There are certain lines of business where insurance premiums have increased, but the property and casualty market is generally soft, and reinsurance pricing has broadly fallen. Given the soft market, there is not significant pressure for alternative risk transfer, including the use of captives.


However, there is an understanding that the inherent value of captives extends far beyond merely obtaining lower premiums by acting as a catalyst for enhanced risk management. The use of a captive is recognised as a long-term strategy, not a short- term solution. There does not appear to be a major rush of captive closures in this soft market, perhaps as companies understand that while obtaining reduced premiums can be the primary function of a captive, awareness of risk management can increase through self-insurance.


A slowdown in captive formations could in part be attributed to many larger companies already owning captives. It is estimated that four- fifths of FTSE 100 companies currently have their own self-insurance vehicles, and it is the small to medium-sized enterprises that tend to be currently creating captives or considering the use of PCC.


Potential new lines of business emerge Larger companies tend to use captives predominantly for property


and casualty lines and other conventional risks, and are reportedly considering utilising PCC for one-off risks, including for environmental lines of business.


Some companies are also considering utilising captives for particular


lines of business where rates and deductibles have increased in the wake of the financial crisis, in particular for credit insurance or professional indemnity cover.


Discussions surrounding the use of captives for employee benefits


have returned to the fore in recent months, with long-term health and long-term disability being proposed as lines of business that more captives could offer.


Companies are considering using their captives in innovative ways, although captives need to find a balance between writing profitable business and serving their parent companies.


Promising prospects await the industry


The captive industry is undergoing a further period of change, although uncertainty is set to remain until further details of Solvency II’s impact on capital requirements emerge from QIS5.


The challenging economic climate is also impacting the captive and


PCC markets, and there are reduced opportunities for self-insurance if parent companies are under pressure. Companies with captives and PCCs are looking at utilising these vehicles for different lines of business, although captives and PCCs must continue to focus on appropriate pricing of risks.


Despite the range of challenges facing captives, A.M. Best expects


the sector to experience some stability, with ratings affirmations vastly outnumbering downgrades.


Captives have changed tremendously over the past decades. That evolution will continue in the next few years as the industry braces itself for further significant development.


This article is based on a report published by A.M. Best. For the full report, Europe’s Captives Navigate Recession, Regulatory Changes, please go to www.ambest.com


Yvette Essen is head of market analysis at A.M. Best Europe Rating Services. She can be contacted at: yvette.essen@ambest.com


A captive market in the Middle East? The benefits of operating a captive are increasingly being


considered in the Middle East, with member states of the Gulf Cooperation Council (GCC) attempting to establish themselves as captive centres. A greater understanding of enterprise risk management (ERM) is also being encouraged among insurance market participants operating in the region.


Dubai, Qatar and Bahrain have introduced captive legislation


in recent years. In February 2010, the Qatar Financial Centre unveiled intentions to become a captive, reinsurance and asset management centre as part of a revised financial strategy. Kane Group, which has a presence in Bahrain and Dubai, anticipates growth in this region and became the first captive manager awarded a licence by the Qatar Financial Centre Regulatory Authority in September 2010.


The United Arab Emirates is also attempting to establish itself


as a captive domicile and offer opportunities to self-insure. The Dubai International Finance Centre recently reduced its application fee for captives from $15,000 to $5,500 and for PCCs from $40,000 to $8,000 for the core cell, plus $1,000 per additional cell.


It is hoped that a number of companies could utilise captives


for energy risks. However, to date, captive formation in the Middle East has been muted. There is still a lack of awareness and understanding surrounding captives, as they are a relatively new offering.


A common attraction of the captive structure is the ability to lower premiums, but insurance prices are already generally low in the GCC as there is great competition in the region, particularly among local insurers. There is therefore little incentive for companies to self-insure; nevertheless, captive formation in the region is considered to be a long-term undertaking.


12 emea captive 2011


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