Understanding your risks
Alan Fleming of the Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC)
addresses the key risk management concerns faced by today’s captive industry.
What are the key concerns that captives need to attend to in today’s environment?
Solvency II remains the key concern for the industry, because there is
so much uncertainty about how it will be applied. Most UK captives are located offshore, raising questions regarding what their attitude to the new regime will be. Offshore domiciles have already indicated that they are not going to be driven by Solvency II, but what does that mean? Is that going to threaten issues such as fronting costs?
The second concern relates to proportionality. Everyone talks about proportionality, but I don’t see too much evidence of its being applied, and it’s an area where the offshore jurisdictions are probably a bit more constructive in their approach. The most interesting dynamic will concern what happens in Bermuda. Bermuda is applying for equivalence, but the industry is watching to see whether they will apply the ruling to their captive sector. If they do, then they will lose a lot of business because it will go back to the mainland US.
An adjunct to Solvency II, but not only an adjunct, is diversification.
People are increasingly looking to use their captives on a broader basis, with how exactly they are going to do this a topic of some debate.
Another issue is the question of capital coming under threat from within the company. Some firms are questioning why they should have £20 million tied up in Guernsey, particularly in such troubling economic times. My view, however, is that for the larger companies, and in fact for almost all companies, a captive is actually quite a good investment of
capital because their operations save the parent money and any profits are consolidated into the parent company. Captives are, after all, a constructive way to purchase your insurance programme.
Finally, because the market has been soft for a number of years and
there are some expectations of a turn in 2012, companies are looking at how they can more constructively use their captives, particularly for things such as employee benefits and health risk. I would have to say that companies with serious US exposures would be mad if they weren’t considering deploying captives in these areas.
How can captives work to overcome threats posed by captive immaturity and data scarcity?
In the case of newly formed captives, if they don’t know what they are doing, they shouldn’t be doing it. Sometimes, however, captives are formed for exactly that reason, because the information is not being
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