Captives look for growth spots as soft market persists

| 14/12/2015 | 0 Comments

CNS Business(CNS Business): As insurance and reinsurance rates have now declined for ten consecutive quarters, there can be no doubt about the depth of the soft market, which continues to constrain captive formation. This has left the industry looking towards new emerging markets for future growth opportunities, as well as bringing new, non-traditional risks into captives, with cyber risk getting the most attention.

According to data calculated by Marsh Management Services, global insurance rates declined by 4.8% in Q3 2015 and as commercial rates continue to fall, it means there is less incentive for companies to form captives and self-insure. The property sector led the weakness in prices, with falls of more than 5%, while cyber risk and the unknowns that presents saw rate increases of 15%.

“With general price weakness for ten consecutive quarters, the soft market really has to be seen as the new normal,” said Chris Lay, president of Global Captive Solutions at Marsh. The three main drivers behind the softness, he said, have been the amount of capital being committed to the market, greater sophistication in pricing methodologies and the fairly benign catastrophe market, with fewer major hurricanes over the past ten years. Regionally, the decline in rates was steepest outside the US, with Asia Pacific, Latin America and the UK showing the biggest drops.

Despite the prolonged soft market, the global captive insurance sector continues grow and Cayman is continuing to see a good share. However, M&A activity in the US healthcare sector — as institutions expand as a result of the ObamaCare legislation — has resulted in a decline in captive numbers in Cayman’s biggest market, as surplus captives are cancelled after the deals are completed.

Marsh said that last year there were over 250 new captives formed worldwide, while Cayman itself issued just 23 licences in 2014, according to CIMA, which was at least a 20-year low. New captive formations for this year have been 20 plus, which Kieran O’Mahony, Chairman of the Insurance Managers Association, said was a “great result”.

While there has been a dip in the overall number of captives, O’Mahony said that capital, risk and lines of business had all increased from the existing captives. The other factor which points to continued growth in the traditional captive arena is that structures which have reduced the entry cost for group or rent-a-captives, have opened the doors to captive insurance solutions for smaller and medium sized companies.

The other factor which is helping to limit the downside is re-domiciliations, where for example two merging US healthcare institutions may find themselves with a Cayman captive and a captive in another jurisdiction. O’Mahony said in these situation there is a great deal of interest in owners remaining under the Cayman regulatory system, either by redomiciling to Cayman or keeping the Cayman captive open. O’Mahony said that a number of captives are returning to Cayman due to the level of experience, industry knowledge and expertise here.

Traditional markets, however, are still in a mature state, which has maintained the focus on emerging centres for captive insurance activity. Marsh’s Lay said that in China there are 150 state-owned and over 100 private enterprises currently considering captives, while in Dubai there is a long list of firms seeking more control over global risk. Latin America is seeing a huge explosion in interest, feasibilities and formations, he added.

Merger activity and consolidation has been the big driver of the capital surge coming into the insurance sector, which has kept the market soft.

“Capital coming from alternative sources has grown at a rate of 22% over the past six years so it is a major influence,” Lay said. Since 2014 there have been 23 major deals in the insurance and reinsurance sector, underpinned by the desire to build scale as well as to diversify business and investment.  “Asian capital looking for investment overseas has been the main story this year,” Lay said, with deal value from Asia Pacific up 400% this year to October.

Where captives have been successful, for example in the healthcare sector, some owners are considering bringing non-traditional types of risk into their captive. Political risk, employee benefit and supply chain and director and office risk are all featuring in discussions, in addition to cyber risk, which has become much more expensive to cover in the wake of the major hacks that have been in the news recently.

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Category: Finance, Financial Services

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