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DARAG completes captive transaction in Benelux
Legacy carrier DARAG has concluded a novation agreement between an undisclosed Benelux based captive, the captive’s policyholder and DARAG’s German insurance carrier DARAG Deutschland AG.
The parties have agreed that DARAG shall assume expired long term liability insurance policies.
“DARAG continues to expand its footprint in Benelux and has brought to bear its local claims know-how in the diligence and ongoing management of this specialist portfolio,” said Tom Booth, DARAG CEO.
“Once again, we have proven that our Continental European DNA is a differentiator in the marketplace.”
DARAG will provide full legal, operational, and economic finality for the captive, with the transaction allowing the company to cease operations of its captive.
Guy Carpenter acted as broker and sell-side advisor on this transaction.
“We were delighted to be able to offer our client a comprehensive final solution for its captive insurance company via this novation agreement,” said Alexander Roth, global head of M&A and CEO of DARAG Europe.
“Novation is an extremely efficient process, which meant it could be completed swiftly allowing our client to focus on its core business.”
Roth said the deal was further demonstration of DARAG’s ability to provide “timely and attentive service” to clients looking to redeploy capital to further their strategic goals.
Dow Chemical captive has ‘Excellent’ rating affirmed
AM Best has affirmed the financial strength rating of ‘A’ (excellent) and the long-term issuer credit rating of ‘a’ (excellent) of Michigan-domiciled Dorinco Reinsurance Company (Dorinco). The outlook of these Credit Ratings (ratings) is stable.
Dorinco is the single-parent reinsurance captive for the Dow Chemical Company. The captive is a wholly owned subsidiary of Liana Limited, which is ultimately a wholly owned subsidiary of Dow.
Dorinco issues direct property and liability cover to Dow and certain related companies, and participates in property and casualty reinsurance treaties covering Dow and related parties with other insurance companies.
Around half of Dorinco’s premium is derived from reinsuring uncorrelated non-standard auto third-party business, with this diversification enhancing Dorinco’s business profile.
The ratings reflect Dorinco’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.
The “very strong” balance sheet strength assessment is supported by Dorinco’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), which AM Best said remains at the strongest level.
Dorinco has a record of positive reserve development, conservative investment strategy, and good liquidity, which are enhanced by its parent company.
The ratings also reflect Dorinco’s operating performance, which AM Best assess as adequate.
The company’s historically favourable operating performance improved during 2022, although its profitability metrics have trended in an unfavourable direction in recent years.
The fluctuations are mostly due to redundant reserving, which may produce lower accident year combined ratios when the claims are ultimately settled.
Additionally, the ratings acknowledge Dorinco’s business profile, which AM Best assesses as neutral.
Skyward to offer capacity for eMaxx’s alternative energy warranty captive products
Skyward Specialty will provide support and additional capacity for eMaxx’s alternative energy warranty products for captives.
eMaxx’s warranty products support manufacturers, developers, and owners of renewable and energy-efficiency projects by providing captive solutions.
The partnership will provide captives with risk capital, engineering-based underwriting, and risk management to mitigate performance risk and improve manufacturer and contractor warranties.
“If the transition to a greener economy is going to be successful, the market needs superior risk management opportunities to protect the businesses driving the transition forward,” said Kirby Hill, president industry solutions programmes and captives at Skyward Speciality.
“eMaxx’s solutions do just that and have a track record for strong historical loss performance.”
The alternative energy warranty products will be available in the United States and Canada.
Kevin Kaminski, senior vice president, underwriting at eMaxx, said that recent regulations published by the Internal Revenue Service relating to the Inflation Reduction Act are increasing demand for alternative energy warranty products.
“The strategic relationship we have with Skyward Specialty Insurance, the financial strength and capacity they provide, combined with eMaxx’s deep expertise and underwriting experience for securing projects performance will further increase and accelerate investors and project owners’ confidence to undertake alternative and renewable energy projects,” he said.
Captives can play “crucial role” in absorbing parametric basis risk
Captives could be key to taking parametric insurance more mainstream with large corporates by playing a “crucial role” in absorbing the basis risk of the policy and providing direct indemnification the insured parent, according to Thomas Keist and Jan Bachmann at Swiss Re Corporate Solutions.
Captive Intelligence published a long read on parametric insurance in September where Keist and Bachmann touched on their approach to parametrics and captives.
In a GCP Short released today, they expanded further on the concept with Adrien Norulak, head of risk analytics and director of innovation & technology at Swiss Re.
Keist said captives are currently “not in the centre” of the discussion with corporates on parametrics.
“There might be various reasons for that,” he added. “One could be that it’s mainly treasury and CFO level involved as soon as it gets to parametric insurance.
“However, I clearly believe that, in future the role of captive in the entire parametric insurance discussion should be much, much higher.”
Bachmann added that while more corporates are growing comfortable with parametrics, the risk profile of most policies – low frequency, high severity – does not match the classic utilisation of captives, which is usually designed around high frequency, low severity risks.
Keist and Bachmann believe there is a role for captives to play, however, particularly those which are well established and well capitalised, to support its corporate parent in absorbing the basis risk inherent in all parametric structures.
Basis risk materialises when the economic losses of the insured differ from the amount of coverage that is triggered, or the insured experiences losses without the parametric being triggered.
The downside to the insured is it does not receive a payout, but there is also an upside risk, that the policy and payout is triggered by the event but there is no loss, or a much smaller loss than anticipated.
“Basic risk is naturally present in parametric insurance and is comparable to other difficult to insure risks,” Bachmann said.
“And with all of those difficult to insure risks, the captive might be a good home for it.”
Keist explained that while some see the basis risk as another deterrent to using the captive, he believes it presents the captive with an opportunity to play a “crucial role” in enabling an effective parametric policy for the corporate.
“If the captive is the entity to pay the parametric insurance or reinsurance in the case of a captive, they could then use their, hopefully, strong capital base to keep the basis risk within the captive and provide coverage to their entities on a traditional indemnification basis,” he said.
“By doing that, they would transform a basis risk into a normal indemnification coverage. And that, of course, could be the decisive piece or element in the contemplation of parametric insurance for a corporate.”
Keist believes that classic natural catastrophe risks such as windstorm and earthquake are likely to be the best place to start for captives engaging in parametric structures, but any risk which can have an independent third-party data provider that proves an event has occurred or not could be addressed.
“Since captives themselves often lack knowledge or resources on transforming risks into parametric insurance, specialists like us are filling the need for risk modelling and solution design,” Bachmann added.
“This is then usually combined with our fronting capabilities to bring the risk into the captive.”
Modelling and minimising basis risk
Although a captive can be used to absorb the basis risk, the ultimate target of any parametric policy should be to minimise the range of basis risk, even if impossible to remove entirely.
“Having the highest possible correctness and accuracy of your exposure data is paramount to decreasing the basis risk, and this means having the highest precision of your locations, underlying values but also understanding the vulnerability,” Norulak said.
“In Risk Data Services (RDS) we provide, for example, a data readiness report, which assesses the completeness of data and guides the user to increase the overall score, coming to a highly accurate data set and enhance representation of the risk, which then, in something like a parametric policy, decreases the overall basis risk.”
Keist believes that the captive, being part of the corporate group, can have access to the data required to then work with the commercial market and risk modelling experts on structuring the most effective coverage.
“The captive is best suited to provide the necessary data analysis to minimise the basis risk, given that it has access and knows all the details of the company’s exposure and has tools available, such as RDS for example, to collect and analyse the data in a very, very precise way, such that it can minimise the basis risk,” he added.
Listen to the full discussion on utilising captives in parametric policies to minimuse basis risk on the Global Captive Podcast here, or on any podcast platform. Just search for ‘Global Captive Podcast’.
GCP Short: Can captives absorb basis risk & transform parametric policies?
In this GCP Short, produced in partnership with Swiss Re Corporate Solutions, Richard explores the viability of more captive adoption of parametric policies.
Thomas Keist, Global Captive Solutions Leader, and Jan Bachmann, Head of Innovative Risk Solutions, explain how a captive can be utilised to absorb that basis risk that usually exists in a parametric policy.
Adrien Norulak, Head of Risk Analytics and Director of Innovation & Technology at Swiss Re, discusses how Risk Data Services (RDS) can also be used to minimise the basis risk and contribute to more accurate modelling and parametric triggers.
Adrien will be presenting on this topic at the European Captive Forum alongside client Fabien Couillard, insurance manager at TetraLaval, from 4.15pm on Wednesday, 8 November.
Read the Captive Intelligence long read on parametric insurance and captives here.
Stay up to date with all major developments in the captive market by signing up to the twice-weekly Captive Intelligence Newsletter.
Legacy management an increasingly valuable tool for captives – Ryan Heyrana
Brown & Brown launched an in-house captive offering for legacy solutions earlier this year because it identified it as an increasingly valuable risk, balance sheet and capital management tool for captive clients.
Brown & Brown, previously through Beecher Carlson, has long provided captive consulting and management services, across the United States and offshore but Ryan Heyrana joined as vice president of legacy solutions, from run-off specialists DARAG, in March 2023.
“There was value in having the ability to offer this specialisation to customers and prospects as an in-house offering,” Heyrana told Captive Intelligence.
Heyrana said being in a position to not only prospectively place a programme but also look at historical liabilities and the “full breadth of retained exposure to identify opportunities” has been popular with customers.
“Particularly because they did not know that it was available to them to improve their overall risk portfolio,” he said.
He said his primary focus is to bring capital solutions, volatility solutions, and operational management solutions to existing and prospective Brown & Brown retail customers.
Heyrana highlighted that the retail corporate market has always been an underserved market in the legacy space, as the transactions tend to be smaller.
“It is rare to find a retail customer with several billion dollars of liabilities on their books,” he said.
However, he said that nine-figure captive deals are not out of the ordinary for Fortune 500 companies with large amounts of workers’ compensation, general liability or other retained exposures on their books.
“There is an active market for much smaller transactions as well,” he added.
Heyrana said that when in discussions with directors of risk management and the decision makers within retail customers, a vast majority of them are unaware that they can “eliminate or relinquish” their legacy liabilities.
“Since starting in this role in March of this year, it has really been an education campaign, not only for our retail customers but also for our retail brokers whose primary focus is the efficient structuring of insurance programs,” he said.
He noted that one of the misunderstood parts of the legacy space is that it is not an “all-or-nothing” transaction.
“You can take a portion of the risk, whether it’s old risks, a certain set of policies, or a certain kind of business that doesn’t suit you and has negative capital implications and find a solution for those ringfenced liabilities,” he said.
Disaster response fund launched using Guernsey SPV
The International Federation of Red Cross and Red Crescent Societies (IFRC), in collaboration with Aon, Lloyd’s Disaster Risk Facility and the Centre for Disaster Protection, is launching a disaster response fund.
The transaction has been completed through a Guernsey special-purpose vehicle (SPV) managed by Aon and uses other Guernsey vehicles in its structure.
The new insurance tool provides the IFRC’s Disaster Response Emergency Fund (DREF) with contingency funding of up to £18m.
Paul Sykes, managing director at Aon Guernsey, said the achievement was the Guernsey insurance industry’s “finest hour yet” as it will allow the Red Cross, potentially, to reach an additional six million people each year.
“It is another watershed moment for the industry, demonstrating that it can address the protection gap and rising humanitarian needs,” he said.
Once DREF’s allocated funding for natural hazards hits £29m, the reinsurance is triggered to replenish DREF’s reserves to ensure that extra funds are available to provide aid to vulnerable communities, even during periods of increased demand.
IFRC’s ambition is to grow the fund every year to reach £89m in 2025.
Andrew Mitchell, minister of state for development and Africa, UK foreign, Commonwealth and development office, said: “Climate change is devastating the lives of millions around the world.
“With natural disasters on the rise, this innovative new insurance will provide extra funding for life-saving emergency assistance.”
Ogier’s Banking and Finance team in Guernsey provided counsel to the IFRC for the establishment of the Guernsey structure.
Paul Hodgson, his team and Tom Lees from Butterfield Guernsey also provided support around a trust structure.
Ogier’s team in Guernsey was led by partner Christopher Jones, with managing associate Matthew Macfarlane.
“This is the first time an indemnity-based reinsurance model has been developed within a humanitarian disaster risk finance context,” Jones said.
“We’re delighted to have advised our client alongside Reed Smith on this pioneering, innovative and ambitious project which will provide extra funding for life-saving emergency assistance.”
More clients turning to risk incubation – Matt Latham
Utilising a captive to put a more formal structure around previously uninsured risks is becoming more common, according to Matthew Latham, risk transfer leader in the financial solutions group at Marsh.
Latham joined Marsh in December 2021, having previously worked on the captive fronting and global programmes side of the business with AXA XL, AIG and Ace for the past 20 years.
His team works closely with analytics colleagues on risk finance optimization (RFO), assessing a client’s ability to retain risk, their risk tolerance and appetite.
“We do the analytical work on their losses and work with the placement brokers to understand what it would cost to transfer the risk into the market,” Latham said, speaking on episode #94 of the Global Captive Podcast.
“We try and find the optimum point of which risk they would like to retain and which they would want to transfer. That then leads to a programme design discussion and sometimes we’ll suggest some innovative solutions.
“One part of the transaction piece is that we look to place non-traditional insurance, or reinsurance more normally into the market. It’s going to be a combination of lines of business, not just one individual line so multi-line, or it could be multi-year.”
Latham said around 75% of the programmes they work on with clients will have a captive involved in the solution with risk incubation becoming increasingly common. In such cases, he works closely with the Marsh Captive Solutions team.
“They’re wanting to utilise their captives for more risks and they’re wanting to see how they can take a risk which is currently uninsured on their balance sheet and put some more structure around it,” he explained.
“You can gather data, you can bring the company’s focus onto that risk, give it a bit of a spotlight.
“Over a period of time with the captive underwriting that risk, you can get to the point where you could be able to take it to an insurance market to actually start to take some real risk transfer once you understand that risk better and you’ve put in place risk mitigation measures.
“The alternative would be you carry on retaining it on your balance sheet, but you would then have to take the volatility on your balance sheet. Say it was the type of risk where you might have a loss once every 10 years, you have nine years with no hits to earnings, and then you have a hit to your earnings.
“If you’re putting it in your captive, you can have some budget stability over that period of time, build up reserves, and then when the loss happens, the captive takes that rather than have it on the balance sheet of the operating companies. It also provides the captive with a bit of extra diversification.”
Listen to the full interview with Matthew Latham from 27 minutes into episode 94 of the Global Captive Podcast, here on Captive Intelligence or any podcast app. Just search for ‘Global Captive Podcast’ and hit follow or ‘subscribe’.