AM Best has affirmed the financial strength rating of B++ (Good) and the long-term Issuer Credit Rating (Long-Term ICR) of “bbb” (Good) of Bermuda-based Sura Re.
Sura Re is the wholly owned captive reinsurer of Suramericana S.A. (Sura), which in turn is 81.1% owned by Colombian financial services conglomerate Grupo de Inversiones Suramericana S.A.
Sura Re participates in property business underwritten by Sura’s affiliates across Latin America to help the group achieve its goals.
The ratings reflect Sura Re’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM). The outlook of the ratings is stable.
In December 2022, Sura Re reported a positive net profit for the fourth consecutive year since its inception.
Operative performance was driven by technical results, backed by good underwriting practices and strong fee income.
AM Best said it recognises the greater relevance that Sura Re is aiming to achieve in Sura’s overall regional strategy, which is starting to be reflected with Sura’s expanded geographic scope.
During 2022, capital requirements continued to reflect higher premium risk as the company executes its strategy and retains a higher portion of risks.
AM Best expects Sura Re’s capital requirements to increase due to a larger deployment of its capital while supporting its current very strong level assessment of risk-adjusted capitalisation.
AM Best said the company’s asset-liability management follows a very conservative investment policy focused on maintaining liquidity to cover Sura Re’s obligations in terms of tenure and currencies.
The ratings agency also considers the company’s ERM practices as appropriate given the complete support by Sura’s expertise and management team.
Bring part of the third largest insurance group in Latin America provides flexibility in terms of growth and premium risk to manage its capital and return positions efficiently in the future.
“AM Best therefore considers operating performance to be adequate for the current ratings,” the ratings agency said.
“Negative rating actions could take place if the company fails to meet its financial performance objectives, with results that fall to a level that impacts capital, and therefore, its risk-adjusted capitalization, either by business decisions, importance to its financial group or deteriorating macroeconomic conditions.”
Artex Risk Solutions has appointed Joni Steffen as a client services director of its Cayman office.
Steffen will be responsible for overseeing Artex’s client relationships, leading strategic initiatives and managing the client services team in the region.
She will report to Suzanne Sadlier, managing director, Cayman Islands at Artex.
“Core to the Artex business strategy is a client-centric partnership built around trusted advisory and consultative support. That’s why Joni’s in-depth experience in all areas of insurance management make her the best person to co-lead our client services team in Cayman,” said Sadlier.
“Joni’s expertise is critical to our growth trajectory, with oversight of our clients’ needs and delivery of the most comprehensive risk management solutions and services available.”
Steffen has more than 17 years of financial services experience and has experience across several industries including group captives, MGA and fronted reinsurers, SPCs, long-term annuity, healthcare, legacy run-off solutions, casualty pooling, chemicals, pharmaceuticals and transportation.
Steffen joins from Aon Cayman where she has worked as a senior vice president and has also served as an audit manager for Grant Thornton.
She is also experienced in analysis of investment portfolios including private equity, hedge funds, derivatives and specialty finance lending.
Legacy acquirer DARAG has concluded two transactions with undisclosed North American captive insurance companies.
The first transaction was completed in May, with the second concluded in June 2023.
“Our team has seen increased interest in North America for bespoke legacy solutions that enable insurers to achieve finality for their non-core books of business,” said Tom Booth, CEO of DARAG.
“We are pleased to be able to meet that demand and further develop our relationship with the US self-insured market. These latest transactions demonstrate DARAG’s ongoing commitment to our North American platform.”
The transactions have been written into DARAG Bermuda and offer full legal finality for the US workers’ compensation book of the latter and the US workers’ compensation and automotive liability books of the former.
Joel Neal, executive vice president of M&A at DARAG North America, said: “It has been a busy year for DARAG’s North American platform, and we continue to have a very active pipeline.
“These transactions, alongside the many others we have had in North America, demonstrate the growing demand for the solutions DARAG offers in the region.”
In April DARAG concluded an agreement between an undisclosed Cayman-domiciled captive and its Bermudian insurance carrier, DARAG Bermuda.
The agreement allows the counterparty to release capital back to members of the wider group.
David Stebbing is Senior Director for Strategic Risk Consulting and Risk & Analytics at WTW, based in the United Kingdom.
Ed Koral is Director of Risk & Analytics at WTW, based in New York City.
“I allocate, therefore I am.” These words were uttered with gloomy resignation by a beleaguered risk manager. The lack of enthusiasm is understandable; it is hard to get jazzed about a process whose best result is often described as “making sure everybody is only a little unhappy”.
When a firm buys insurance via a centralized risk management function, it hopes to enjoy the economies of scale of the unified consolidated organisation. In fact, many captive insurers are used to facilitate an “internal risk pooling” function, in which the consolidated group accepts a larger firmwide risk retention, the business units take smaller individual retentions, and the captive insures the gap between the two.
Using the captive allows the organisation to harness the economic strength, size, and risk-taking ability of the larger combined group, while recognising the smaller risk appetites of the component business units.
Alternatively, the business units may be buying “ground-up” coverage from the captive, while paying an allocated share of the firmwide premiums and retained losses.
Actuarial consultants are often enlisted to model the risks and develop loss projections and even “premiums” within the risk retention layer, considering the many factors typically considered in an underwriting process: exposure, loss history, volatility, and other factors. Brokers may be enlisted as well, providing market indications for captive “infill” policies.
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The benefits of centralized risk management can only be realized, however, when the firm-wide insurance premiums are allocated in a fair, equitable manner among the different component entities of that firm.
The allocation framework must address the needs of multiple stakeholders, including business unit managers, financial reporting and tax professionals, and individuals tasked with government contracting – as well as corporate risk management itself.
And the complexity builds. Allocation frameworks have multiple goals: all of them worthy, and many of them in conflict with one another. Think about this set of goals for an allocation system:
Considers loss history: Business units with favorable past experience should be rewarded, and those with poor experience should be surcharged.
Considers Exposure to loss: Business units need to be compared based on the relative “size” of their risks. While this is often measured in simple terms such as payroll, vehicle counts, sales or square footage, it is also often a complex question that must also consider underlying “riskiness” of the businesses, geography, or other considerations, especially with highly diversified firms.
Incentivizes Desired Behaviors: Business units that adhere closely to safety and loss prevention protocols should be rewarded, and those who lag behind should suffer negative consequences. Other compliance areas to focus on include claims reporting deadlines and return to work practices.
Should produce better-than-market results: Business units should not be able to approach the insurance market on a stand-alone basis and improve on their allocated share of the firmwide policy. This issue frequently arises with international operations and can prove challenging in diversified conglomerates where one subsidiary drives up the cost for the entire firm, or where one subsidiary is a stand-out performer in a group of otherwise average performers.
Supportable and repeatable: There needs to be sufficient reliable data to support the allocation approach, making similar calculations over multiple periods. Having a consistent approach to cost allocations from year to year also establishes credibility with government contract auditors who may be enforcing Cost Accounting Standards, as well as tax auditors.
Transparent and easy-to-understand: Stakeholders need to be able to comprehend the methodology used in the allocation calculations.
It is difficult if not impossible to create an approach that fully satisfies all the objectives. Above all, the allocation approach must be perceived as “fair,” so that each entity receives equal and non-preferential treatment.
This is important not only in preserving internal relationships and cooperation, but in satisfying the needs of external parties such as public entities, who may be paying “pass-through” insurance allocations as part of a contractual agreement.
Premiums invoiced by related-party captives often attract extra attention, and these parties will need to be satisfied that subsidiaries are not subsidizing one another at the government’s expense, and that premiums were developed using reasonable, actuarially sound methodologies.
There are numerous available tools for solving this riddle. One can create, with relative ease, an allocation spreadsheet that meets one or several of these objectives using relative weightings of exposure and/or loss experience, and some long division.
But this leaves behind some nuanced approaches that introduce real-world considerations such as minimum and maximum premiums, budgetary constraints of the subsidiaries, uneven and varying need for excess policy limits, acquisitions and divestitures, and new emerging classes of risk in which the firm has no meaningful track record.
One actuary suggested a capital allocation model that blends both average and marginal cost of risk capital for all subsidiaries into a single premium and risk allocation formula. Analysis for an organisation with ten business units would start with a single operation and then review the marginal risk created by including each additional business unit until all ten have been included – in every possible permutation.
This results in over 3.6 million possible combinations – well beyond the capability of a spreadsheet program – but it also goes a long way to ensure that risks are allocated even-handedly. At this point, we have departed simple arithmetic and entered statistical modeling.
Nearly all risk managers interviewed on the subject agree on this: getting allocation right is a multi-year learning process that requires patience, consensus, feedback, adjustment and revision.
All agreed on the adage, “what gets measured gets done”. That is, individuals and even organisations will manage their activities to achieve the measurable targets that have been set for them, often with unintended consequences. Here are a few stories, and the lessons learned:
One risk manager interested in creating a reward and chargeback system based on loss experience realised that while the business unit had some ability to prevent workplace accidents, it had little or no ability to control the cost of those accidents once they occurred.
Basing an allocation on the total cost of claims seemed punitive, because the local management did not control claims once they occurred. As a result, the allocation system was modified to measure claim counts, rather than the total cost of claims.
Another risk manager, who was initially satisfied at creating an allocation and chargeback system that measured exposures, loss history, adherence to risk management protocols and return-to-work goals, eventually realized that the system was so complex and opaque that local managers did not feel they could control their outcomes. The calculations of the model needed to be simplified so that all could understand how it worked – so that they could manage to the desired outcome.
In still another case, the penalties for excessive claims activity were so severe that it led the local business units to avoid or delay reporting claims. In response, the system was amended to cap chargebacks and reward prompt claims reporting.
The design process is critical, and requires careful thinking, planning and collaboration. It is essential to engage actuarial consultants and experts on government cost accounting, and it helps to seek involvement from internal parties responsible for reporting or analysing risk and loss information.
Buy-in from a wide cross-section of your organisation will improve the chances for success with the methodology selected. This includes people from accounting, legal, risk management, government contracting (as applicable) and business unit leaders.
These stakeholders should not only be involved in the development and selection of the methodology, but also in communication with the internal customers. And in that regard, support from the top levels of the organisation (e.g., Chief Financial Officer, Chief Risk Officer or even the Chief Executive Officer) will be critical.
The allocation methodology should be readily understood by the end-users: the people at the business unit who are paying the costs, and whose bottom line is directly affected by the allocation. If people cannot understand how their bill was calculated, they will be slow and resistant to accept the allocation approach. But know also that there is no single right way to allocate costs; so later, after you believe you have implemented the “perfect” methodology, be prepared to react to constructive feedback, making incremental adjustments as business conditions and objectives change.
While premium and cost allocation may appear at first glance to be a dismal topic, the benefit for the organisation is a network of incentives and rewards that move the company closer to its business and risk management objectives. It is important to invest the appropriate time and involve the right stakeholders and experts at the outset.
And if you’re finding that the onus of performing allocations drives you to use existential language, remember that you do have the available tools to make this process be all that it can be.
A Magistrate judge in Tennessee has ruled that CIC Services should not be awarded attorneys’ fees in its case against the Internal Revenue Service (IRS), arguing that the agency’s losing position was substantially justified.
A Bloomberg Law article reported that in siding with the IRS over the fees, Tennessee Magistrate Judge Jill E. McCook said the agency had not disregarded any binding court precedent when it maintained that the requirement did not have to go through a notice-and-comment process under the Administrative Procedure Act.
“The IRS therefore did not take a position that was ‘flatly at odds with the controlling case law’ but instead it ‘lost because an unsettled question was resolved unfavourably,’” McCook said.
The firm brought the case to challenge IRS Notice 2016-66, which required captives taking the 831(b) election and their insurance advisers to report on the transactions.
In a GCP Short episode released in March last year, three legal and captive experts from the US discussed the judgement from the District Court of Eastern Tennessee striking down the IRS’s controversial Notice 2016-66.
CIC Services LLC asked for the fees in the long-standing case that had also included a trip to the United States Supreme Court.
The company had highlighted the Equal Access to Justice Act as reasoning for being awarded the fees, as the Act provides parties who beat the US in a civil case with attorneys’ fees unless the government’s position was substantially justified or other special circumstances make an award of the fees unreasonable.
CIC Services agreed that the agency’s position that the suit was blocked by the Anti-Injunction Act was substantially justified, even though the Supreme Court sided with the firm in 2021, according to the IRS.
The IRS defended its justification for arguing that its reporting requirement did not need to be issued by first giving notice and responding to public comments, even though it lost on that point at the district court in 2022.
The final decision on awarding attorneys’ will be decided Chief Judge Travis R. McDonough at the US District Court for the Eastern District of Tennessee.
Under the Notice, the IRS proposed regulations would see certain 831(b) captives 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”.
More than 100 comments have been submitted in response to the IRS latest proposed regulations, including from CICA, SIIA and the Oklahoma Department of Insurance.
The 831(b) Institute was launched at the of June in the US and has asked for clarity from the IRS around how it regulates micro-captives, arguing that it “unfairly” scrutinises them.
The Guernsey Financial Services Commission (GFSC) has received 21 applications during the first six months of the year, eight of which were for captive licences.
The domicile remains a go-to jurisdiction for UK-based corporates, as well as a strong option for international businesses.
Guernsey added 12 new captives in 2022 while three captives surrendered its licence, taking its total number of captives to 201.
The start to 2023 suggests another strong year of new formations of both pure captives and cells.
“We have seen increased interest in captive formations since 2021 and that continues for firms that are having difficulty in placing their insurance programmes or when the cover they seek is not available,” the GFSC told Captive Intelligence.
If a company is looking to set up a single parent captive in Guernsey, the application can be processed by the GFSC in around four weeks from submission of a fully completed application.
“We have a pre-authorisation scheme for captive cells which means that, within certain parameters, a cell can be formed at short notice by the insurance manager providing the Commission is advised within 14 days thereafter,” the GFSC said.
The GFSC said one of the biggest challenges that Guernsey faces as it aims to continue attracting new captive formations and maintaining its position as the biggest domicile in Europe is attracting and housing sufficient skilled staff.
“This is a matter for government but the Commission contributes to the debate when appropriate.”
Strategic Risk Solutions (SRS) has promoted Elyse Dandeker to deputy managing director of the SRS Guernsey office and head of European operations.
Reporting to SRS Europe CEO Peter Child, Dandeker will be responsible for further expanding the captive manager’s influence in the European marketplace.
“I’m delighted that Elyse’s hard work and dedication has been rewarded by this promotion,” Child said.
“Elyse is a fundamental part of SRS both in Guernsey and across Europe, and I am looking forward to working with her to continue to expand our European footprint.”
Dandeker joined SRS in 2021 as the director of accounting in Europe, based in the SRS Guernsey office.
She has played a key role in establishing SRS in the domicile, focusing on development of the team, the operational platform and delivery of service to a diverse portfolio of insurance management clients.
“I am thrilled to be appointed deputy managing director of Guernsey and head of operations across Europe” Dandeker said.
“I am dedicated to maintaining our commitment to deliver a high – quality service to our clients, whilst ensuring operational excellence in all aspects of our business. With the support of our talented team, I am confident that we will exceed expectations and further strengthen our position in the market.”
Extreme weather and inflation creating ‘perfect storm’ for rate increases
Captives under greater consideration, but warning against short-termism
Captives pushed up the tower, with commercial market keen for primary layer
Concern over fronting capacity and structure on property programmes
The current environment for property risk has created the “perfect storm” for writing the line through captive insurance companies, although important questions concerning collateral, retentions and long term strategy need to be considered for insureds.
Globally, weather events have become more capricious and more locations are becoming exposed to frequent, dangerous and costly environmental catastrophes.
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The Big Ticket data platform will provide Specsavers with more confidence to retain risk within its captive, according to Lee Worth, head of group insurance at Specsavers.
Big Ticket launched its neutral digital infrastructure hub for corporate insurance customers at the Airmic Conference in Manchester, UK in June, after four years of development.
Guernsey captive owner Specsavers is the first client on the platform and Worth was part of the launch.
“Big Ticket will give us better data and it will give us the data in real time,” Worth told Captive Intelligence.
“It will allow us to do much more analysis and if we can then do that analysis ourselves or alongside our broker, it gives us a lot more confidence to retain that risk within the captive.
“One of the things we are looking to do is to start diversifying the captive, but we can’t diversify into other types of risk unless we’ve got confidence in the data being provided.”
Worth noted that Specsavers has historically always been quite reserved with it comes to the utilisation of its captive.
“We’ve always had a captive, but we’ve not necessarily used it to its full potential, and we’ve transferred a lot of our risk to the insurance market,” he added.
He said that property is currently the main focus of the Specsavers captive, but the captive also has some liability risk.
“In particular with Specsavers being a healthcare provider, we also have the need to write medical malpractice,” he said. “I’m keen to get more data from the industry so I can plan ahead and not be reactive.”
Rob Bartlett, co-founder and CEO at Big Ticket, said the platform allows brokers, insurers and captive managers to provide one version of the truth, “so we solve the problem around data capture and transmission during the renewal process”.
“Everyone is sharing the same data, they know where it came from, and they know the quality of it,” Bartlett added.
He believes that the Big Ticket platform provides a great opportunity for captive managers to improve the way they operate, if they consider some of the challenges of moving data between captives and reinsurers.
Bartlett noted that captives are an increasingly important part of the insurance ecosystem “and all the data benefits the insurer can get from Big Ticket is even more true for captives”.
“It might even be more important to the captive as it is part of the corporate and it’s their captive, and therefore, the accuracy and quality of that data is even more important,” he said.
Ken Fraser, co-founder and president at Big Ticket, highlighted that once companies are on the platform, it doesn’t necessarily just have to be used at renewal.
“One of the advantages is that captives can start thinking more strategically over the course of the year, so when it comes to the new renewal, the captive can be more aggressive if it wishes,” he said.
“Having a high confidence level in the exposure data puts the insured and their broker in a position where the captive can send a different message into the market essentially saying that the captive is very comfortable taking more risk if your rate goes too high.”
Big Ticket is backed by founding partner MasterCard and has a Global Advisory Board which includes members Aon, Aviva, Oasis, Zurich, Pool Re and Motive Partners.
Airmic CEO Julia Graham is chair of the Big Ticket Advisory Board.
“Big Ticket is the solution that the risk management community has been crying out for,” Graham said.
“Every year at the start of every insurance renewal, hundreds of thousands of companies use an industry-imposed process to collect exposure data.
“They are asked to use unencrypted spreadsheets and e-mail to do this; a painful, laborious and insecure process which takes up to nine months to complete at an annual recurring direct operational cost globally of US$25 billion, on top of which it actually increases vulnerability to data privacy and cyber security risks.”
Douglas Plenty is a Partner in Insurance Consulting at Ernst & Young LLP, based in London, United Kingdom.
Imogen Gammidge is a Senior Consulting in Insurance Consulting at Ernst & Young LLP, based in London, United Kingdom.
Unprecedented disruption, a hardening (re)insurance market, and the onset of new major risks have increased interest in captive use by corporate risk managers. The captive market – once seen as an alternative to traditional commercial insurance – is establishing itself as a valuable risk management tool and a market in its own right.
Changing risk profiles, from tangible assets, including physical property, to intangible assets, such as intellectual property, has meant that corporates are seeking alternative methods to provide coverage or capacity where traditional insurance cannot.
We estimate that the captive market grew to a total gross written premium of US $250bn in 2022 (Source: EY Nextwave Insurance – commercial and reinsurance paper). Through offering flexible and sophisticated insurance solutions, captives have expanded globally and diverted premium from the open market – and there’s every reason to believe they will continue to do so.
Addressing the changing needs of corporate customers
The changing needs of customers in the commercial market, including corporate risk managers, global businesses, and mid-market organisations, is a major driver of this growth.
Customers are seeking tailored insurance solutions that meet their exact risk profiles and reflect their virtual asset base, operating models, and geographical footprints.
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Large corporations have been examining their insurance strategies and selecting captives to provide a range of capabilities unavailable on the open market and will continue to if traditional insurers cannot meet their requirements.
For many smaller corporates facing new and more costly risks, captives are also being seen as a potential tool to manage the impact of pricing shifts which have substantially hit some industries.
As businesses expand their operations into new markets and increase their reliance on technology, they also become more vulnerable to intangible risks, such as climate events, political volatility, changes in regulation, and cyber-attacks.
With the increasing value of intangible assets from corporate companies, the demand for coverage, and more robust protections from cyber and climate threats through advanced risk insights, is ever increasing.
Companies of all sizes and sectors are now seeking effective risk advisory services and packaged solutions that feature data and analytics services, provision of risk engineering and market-specific offerings, tailored to local laws and regulations.
Solving for intangibles and new threats
To solve for the rise of intangible risks, which now comprise most of the value on company balance sheets, many corporate risk managers have embraced self-insurance for coverage and risk insights that are not readily accessible on the open market.
Corporates have realised the potential for captives to provide advanced analytics and insight generation capabilities, which has led them to master their parents’ risks and build effective loss prevention strategies.
Reduced losses, in combination with use of sophisticated reinsurance purchasing, has resulted in a reduction in portfolio volatility and captives becoming increasingly comfortable taking on more risk.
Captives are further deploying data analytics tools to enhance their risk retention reviews, pricing and coverage negotiations, and risk management efforts. Having grown increasingly self-sufficient and profitable, many large captives see little reason to turn to the open market.
The largest captive insurers are going beyond covering their own risks because they see an attractive path in commercializing their capabilities.
Insights into specific customer needs also means that captives can generate innovative solutions to protect society from its greatest threats. For instance, captives are being used more frequently as incubators for product development, including cyber threats and parametric coverage for intangible assets, to understand companies’ evolving exposures.
Captives offering cyber insurance emerged in response to reduced capacity and rising pricing of this product line in the traditional market. Cyber cover provided by captives now typically forms a fundamental component of their parent’s cyber risk management strategy.
Similarly, a withdrawal of carriers willing to underwrite “brown” risks, due to increasing ESG concerns, has led customers to consider bifurcation of their “brown” and “green” exposures through captives, or bundling of these exposures to support the onward transfer of risk.
The role of brokers and insurers
There is huge opportunity for brokers and insurers to be doing more for their captive clients. Specifically, around alternative revenue streams, including risk advisory and data-led services to provide expert advice on risk management, regulatory compliance, and industry benchmarking.
These services can help captive owners to regularly evaluate their insurance programmes and identify opportunities for improvement. Captives are a tool to solve problems that cannot be solved in the commercial marketplace, and they should work in harmony with the wider ecosystem.
Brokers and insurers have the capabilities to facilitate this relationship and in doing so, support both themselves and captive owners seize further revenue and growth opportunities.
To support clients in their decisions to build out captives and gain the benefits of continuous product development, advanced insurance strategies and risk insights, collaboration may be the best path forward for insurers and brokers. In turn, new growth opportunities may be realised for captives, too.
A success story in this space is the collaboration between captives and managing general agents (MGAs).
Their flexible structures allow for captives to support in a myriad of ways, primarily through providing access to reinsurance markets.
The prevalence of these arrangements is in its early days. However, we believe there are more opportunities for MGAs to exploit – and more innovative captive partnerships on the table to drive growth.
Conclusions
As demand for non-traditional risk cover rises, so will the need for alternative insurance solutions. Corporates and their (re)insurance partners that are ambitious in their action to together navigate changing risk profiles and demands stand to realise benefits from new insurance strategies and considering the role of captives.
Within a complex and ever-changing environment, a combined cross-(re)insurance industry approach, centred around the needs of customers, is imperative.
Those that succeed will invest in the opportunity to form early alliances with captives to drive innovation and build the capabilities needed to add value to customers and protect wider society.
Disclaimer: This Publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Member firms of the global EY organization cannot accept responsibility for loss to any person relying on this article.