Appetite for captives increasing in Asian markets

A harder insurance market, the ongoing effects of the COVID pandemic, increased numbers of Nat Cat events and a fundamental shift from businesses to derive increasing revenue from intangible assets are all driving increased interest in captives amongst risk managers in Asia.

On an episode of Global Captive Podcast, Andre Martin, Head of Innovative Risk Solutions APAC reported a significant uptick in interest in captives also in the Asian insurance market.

He told the podcast that Swiss Re Corporate Solutions was seeing an increasing number of risk managers looking at the alternative risk transfer market for ways to complement their traditional programs, and captives or captive-like structures were top of the list.

Currently, only 5-6% of the 6,000 captives globally have parents headquartered in the APAC region, compared with an 86 per cent share from Europe and the US. With 40 per cent of Fortune 500 companies headquartered in Asia, this region is certainly underweight and there is significant potential for growth.

"One key reason for an increased interest is that captives have proven to be a very effective instrument to navigate market volatility and insurance market cycles in general," said Martin. "The biggest benefit of a captive is that it provides a company the ability to optimize its self-insured retentions on a group level, so it doesn’t have to pass on higher deductibles to its local operating units," he added.

The emerging trend toward captives in Asia isn’t just for the formation of new captives, but also a more effective utilisation of existing but sometimes dormant captives through increased retentions – both on existing programs and by adding more classes into their captives.

The severity and extent of the COVID pandemic seemed to have taken many risk managers by surprise, prompting them to review their risk profiles and exposures and more broadly asking the question if their current insurance program was still fit-for-purpose in this ever changing environment, not only now but also for the future. This also encouraged some of them to have a closer look at captives.

The fact that companies are deriving more and more of their revenues from intangible or non-physical assets such as data and intellectual property, rather than from a physical product or production facilities, is also forcing a rethink amongst risk managers.

These new assets classes and emerging risks are often still uninsurable under traditional programs. Here the captive can serve as an incubator, by pooling and warehousing these exposures on a group level, rather than leaving individual operating business units exposed. A classic example is cyber risk, which is the fastest growing class written by captives.

Once a captive has assumed the risk, the company can also access the reinsurance market directly and secure tailored innovative risk solutions and transfer some of the exposure into the commercial market. Captives can also act as a buffer between the protection it offers to their businesses and what it purchases on the reinsurance market. One example would be a business with a Nat Cat exposure that is difficult to insure in the commercial market, e.g.  storm exposure for overhead power transmission and distribution lines. The captive could issue a bespoke insurance policy to the exposure business unit and purchase a parametric Typhoon reinsurance protection in the back. In such constellation the captive would assume the basis risk and act as a buffer between the business unit and the protection available in the commercial reinsurance market.

The most common captive structure in the Asian market involves the captive retaining a primary layer and purchasing reinsurance protection in the commercial excess market at a higher attachment point. This usually unlocks more appetite from the commercial insurance market and allows the captive to optimize the overall capacity that is available. This also signals to the commercial market that the business is convinced about the risk quality and has skin in the game, making the overall program more attractive. Thus unlocking more capacity at more competitive prices.

By retaining the primary layer, the captive is also less exposed to external market volatility or a market overreaction after a loss, because this volatility usually affects the primary layers much more than it does on the excess layers.