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Swiss Re Corporate Solutions (SRCS) have unveiled the Virtual Captives Concept. What market need does it address? To whom are they suited? What gap does it bridge?
What is the applicability of a pseudo-captive within the current market reality?
Captives: the journey so far ……..
Arguably, earlier practices of marine insurance among merchants (preceding even Lloyds of London) underwriting each other’s marine ventures, constituted a form of mutual and/or captive insurance. However, captive insurance as we know it has its humble beginnings in the early 20th century.
With all the developments in terms of vehicles, structures, domiciles and their regulation, the fundamental objective of captive insurance often gets lost in translation! So many, nowadays, equate captive insurance (or assess its success) on the fiscal arbitrage it is able to produce for ultimate beneficiary owners. Those long enough in the game know that taxation is a living and constantly changing beast and if allowed to form part of the basis of a captive’s strategic objectives, that strategy is, at best, myopic and, at worst, sooner or later doomed to fail.
The fundamental objective of captives was always to economically substitute or supplement conventional insurance cover or insurance capacity when this fell short of what certain larger corporations required. The first captives, such as British Petroleum, Imperial Chemical Industries, British American Tobacco and, later, the Steel Insurance Company of America were established specifically for these two reasons, i.e. cover and or capacity not otherwise being available (or economically feasible) through the conventional insurance market.
This, therefore, begs the question, “why did cover, capacity and pricing in the conventional insurance market fall short of the expectations of captive proponents?” The answer was increasingly evidenced in three factors that spurred captive development, i.e. the corporations that looked at captives as an alternative source of insurance did so because:
– Their loss history was generally better than that of the market and, as a result, they were subsidizing the losses of the market;
– They did not derive any benefits (e.g. no/low claims discounts, investment returns etc.) for presenting ‘more profitable’ risks to the insurance companies;
– Their results were better than the market’s because they had invested heavily in risk management which, regrettably, did not translate into long-term, tangible benefits for the organisation.
In the 1970s there was significant growth in the captive liability insurance market (pollution, medical malpractice etc.) and this development was, again, in response to lack of economic supply from the conventional market. And as new classes of business entered the captive arena, so did new captive jurisdictions addressing the perceived inefficiencies, not only of the conventional market but of what was now perceived as the traditional ‘captive’ centre, i.e. Bermuda. In 1976, for example, we see the growth of captive insurance in the Caymans specifically as a healthcare centre. In the 1970s we also had the development of the rent-a-captive model, making the captive technology assessable downstream from the very large and/or multi-national organisations or specialist professional classes by reducing the capital barriers to entry.
Tax considerations should never one of the objectives of captives. However, as early as the 1950s, we see the involvement of ‘off-shore’ jurisdictions which- through fiscal arbitrage – allowed for a faster build-up of capital and reserves. With this development we also started seeing the changes in tax regulations to address a perceived drain of otherwise taxable income from mainstream economies.
It is a documented fact that discussions around taxation vis-à-vis captives are as old as the captive concept itself. It did not originate a few years ago with domestic tax base erosion and profit shifting (BEPS) or the more recent IRS crusade against micro-captives or indeed the wider on-going fiscal level playing field that some are lobbying for within Europe; a discussion that impinges upon financial services centres. Taxation runs parallel to, and can be part of the benefit of. a captive, but should not be a driver of the strategic objectives of a captive.
However, during the most recent soft conventional insurance market cycle, potential captive investors weighed the incumbent cost of risk (e.g. premiums, deductibles and excluded or capped losses) against the investment required (and the expected returns) for an alternative means of risk transfer. Under soft market conditions, tax saving played a more prevalent role in tipping the scales when investors decided in favour of captive formation.
Selling the captive concept is always more challenging during a soft conventional insurance market cycle due to the competitive offering from insurers…
Some of the largest conventional insurers and reinsurers have in their DNA, capital that originally emanated from the alternative insurance markets. ACE (purchased by Chubb in 2016) and AXA XL (with AXA’s purchase of XL in 2018) come to mind as they started life as association captives. Lines between the conventional, captive and alternative risk financing market also became blurred with captives increasingly entering the open-market arena in some shape or form.
Historically, the first captives were known as pure captives as they were single-parent captives and only insured risks of the parent. Over the following 100 years or so, Mutuals and Association Captives, RRGs, RPGs, PORCs, side-cars, rent-a-captives, ILS, PCCs, micro-captives and other vehicles flourished as each domicile endeavoured to carve out a differentiated, sustainably profitable proposition. Domiciles also continued to grow onshore in the USA and offshore centres west of the Atlantic to the Channel Islands, onshore and offshore EU, the Middle East, South East Asia and the Far East. The greatest changes in recent history in the captive arguably occurred post- early 1990s hard market when the captive industry experience another growth impetus.
We are exiting arguably the longest soft insurance market cycle in living memory. Premiums have been softening since before the Millennium and not even the dot.com bubble, Enron debacle or the great financial crisis OF 2006/7 managed to break the soft market cycle. Pricing did not follow any scientific logic and was held hostage by the market reality of excess and constantly growing supply. I remember, when working in the Middle East, that it was sometimes cheaper to insure a tower block for property and general third party liability than it was to purchase comprehensive motor insurance on an executive car!
However, the prevailing long-term negative interest environment, expensive natural disasters, the current economic slump and bleak, short-term economic recovery prospects have finally strengthened the arm of reinsurers, who are ultimately the puppet masters behind the primary insurers serving markets. A competitive environment dictates that companies can enter and exit markets with relative ease. Reinsurers exercised this option this by reducing or withholding capacity in markets or lines of business that do not deliver the technical returns expected by management or their investors. This translates into higher premiums and deductibles, higher client selectivity and more policy exclusions.
These harsh market conditions, with premiums increasing between 20% and over 100%, depending which on line of business, makes the captive proposition more attractive once again.
The latest in the repertoire of captive solutions is the Virtual Captive concept (VCC)pioneered by Swiss Re Corporate Solutions (SRCS). Why and for whom is their proposition even more valid today? To call it ‘new’ may not be strictly speaking correct since a similar concept existed in some shape or form since the late 1980s conventional market hardening and the term ‘virtual captive’ may mean different things to different people. But, SRCS have freshened up the concept, starting from conventional underwriting and risk appetite (and some ultimate risk carrying if required) as their spring-board to a ‘capacity-building’ product.
Captives remain valid today for the same reasons they were valid when they first started, i.e. companies with a loss history that is better than that of the conventional market and that are very serious about their risk management and who are not yet invested in captives, are still subsidizing the losses of others in the market.
If they are not yet invested in captives then the time to do so is now.
Investing in captives is not only a matter of putting in the required capital. Insurance companies (even captive insurance companies) are regulated entities that operate within a supervised regime and require structured technical and governance substance.
SRCS’s VCC is not, in itself, a captive; it is the prelude to a captive. VCC is a multi-year insurance contract that allows a corporate client to ‘build’ capital on SRCS’s balance sheet. How? The premiums paid by a corporate client are ‘ring-fenced’ by SRCS and used only for administering the policies of that client. Any surplus at the end of the multi-year period less any management fees IS repatriated to the client. This means that clients with a better than market loss ratio will, at the end of the multi-year insurance period, reap a return premium which can be translated into the minimum capital required for the client to establish a captive.
If the proverbial hits the fan and claims exceed the maximum expected losses under the multi-year programme , then there are mechanisms in place to ensure insurance continuity for the client.
Before taking the plunge and establishing a captive, the multi-year period can be used not only to build up the required capital, implement a stronger risk management framework but also to build the required technical and governance substance in anticipation of establishing a captive.
The virtual captive concept can also be used by existing captives. How? If captives are considering expanding their lines of business and would not wish to initially expose their balance sheet to potential liabilities from the new line of business, they can ‘sand-box’ the risk on the balance sheet of Swiss Re Capital Solutions.
It can, likewise, be used when captives are exiting a line of business. The virtual captive can be used as a ‘run-off’ solution by using the SRCS’s balance sheet for their exit strategy in respect of any unwanted risk.
The Virtual Captive Concept is still in its infancy. Once it becomes accepted technology, the opportunities ,appear limitless.
In meeting corporate risk financing needs, the Virtual Captive Concept permeates across client, captive and conventional insurance strata by offering a blended solution.
And the journey of captives continues………
Cutts-Watson Consulting Limited
Cercle de Pierre, La Grande Rue,
St Saviour, Guernsey, GY7 9PS
+44(0) 7781 135 628 malcolm@cuttswatson.com
Co. Reg. No. 60168 | © CWC 2021. All rights reserved.
Cutts-Watson Consulting Limited
Co. Reg. No.60168
Cercle de Pierre, La Grande Rue, St Saviour, Guernsey, GY7 9PS
Cutts-Watson Consulting Limited
Co. Reg. No.60168
Cercle de Pierre, La Grande Rue, St Saviour, Guernsey, GY7 9PS
+44(0) 7781 135 628 cwc@cuttswatson.com
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To continue to offer, or to create, a compelling and competitive captive offering, domicile authorities need to understand the global captive marketplace, changing stakeholder demands and threats or opportunities for the business. It can be a challenge for these bodies to be able to access independent, insightful advice upon which to base their strategic planning and resource allocation.
Examples of CWC services for Industry Engagement:
To continue to offer, or to create, a compelling and competitive captive offering, domicile authorities need to understand the global captive marketplace, changing stakeholder demands and threats or opportunities for the business. It can be a challenge for these bodies to be able to access independent, insightful advice upon which to base their strategic planning and resource allocation.
Examples of CWC services for Short Term Consignment:
To continue to offer, or to create, a compelling and competitive captive offering, domicile authorities need to understand the global captive marketplace, changing stakeholder demands and threats or opportunities for the business. It can be a challenge for these bodies to be able to access independent, insightful advice upon which to base their strategic planning and resource allocation.
Examples of CWC Consultant held Non-Executive Directorships:
The Board, and individual Board Members, face a growing array of stakeholders’ scrutiny whilst directing a captive or SME insurer. Increasingly, they are looking to external independent counsel to ensure, and provide evidence, that they are a high performing and soundly governed caucus.
Our Products:
As part of our commitment to develop the talent in the captive industry, we host various educational events. Recent examples include the 2015 UK Insurance Act and management of assets in a Solvency II world.
We also run an Advanced Captive Training programme as we have identified there is little structured educational resource in the industry beyond introductory courses.
Our consultants are frequent speakers at industry events covering technical topics as well as offering their outlook on the current and future captive landscape.
To continue to offer, or to create, a compelling and competitive captive offering, domicile authorities need to understand the global captive marketplace, changing stakeholder demands and threats or opportunities for the business. It can be a challenge for these bodies to be able to access independent, insightful advice upon which to base their strategic planning and resource allocation.
Examples of CWC services for Domicile Regulators & Promotional Agencies:
The market typically interacts with a captive in the following ways:
In all situations (re)insurance industry stakeholders should interact with the captive on the same terms as they would with any other market participant yet recognising the unique characteristics of the captive arrangement.
Examples of CWC services for Insurers & Reinsurers:
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Examples of CWC services for Service Providers:
We maintain close links with captive industry globally and so are able to guide you through market dynamics, culture & accepted practice, trends and emerging developments. Our extensive network of contacts ensures honest feedback and access to key influencers and decision makers in the domiciles.
We can contribute to your marketing and sales planning and facilitate product launches, or simply be a sounding board for your ideas.
Examples of CWC services for Captive Owners:
CWC Products for Captive Owners:
Captive Strategic Review
Captive Feasibility Study
Captive Health Check
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Exiting Chief Executive of Guernsey Finance, the promotional agency for Guernsey’s finance industry.
His role included business development and the promotion of Guernsey’s finance industry in the Island’s target markets including Europe, the US and the emerging markets, technical research to support promotional activities and liaison with industry associations and government.
Previously Chief Marketing Officer of the Willis Global Captive Practice and Managing Director of its Guernsey business. Over 25 years of finance experience in London and, for the past 19 years in Guernsey.
A member of the Institute of Directors and serve as a non-executive director on a number of local boards. A fellow of the Chartered Insurance Institute and holds an M.B.A from Warwick University.
Exiting Chief Executive of Guernsey Finance, the promotional agency for Guernsey’s finance industry.
His role included business development and the promotion of Guernsey’s finance industry in the Island’s target markets including Europe, the US and the emerging markets, technical research to support promotional activities and liaison with industry associations and government.
Previously Chief Marketing Officer of the Willis Global Captive Practice and Managing Director of its Guernsey business. Over 25 years of finance experience in London and, for the past 19 years in Guernsey.
A member of the Institute of Directors and serve as a non-executive director on a number of local boards. A fellow of the Chartered Insurance Institute and holds an M.B.A from Warwick University.
Guernsey based chartered accountant with c30 years’ experience spent in practice.
Unique blend of operational and client experience split between audit and advisory latterly focused on providing transactional support across the insurance, funds, fiduciary and banking sectors as well as local government.
Led a number of high profile and innovative engagements for the States of Guernsey including:
2017 – States bond issue commissioned by the Scrutiny Management Committee
2017 – Guernsey housing market review
2016 – Strategic review of the Guernsey fiduciary industry
2015 – Financial mitigation for milk distributors
2015 – International Capital Flows (funds sector)
Various other confidential engagements
Qualifications
Fellow of the Institute of Chartered Accountants in England and Wales
BSc (Hons) Economics, University of Warwick
Guernsey based chartered accountant with c30 years’ experience spent in practice.
Unique blend of operational and client experience split between audit and advisory latterly focused on providing transactional support across the insurance, funds, fiduciary and banking sectors as well as local government.
Led a number of high profile and innovative engagements for the States of Guernsey including:
2017 – States bond issue commissioned by the Scrutiny Management Committee
2017 – Guernsey housing market review
2016 – Strategic review of the Guernsey fiduciary industry
2015 – Financial mitigation for milk distributors
2015 – International Capital Flows (funds sector)
Various other confidential engagements
Qualifications
Fellow of the Institute of Chartered Accountants in England and Wales
BSc (Hons) Economics, University of Warwick
Based in Guernsey, Graham brings his unique skill set to CWC working centrally with the team as it responds to the diverse and ever-changing needs of its clients.
As a result of so many years at the “coal face” Graham has a unique insight into every aspect of insurance management. This wealth of experience is now channeled into helping CWC’s clients realise the full potential of their insurers.
This in-depth knowledge came into its own when CWC was commissioned to carry out a strategic review of the Guernsey insurance sector by the States of Guernsey. Graham acted as the project manager for this major piece of work.
Outside of CWC, Graham acts as an independent non-executive director on a number of Guernsey (re)insurers for groups operating in a wide range of industries. The owners of these entities range from private individuals to constituents of the FTSE 100 and Nasdaq.
Graham is a Chartered Insurance Practitioner and a Fellow of the Chartered Insurance Institute by examination. He is registered and approved as a Director with the Guernsey Financial Services Commission.
Based in Guernsey, Graham brings his unique skill set to CWC working centrally with the team as it responds to the diverse and ever-changing needs of its clients.
As a result of so many years at the “coal face” Graham has a unique insight into every aspect of insurance management. This wealth of experience is now channeled into helping CWC’s clients realise the full potential of their insurers.
This in-depth knowledge came into its own when CWC was commissioned to carry out a strategic review of the Guernsey insurance sector by the States of Guernsey. Graham acted as the project manager for this major piece of work.
Outside of CWC, Graham acts as an independent non-executive director on a number of Guernsey (re)insurers for groups operating in a wide range of industries. The owners of these entities range from private individuals to constituents of the FTSE 100 and Nasdaq.
Graham is a Chartered Insurance Practitioner and a Fellow of the Chartered Insurance Institute by examination. He is registered and approved as a Director with the Guernsey Financial Services Commission.
Paul delivers his own in-depth market knowledge of, and insight into, the captive insurance world.
Paul brings longstanding experience of working in both onshore and offshore environments, most recently as a Non Executive Director with a London market insurance company.
He is also currently a Non Executive Director of a number of Guernsey based insurance companies. He provides CWC clients with further valuable knowledge and a proven track record of strategic and operational consulting.
Paul has undertaken numerous feasibility studies and set up insurance subsidiaries for multi- national corporations across the globe.
As part of the work with captives he has overseen portfolio transfers, novations, redomiciliation of captives, Protected Cell Company formation and the design and implementation of multi-year multi-line reinsurance programmes. He also has undertaken various consultancy work on the regulatory side of insurance.
Paul is an Associate of the Chartered Insurance Institute. He is registered and approved as a Director with the UK Prudential Regulatory Authority and the Guernsey Financial Services Commission.
Paul delivers his own in-depth market knowledge of, and insight into, the captive insurance world.
Paul brings longstanding experience of working in both onshore and offshore environments, most recently as a Non Executive Director with a London market insurance company.
He is also currently a Non Executive Director of a number of Guernsey based insurance companies. He provides CWC clients with further valuable knowledge and a proven track record of strategic and operational consulting.
Paul has undertaken numerous feasibility studies and set up insurance subsidiaries for multi- national corporations across the globe.
As part of the work with captives he has overseen portfolio transfers, novations, redomiciliation of captives, Protected Cell Company formation and the design and implementation of multi-year multi-line reinsurance programmes. He also has undertaken various consultancy work on the regulatory side of insurance.
Paul is an Associate of the Chartered Insurance Institute. He is registered and approved as a Director with the UK Prudential Regulatory Authority and the Guernsey Financial Services Commission.
Niall has spent most of his professional career in the captive insurance industry.
He started in Guernsey in 1996, where he provided underwriting support the UK Post Office captive.
During his career, Niall has advised captive stakeholders on underwriting, strategic, operational and governance matters across a broad range of industries and jurisdictions.
He has lead difficult consulting projects requiring innovative thinking, high quality communication skills and perseverance.
Niall has exceptional marketing and up to date IT knowledge with highly developed research and analytical skills. He qualified as a Chartered Insurer and Financial Planner. These attributes together with his vast captive experience allows Niall to fulfil his role as Chief Operating Officer of CWC.
Niall joined CWC in 2015 to support Malcolm in the development of the company. In 2016 he was promoted to COO and continues to support CWC as it holds its place as the global Captive Consultants of choice.
He started in Guernsey in 1996, where he provided underwriting support the UK Post Office captive.
During his career, Niall has advised captive stakeholders on underwriting, strategic, operational and governance matters across a broad range of industries and jurisdictions.
He has lead difficult consulting projects requiring innovative thinking, high quality communication skills and perseverance.
Niall has exceptional marketing & up to date IT knowledge with highly developed research and analytical skills. He qualified as a Chartered Insurer and Financial Planner. These attributes together with his vast captive experience allows Niall to fulfil his role as Chief Operating Officer of CWC.
Niall joined CWC in 2015 to support Malcolm in the development of the company. In 2016 he was promoted to COO and continues to support CWC as it holds its position in the industry as the global Captive Consultants of choice.
During this time Conor has managed and directed captive insurance companies for clients ranging from small, family-held businesses to US Fortune 500 companies encompassing a whole host of industries.
Having, most recently, spent over a decade in the Caribbean managing mainly North and South American captive insurance clients Conor leverages his deep global knowledge and skills set to provide creative risk financing solutions to clients from all over the world.
During this time Conor has managed and directed captive insurance companies for clients ranging from small, family-held businesses to US Fortune 500 companies encompassing a whole host of industries.
Having, most recently, spent over a decade in the Caribbean managing mainly North and South American captive insurance clients Conor leverages his deep global knowledge and skills set to provide creative risk financing solutions to clients from all over the world.
Malcolm Cutts-Watson has spent most of his professional career in the captive insurance industry.
He started in Bermuda in 1982, was in the vanguard of the development of Vermont captive business and then worked in Guernsey. During his career, Malcolm has advised captive stakeholders on strategic, operational and governance matters across a broad range of industries and jurisdictions . He also advises governmental and regulatory bodies on legislative and regulatory change.
He has served, and continues to serve, as a director on a variety of captive insurers and is an approved person in many captive domiciles. He qualified as an accountant in 1982.
Malcolm was a member of the Captive Review Power 50 and in 2015 received the industry’s outstanding contribution by an individual award.
In 2017 he became an inaugural inductee into the Captive Hall of Fame which recognises the most influential figures in the captive industry over the past 50 years.
He has acted as industry partner to AIRMIC’s Captive Special Interest Group. He is a regular contributor to industry debate and is a passionate advocate for the raising of standards in the captive industry.
Malcolm founded CWC in 2015 to allow organisations access to the accumulated knowledge, insight and solutions that he, and the rest of the CWC team of captive insurance experts, have gathered over their lifetimes.
Malcolm Cutts-Watson has spent most of his professional career in the captive insurance industry.
He started in Bermuda in 1982, was in the vanguard of the development of Vermont captive business and then worked in Guernsey. During his career, Malcolm has advised captive stakeholders on strategic, operational and governance matters across a broad range of industries and jurisdictions . He also advises governmental and regulatory bodies on legislative and regulatory change.
He has served, and continues to serve, as a director as a director on a variety of captive insurers and is an approved person in many captive domiciles. He qualified as an accountant in 1982.
Malcolm was a member of the Captive Review Power 50 and in 2015 received the industry’s outstanding contribution by an individual award.
In 2017 he became an inaugural inductee into the Captive Hall of Fame which recognises the most influential figures in the captive industry over the past 50 years.
He has acted as industry partner to AIRMIC’s Captive Special Interest Group. He is a regular contributor to industry debate and is a passionate advocate for the raising of standards in the captive industry.
Malcolm founded CWC in 2015 to allow organisations access to the accumulated knowledge, insight and solutions that he, and the rest of the CWC team of captive insurance experts, have gathered over their lifetimes.
