Malcolm Cutts-Watson reviews major changes to captive landscape over past 20 years and predicts future developments

I was delighted to be asked to contribute to a retrospective and prospective assessment of the captive industry. I seem to be the only commentator recognising protected cell technology as the greatest advance over the past 20 years. In 20 years time, I suspect we will be saying the same about distributed ledger technology (e.g. blockchain).

Malcolm Cutts Watson, founder of Cutts-Watson Consulting | November 2019

What does the future look like?

I’m optimistic that the captive industry can provide solutions for climate change. The governance, discipline, structuring and accountability of a captive in a reputable jurisdiction is ideal for this.

Captives can provide for pre-disaster funding and accessing cheaper excess protection. You can guarantee payments triggered by parametrics for example, meaning governments and aid agencies can plan much more efficiently.

As we move into the technological age, corporate risk profiles are also going to change. Captives will insure not just traditional risks, but new ones too. The traditional market has always had trouble dealing with new risks because it finds it hard to model and price them. The captive can act as an incubator until the market is comfortable to assume it.

How has the industry changed?

The industry has changed in a variety of ways, and these can be broken into three segments: Offerings, markets, and business models.

When it comes to offerings, the biggest change was the introduction of the protected cell company (PCC) structure, which was around 1995. Ultimately, it then morphed into the incorporated cell company structure (ICC). That subsequently facilitated a lot of the insurance-linked securities (ILS) deals we hear about, and the pension de-risking transactions.

The introduction of the cell opened the captive industry up to a whole range of new risks, companies and markets. More importantly, it opened the market up to a whole new way of thinking. Following their introduction, you were not bound to having insurance risk remain in the (re)insurance market. It gave you a vehicle that was bilingual in terms of financial markets

With regard to markets, the biggest development has been the proliferation of domiciles. There is now a whole raft of jurisdictions that have sufficient infrastructure and dedicated legislation. There is much more choice for the consumer.

Looking at operating models, I believe there has been a consolidation of insurance managers. When I began my career, in Guernsey there was around 28 captive managers. Now we’re down to five or six. It’s dominated by broker-owned managers, and there will be further consolidation, I predict.

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