Originally published in Strategic Risk, Captive Management, A guide to European captive domiciles and company strategies, March 2009
Foreword by Peter Niven, Chief Executive of Guernsey Finance – the promotional agency for the Island's finance industry.
The captive market has been the subject of some particularly interesting comments during the last two years.
For example, in October 2007, The Journal, published by the Chartered Insurance Institute, featured an article 'Capturing Interest' which reported that there were some 5,000 captives globally. In the same year, Andrew Tunnicliffe, group managing director, business development, Aon Global Risk Consulting, commented that the report, 'Global 1500: A Captive Insight 2007', published by his firm, 'shows that growth in the captive market is not slowing down.'
Tunnicliffe also remarked: 'There is still a long way to go before companies are truly managing risk effectively ... you are missing out on significant cost savings by not using captives as part of your risk management programme.' The report notes that insurance buyers within the world's largest companies are failing to achieve a better quality of cover as well as cost savings of typically 10-15%, through economies of scale, efficient use of capital, leverage and more efficient use of senior management time.
In addition, Marsh published a report last year called 'Next generation captives, Optimising opportunities'. This revealed that there were approximately 2,750 captives that were owned by publicly identifiable companies (for example, a specific firm or parent can be identified as shareholder/parent) and total premium paid to captives in respect of property and casualty insurance was estimated at US$55-60bn.
The report shows that approximately 75% of captives originate from six countries and more than half are US owned. Indeed, captives owned by US firms are the most significant contributors to the overall growth of captives. It is perhaps not surprising then that it is jurisdictions in this region which lead the way in terms of recent growth as captive domiciles, although the traditional 'offshore' jurisdictions are facing increased competition from 'onshore' US states.
The report also reveals that in Europe, Malta continues to lead growth within the EU. However, in terms of numbers, it is Guernsey which continues to be Europe's number one domicile for captives (and third globally behind Bermuda and the US State of Vermont).
Finally, the report stresses that 'whilst Solvency II will undoubtedly impact the capitalisation of EU based captives, the actual impact on existing EU captives may be quite limited given the amount of capital already held.'
From a European perspective these reports demonstrate the growth in numbers of captives established, the challenges that lie ahead and the capacity for increased use of 'self-insurance' with its potential benefits for organisations.
These advantages are now supplemented by other important factors resulting from current global financial conditions which make captives even more attractive.
It is generally accepted that soft market conditions, like those that have recently prevailed, have a limiting factor on the use of captives. A new report from Advisen, 'The Hard Market is Coming (But Don't Hold Your Breath)' suggests that the commercial market will begin to harden towards the end of 2009 because of the changed economic environment in which insurers find recapitalisation more expensive, passing these increased costs on to clients in the form of increased premiums.
In fact, there are now clear signs of a hardening of premiums in a number of critical corporate insurance markets. At the same time, there is likely to be a heightened perception of the risks associated with relying totally on the commercial market for primary insurance given the failures or near-failures of some very large insurers.
All of these factors are developing apace but underwriters often become less willing to cooperate in the engagement of a captive in corporate insurance programmes as the market hardens. This means that establishing a captive should be done now rather than later.
The European Captive Management Guide 2009 therefore comes at the most opportune moment. I have great pleasure in welcoming you to this supplement which provides a comprehensive overview of the European market and key information about forming your own captive.
We look forward to doing business with you!
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.