverages to its ultimate parent and affiliates.

ICMA is considered a core element of CNOOC’s overall risk management and risk mitigation programme and serves a “critical role” in delivering coverage and access to reinsurance.

The ratings reflect ICMA’s balance sheet strength, which is assessed as strongest, as well as its adequate operating performance, neutral business profile, and appropriate enterprise risk management (ERM).

The ratings incorporate AM Best’s view of ICMA’s exposures diversified globally among countries with predictable or developing legal, business and regulatory environments.

AM Best expects ICMA’s level of risk-adjusted capitalisation, as measured by Best’s capital adequacy ratio (BCAR), to remain at a similar level prospectively.

The balance sheet strength assessment considers ICMA’s low underwriting leverage and liquidity measures.

ICMA’s surplus consists of capital and underwriting profits retained in the captive and loaned back to the parent.

The loan is repayable on demand with counterparty risk curbed due to the affiliation and the aligned interests of the two companies.

The captive’s gross loss potential is elevated as it remains exposed to high severity events, due to the nature of the insurance ICMA provides for CNOOC’s oil and gas exploration.

This risk is partially offset by safety programmes and loss control provided by CNOOC, while reinsurance protection is placed to limit the captive’s net exposure.

ICMA has reported solid operating results, aggregating significant net operating profits recorded over the past five years.

“The captive’s loss experience remains favourable due to infrequent material catastrophic events, management’s knowledge of the business and strong loss control programs at parent level,” AM Best said.

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