Gibraltar’s new Minister for Financial Services, Nigel Feetham, wants the legislation for a new dual captive regime to be passed this year, and believes the territory could provide an attractive proposition to prospective captive owners.
Speaking in an exclusive interview with Captive Intelligence at Gibraltar’s Insurance Breakfast on 24 October, Feetham said while Brexit had presented “a major challenge” for the territory’s financial services sector, being outside of the European Union now gave “Gibraltar an opportunity to create specific legislation and regimes in the financial services sector that deviate from EU law”.
Feetham is pursuing a “dual captive regime” that would essentially differentiate between captives that are writing UK business or not.
Prior to Brexit, Gibraltar-domiciled insurers, including captives, could write direct insurance across the EU and into the United Kingdom but they had to follow Solvency II regulations.
Now outside of the EU, Gibraltar has lost its access to write direct across the EU but could implement its own solvency regime.
Insurers in the territory can still write into the UK and it is a major hub for UK auto insurers, and has a growing pet and travel insurance sector.
Dual captive regime
Captive Intelligence understands legislation for the proposed dual regime is currently being drafted and Feetham is hopeful of getting it finalised and passed before year-end.
While drafting continues and details need to be finalised, the dual regime Feetham is pursuing would mean any captive insurer that is writing UK business would have to respect the Gibraltar Authorisation Regime (GAR), meaning it would have Solvency II (soon to be Solvency UK) applied.
A Gibraltar captive that is not writing UK business or seeking UK market access, could be regulated under a “onerous” solvency regime.
“Through our dialogue and discussions with the UK government, we’ve agreed it is open to Gibraltar to have a captive regime that removes the onerous requirements of Solvency II, albeit as a result of the fact that it is captive business and therefore it’s self-insurance and to the extent that there are no consumers involved the risks are much lower,” Feetham explained.
“I’m pleased to say that we’ve had initial discussions with the Gibraltar regulator and I set out my vision for the financial services sector. I explained to the regulator that it’s His Majesty’s Government of Gibraltar’s policy priority to see the implementation of that legislation in Gibraltar as soon as possible.”
Captive prospects
Although Gibraltar is already home to a handful of captives, including Tate & Lyle Insurance (Gibraltar) Limited, owned by Tate & Lyle PLC, and Diramic Insurance Limited, owned by OMV Group, Feetham conceded its previous attempt at becoming an established captive domicile at the turn of the century did not take off.
There are also protected cell companies (PCCs) in the jurisdiction, including White Rock Insurance (Gibraltar) PCC Limited owned by Aon, while it has become a major hub for open market insurers that want to access the UK.
“Gibraltar is a centre of excellence in insurance,” Feetham added.
“Thirty per cent of all motor insurance business underwritten in the UK is underwritten by Gibraltar companies, 20% of all pet insurance and indeed 30% of all travel intermediated business is now underwritten from Gibraltar.
“We certainly have the track record to grow in insurance and with the energy and drive that I know Gibraltar can bring to the table, I’m absolutely certain that it will be a catalyst for the sort of growth that I want to see in the captive sector.”
Gibraltar-based John Harris, group business development director at Robus Group, told Captive Intelligence he looked forward to seeing the draft legislation but felt the likely capital requirements would lend the regulatory environment to being suitable for mid to large organisations.
“Establishing the dual captive regime in Gibraltar will undoubtedly add choice to potential captive owners and should demonstrate Gibraltar’s ability to innovate and strengthen its reputation as a leading insurance jurisdiction,” Harris said.
“Potential buyers would benefit from insurance legislation based on common law, and should benefit from capital requirements which I understand will be significantly less onerous than those required by Solvency II jurisdictions. This should open up opportunities to a wider audience of potential captive candidates.”
Delaware has introduced a series of regulatory improvements, including its legislation on captives writing Side A directors and officers insurance (D&O), as well as captive capitalisation requirements.
Earlier this month, the Department issued Captive Bulletin 14 which outlined the Bureau of Captive & Financial Insurance Products’ requirements for captives which are formed to write Side A D&O coverage for Delaware corporations.
In March, Marsh Captive Solutions established a cell captive facility in Delaware, specifically designed for clients seeking alternative risk transfer options for Side A directors and officers insurance.
The Department also issued Captive Bulletin 12 which adopts a more flexible approach for captive applicants’ capitalisation requirements, including allowing use of brokerage accounts in certain circumstances.
Capital and surplus requirements have also been recalibrated to place more emphasis on consulting actuaries’ adverse case projections.
“As global leaders in captive insurance, we recognise that we must continue to explore improvement, innovation, and industry insight,” said Delaware’s Insurance Commissioner Trinidad Navarro.
“This industry is an important economic engine in our state, and I look forward to continuing to foster its expansion.”
A number of process changes are expected to improve approval application timelines, with reviews of initial application filings decreasing from a target of 45 days to 30 days.
Licensure applications peak towards the end of the year, and moving forward, applications received after 1 November will be reviewed within 80 days of submission.
Routine requests for approvals, such as dividends, business plan changes, statutory dormancy, and changes in approved service providers, will be reviewed within 10 days of receipt.
Captives will also now be able to seek contingent Bureau approval for actions requiring board approval or ratification.
“Delaware has been a top global captive domicile since revamping its captive insurance statute almost 18 years ago,” said Michael Teichman, Delaware Captive Insurance Association (DCIA) president.
“While we believe Delaware continues to have much to offer, we recognize other domiciles are not standing still, and we cannot rest on our laurels.
“Over the past year we have enjoyed the opportunity to work with Commissioner Navarro and Bureau Director, Stephen Taylor to develop these helpful and timely domicile improvements.”
WTW has appointed Fabien Graeff as head of risk and analytics France, strengthening the broker’s captive and alternative risk transfer (ART) expertise.
Between 2004 and 2018, Graeff worked for Marsh in numerous roles including head of global analytics and captives for continental Europe and analytics sales leader for French speaking countries.
Subscribe to the Captive Intelligence newsletter to receive our FREE twice weekly updates with links to news, analysis and podcasts.
Since 2018 he has been a partner in corporate risk services at Optimind, but Captive Intelligence understands he joined WTW last month.
Marc Paasch, global head of strategic risk consulting and global head of alternative risk transfer at WTW, said: “With this key hire we are adding technical capacity in the captive space, specialist know-how in the ART field, and management skills to pursue WTW growth in the whole risk and analytics practices.”
Oklahoma has added 14 new captives so far this year, increasing its number of licensed captives by 25%.
The State has also had three dissolutions for a net gain of 11 new captives, with the total number of active captives standing at 55 for 2023.
In 2022, Oklahoma’s captive insurers generated $297m in direct and assumed premium, representing a 39% increase from $214m in 2021.
There are currently 30 pure captives, one association, 15 special purpose captives, two sponsored captives, four incorporated cells, one protected cell, and two series captives licenced in the state.
Captive Intelligence published a long-read in June, highlighting Side A D&O and cannabis insurance as potential captive growth areas for the state.
“While I am very pleased with the level of captive growth, I am equally aware of Oklahoma’s prominent role in the captive insurance industry,” said Oklahoma Insurance Commissioner Glen Mulready.
“In the realm of captive insurance, Oklahoma has emerged a principal voice of advocacy and leadership.”
Renea Louie, COO at Pro Group Captive Management Services, and a new Oklahoma Captive Association (OCIA) board member told Captive Intelligence in May that Oklahoma is a “sleeping giant” as a captive domicile.
Guernsey and Isle of Man only major captive domiciles where an iNED is required
Increasing governance requirements put greater onus on captive boards
Efforts made in Guernsey to broaden the pool of qualified directors available to captives
Restriction on board appointments under discussion in Guernsey
The corporate governance requirements for captive boards is only increasing and it has been questioned why more domiciles do not require independent non-executive directors (iNEDs).
In a discussion recorded for the Global Captive Podcast SRS Europe CEO Peter Child, local iNED Nick Wild and Airmic CEO Julia Graham debated the evolving role of captive directors, the greater onus put on them by regulators, whether there should be a limit on the number of positions one individual can hold and if other domiciles should introduce the requirement.
Subscribe to Ci Premium to continue reading
Captive Intelligence provides high-value information, industry analysis, exclusive interviews and business intelligence tools to professionals in the captive insurance market.
This GCP Short, produced in partnership with We Are Guernsey and the Guernsey International Insurance Association, discusses the evolution of the governance landscape in Guernsey and specifically, the role of independent non executive directors (iNEDs) on captive boards.
Richard hosts an engaging debate on iNEDs, the demands of the role, the possible restriction on the number of appointments, and whether more captive domiciles should make them a requirement.
The guests are:
Airmic CEO Julia Graham, an iNED on three captive boards in Guernsey
Peter Child, CEO for Europe at Strategic Risk Solutions
Nick Wild, a local iNED with a long background in captive management.
In the introduction Richard references a previous GCP Short episode featuring a group European iNEDs debating the value of outside board directors. Listen here.
The updated Airmic Captive Governance Guide is referenced. You can download it here.
The Non-Executive Director (NED) Development Programme is referenced and discussed by Nick. For more information on the course, visit the GTA University Centre website.
Risk Strategies and One80 Intermediaries will operate under the newly introduced Accession Risk Management Group parent brand, following a reorganisation.
Accession Risk Management Group will represent the family of specialty insurance distribution, captive management and risk management companies, operating under common ownership of their private equity sponsor, Kelso & Company, which includes Risk Strategies and One80.
Subscribe to the Captive Intelligence newsletter to receive our FREE twice weekly updates with links to news, analysis and podcasts.
Risk Strategies specialises in the design, implementation and management of all types of captive insurance companies, and has bought several captive managers in recent years, including Atlas Insurance Management, Risk Management Advisors and Oxford Risk Management Group.
The combined organisation is now approaching $1.5bn in revenues and more than $15bn of insurance premiums under management.
“Our clients and partners have an evolving continuum of insurance and risk management needs, all of which we aspire to address from within the Accession Risk Management Group family,” said John Mina, CEO, Accession Risk Management Group.
“The introduction of Accession Risk Management Group as our parent brand gives us a broader opportunity to serve our clients and partners across an expanding set of niche and specialty market segments.”
More than 170 specialty firms have joined Accession’s companies through M&A, with employees approaching 5,000 on a combined basis across Risk Strategies and One80 Intermediaries.
International SOS will provide health advisory services to policyholders of Munich Re’s epidemic and pandemic policies.
Munich Re was one of the few (re)insurers marketing a pandemic parametric policy prior to the Covid-19 crisis, and has specifically targeted multinational organisations with captive insurance companies for the product.
Leigh Hall, senior originator at Munich Re Markets, discussed the reinsurer’s pandemic policy on the Global Captive Podcast last year.
The latest development in Munich Re’s pandemic offering is to partner with International SOS so policyholders have access to the health and security company’s pandemic portal, an online repository of the latest health advice relating to pandemics, and real-time one-on-one access to International SOS’ health consultants.
“We are delighted to have partnered with Munich Re on this combined offering for their policyholders,” said Franck Baron, group deputy director of risk management at International SOS.
“The solution enhances Munich Re’s pandemic policy, supports captives on a topic for which extensive support is often sought. This next step in our relationship with Munich Re will help protect workforces and, in turn, organisational resilience.
Subscribe to the Captive Intelligence newsletter to receive our FREE twice weekly updates with links to news, analysis and podcasts.
“International SOS is the market leader when it comes to protecting employees and this marks another step forward in our journey.”
Accessing the International SOS service is not dependent on a pandemic being declared by the World Health Organization (WHO) and “can be called upon at any time” according to the companies.
“I have great pleasure in announcing our new partnership with International SOS,” said Mari-Lizette Malherbe, member of the Munich Re board of management.
“The collaboration brings together the essential components of pandemic resilience; financial protection and access to health expertise to minimise a pandemic’s impact and protect workforces.
“Climate change and population shifts are making another pandemic more likely, therefore there is a need to create more resilient organisations. This new integrated pandemic risk management solution equips the insured to confidently navigate the next pandemic crisis.”
Bill Fitzpatrick is senior vice president at Granite Management Ltd and an experienced international employee benefits and captive professional. He previously led Deutsche Post DHL’s corporate employee benefits programme from 2006 to 2022 before joining Granite in January 2023.
Reinsuring international employee benefits into a captive provides many advantages for employers and employees, and is a risk financing strategy increasingly popular having been pioneered in the 1990s. It is important, however, to get execution right. Bill Fitzpatrick explains why some EB captives can struggle to succeed.
Many global employers are facing challenges in providing competitive employee benefits that attract and retain the best talent, while contending with escalating costs.
These cost pressures stem from a changing workforce in both demographics and employee expectations, a rise in chronic diseases, double digit medical inflation in many locations, heightened demand, a heavier reliance on company sponsored medical plans over public healthcare systems and advancements in technology.
These dynamics are leading employers to look for alternative solutions to confront the challenges and continued fulfilment of their benefits strategy.
Captives have proven to be one of the most effective means in both controlling overall risk benefit costs and enhancing prevention and mitigation opportunities by augmenting the management of medical costs and disability cases.
In addition, companies are realising the impact captives can have in maximising employee engagement through both effective plan management and the heightening of their DE&I opportunities.
If we examine the history of EB captive programmes, the first global programmes were established in 1996 by two European companies. Much of the attention at that time encompassed how the insurance networks would write and reinsure the local policies, while managing the cashflow requirements that captives entail.
To address these issues, a specific platform was established that allowed the fronting networks to both maximise the cashflow opportunities to the captive while minimising the unnecessary administration that existed with locally insured and pooled arrangements.
The main components of this structure still exist today, albeit different companies have applied their own variations in order to meet their specific structural needs:
Significant premium discounts (25%) were applied to entice country stakeholders into joining the programme.
All employee benefit plans were allowed to join no matter the claims experience, maximising geographical risk spread and premium volumes.
The local insurer would retain the local administration fees (retention) and a 25% claims fund (covering medical & short-term disability clams) that would be replenished once a quarter, with the remaining funds being ceded to the client’s captive.
The premium and claims bordereaux were produced within 45-60 days following the quarter’s end.
If we fast forward to present, each of these captives are thriving and continue to bring major benefits to their respective organisations with minimal changes to the original platform.
Additionally, many other global companies have since implemented and maintain highly effective EB captive programmes. Considering such a long-established track-record of success, what would cause the breakdown of such a tried and tested practice when funding employee benefit insurance plans through a captive?
This article will address certain short falls or limitations that can result in either the closure or unsuccessful implementation of an EB captive programme. The following are common triggers that can create such a scenario:
Tactical policies are applied to strategic initiatives
Profitability targets erode local subsidiary benefits
Inability to align key corporate stakeholders
EB captive structure platform is over-complicated
Failure to convey the value proposition of the EB captive
Let’s address each of the main causes in greater detail:
Tactical policies are applied to strategic initiatives
One of the primary objectives of a captive is to maintain long-term pricing stability for its local country participants. While employee benefit claims’ experience is extremely predictable year on year, there will be instances when a large loss (large life claim) or poor claims experience (a spike in medical claims) occurs, significantly deteriorating the local country’s claim results.
Applying aggressive premium increases to recoup such losses at subsequent renewals can allow for local carriers to undercut the captive’s pricing or create resentment from country management, eliminating a level of trust between the local subsidiary and the home office.
Most captive programmes operate on a long-term rolling annual combined ratio basis of under 100%, making EB risk benefits desirable to risk management for its predictability and spread of risk versus that of many P&C coverages.
Profitability targets erode local subsidiary benefits
Numerous companies have taken advantage of utilising their captive as a profit centre. This can be accomplished by writing different customer-oriented third-party coverages, such as: warranty coverage, auto and fleet cover, marine cargo, etc.
Most EB captives will operate on a breakeven basis (no profit) when writing cover for subsidiaries of the parent cover. When a captive seeks to reinsure cover on a for profit bass, it places the captive in direct competition with the local insurance market.
Such an approach erodes the advantages that reinsuring risk benefits brings a company in controlling long term benefit costs.
It also removes revenues from local businesses that can be applied to core business opportunities within its respective industry sector or detracts from plan design improvement opportunities impacting the attraction and retention of key talent; further affecting innovation and productivity.
Inability to align key corporate stakeholders
There is a saying attributed to Peter Drucker, management consultant and author, that states: “Culture eats strategy for breakfast”.
In other words, culture can either hinder or enhance the implementation and application of key strategic initiatives.
Various companies rely on policies that have been demonstrated to be effective in the past, which is a respectable position to adopt, but can stifle a company into accepting approaches that have grown obsolete or ineffective compared to new opportunities.
As EB captives are relatively new to the market, companies may be risk adverse into accepting EB insurance exposures into a subsidiary of the parent company. Also, clients may be reticent to make changes due to external opinions from subject-matter experts that have conflicting agendas.
While a company may be already operating or currently considering an EB captive, it is important that key stakeholders (risk management, human resources, finance and legal) are aligned to the employee benefits strategy and are well versed in the short and long-term advantages and challenges with the overall funding methodology.
Early and regular engagement across stakeholders can help avoid confusion and/or misinterpretation, especially around claim results and annual pricing changes.
EB captive structure platform is over-complicated
While many companies have modified the process used for reinsuring employee benefits into their respective captives, there are key components that should be maintained for a programme to stand the test of time:
One of the main purposes of an EB captive is to minimise the premiums being paid for reinsured benefits, while simultaneously offering subsidiaries long-term rate stability. Programmes will struggle when rating actions are based on short-term claims results or head office profitability requirements, reducing the appeal to local stakeholders impacting both plan design enhancements and/or financial advantages.
The risk of reinsuring benefits into a captive should be viewed more so as a timing risk as opposed to an underwriting exposure (assuming proper geographical and line of cover spread of risk can be achieved). Historically, successful programs strived on securing as many countries into the program as quickly as possible, resulting in greater geographical spread of risk, increased predictability with larger premium volumes, thus limiting the effect of large losses or poor results in single country. Applying selective country implementation based on underwriting criteria stagnates the growth of the programme while exposing the captive to large losses and/or poorly performing policies.
Maintaining pooling or locally insured programmes that are less complicated. Quarterly captive reporting versus that of annual pooling results enhances the tracking of premiums and claims resulting in the following improvements: cashflow optimisation, prevention and mitigation campaigns, and effective plan design management (governance and plan enrichments).
Failure to convey the value proposition of an EB captive
Introducing an EB captive programme can present challenges, especially in gaining stakeholder buy-in, notably from HR. In most countries, HR oversees the local placement of EB schemes.
It is imperative that HR understands how an EB captive programme will impact their role and improve the management of employee benefits.
HR and benefit specialists are responsible for a multitude of tasks ranging from; sourcing and managing local insurers, designing plans, negotiating terms and costs, to overseeing renewals and employee inquiries.
Managing these tasks alongside other HR responsibilities, especially when multiple benefit programmes exist, consumes time and detracts from strategic priorities.
Implementing an EB captive program can significantly streamline these processes, serving as a valuable time-saving tool for HR.
These time efficiencies, combined with enhanced access to data and flexible plan designs, empower HR to concentrate on the core aspects of benefit management, designing and delivering benefits in line with their strategic goals and engaging employees effectively.
Effective communication about the value of an EB captive programme across all organisational levels: globally, regionally, and locally, is vital.
Such communication ensures alignment and commitment among stakeholders which is essential for maintaining a sustainable programme in any organisation.
While EB captives may not be appropriate for all companies, a properly implemented and managed programme can promote cost savings, plan design management, enable a company’s global DE&I strategy, prevention and mitigation opportunities; all via a single platform that is more effective than most currently available funding mechanisms.
Those companies that lack the necessary volumes/sufficient premiums, risk tolerance and/or geographical spread may not be suited for such an approach and will need to rely on multinational pooling, self-funding or locally insuring their risk benefits coverages.
Conclusion
That said, even with these caveats’ consideration should be given to reinsuring EB risks into a captive to gain financial savings and efficiencies, but to also achieve the following:
A better understanding and an ability to report on your global employee benefit spend and exposures, resulting in superior governance of your global benefit promises.
Control over these exposures and costs centrally without necessarily changing the current benefit offering, but ensuring that it is not altered without approval and proper cost consideration (both present and future).
Enhanced control and oversight of divestitures and acquisitions affecting EB costs and liabilities.
The ability to deliver to your global benefit strategy by introducing global diversity and inclusion initiatives at minimal cost and time effort.
Early entrant into US captive market has resulted in sophisticated captive infrastructure
Special purpose captives gives regulator and owners flexibility
State has not targeted local businesses for re-domestications
Branch captives under discussion for future legislation
The proficiency and autonomous nature of the captive division is one of the mains reasons South Carolina has become a popular domicile option in the United States, according to regulators and local industry professionals.
The State benefited from being one of the early adopters of captive legislation in the United States, with its 2001 law coinciding with the beginning of a hard commercial insurance market.
Subscribe to Ci Premium to continue reading
Captive Intelligence provides high-value information, industry analysis, exclusive interviews and business intelligence tools to professionals in the captive insurance market.
