The Captive Future

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I have a final few thoughts on the captive journey here closer to home across Asia.? Whilst we have seen some pick up in the formation of captives to date in Asia, progress is still slow. But let’s have a look in the crystal ball and try and assess what the future holds.?

There have been several hurdles to cross when getting a critical mass of captives, and the associated support, in a region. I’ll try and address each of these in turn and consider how matters are improving for the better. But first let’s address some of the often heard reasons for not having a captive

Are Captives as expensive and difficult as they sound?

Well there is certainly some work to do for the risk manager in setting up a captive vehicle. One of the key issues is delivering an effective sales pitch internally. Here are some of the hot topics to consider with your management team.

Why do we need a new company??

Well it's not essential if you prefer a lighter version. Protected cell captives provide more flexibility at a reduced cost.? But many large and more sophisticated corporates prefer to own 100% of the businesses they manage.?

Why do I have to set aside capacity??

This requirement needs to be framed in the context that the company is setting up its own insurance company. The capital required to do this is not that large considering other ventures the company undertakes. With a little luck the business will start paying for itself after the early years of settling in.?

Why does it cost so much and take so long??

Setting up a complete standalone captive can take as little as three to six months. That's not a huge amount of time. The set up costs and annual running costs can vary depending on type and jurisdiction but there are some low cost options.?

Who is going to run the new company and how much hassle will it be??

Most of the heavy lifting can be done by the appointed captive management team. Engaging a specialist to help support the whole process is also an option. (Guess what, that's what I do as a captive director - happy to help if you need the support).??

What else is leading to fewer captives in Asia?

Another reason sometimes put forward for Asia’s comparatively slow take up rate is the relative lack of sophistication of the risk management community in Asia. I’m not sure that’s actually valid although it may have been ten or twenty years ago. More likely is the different financial structures of large corporates in Asia coupled with the fact that insurance markets have generally been comparatively soft in Asia for a long time. But that's all changing after Covid19. Several industries and product lines are hardening and fluctuating more often. Good reasons to reduce that volatility by deploying a captive.?

It is important that the Asia CEO and CFO understand that the captive decision requires a strategic discussion around risk retention and risk financing. In short, what risks does the corporation want to keep on the balance sheet and what risks should be prepared for with a solution that might be partially self funded and partially shared with others.

In Asia, the buying corporation historically tends to rely quite heavily on the broker for insurance advice. For organisations that have a small or no risk management team, this means the buying decision could be made by the CFO, treasurer or procurement. Whilst some brokers are world class and have a high level of expertise, perhaps a larger number tend to provide more in the way of vanilla solutions. This means that the insurer relationship tends to be relegated to a commoditized buy rather than a partnership that would be mutually beneficial to both companies. In best practice situations the relationship with lead markets is elevated to a similar level as that with key partner banks and finance houses. When this is achieved, the benefits to both sides in both cost and quality can be substantial. This is starting to change as the quality of broker services improves in the region.

Where are we now and how is it changing?

As a consequence of this lack of maturity there is only a very small captive market in Asia at the moment. But its growing faster than anywhere else globally according to some statistics. In total there are around 200 captive vehicles domiciled in the region. With perhaps as many as another 100 Asian captives domiciled outside Asia with all the inconvenience that brings managing boards in different time zones.?

Historically the lines going through captives in Asia are relatively limited towards traditional risks such as property, casualty and liability. But increasingly there are examples of more sophisticated risks including employee benefits, third party risks or bespoke designed risks not supported by third party markets.?

So how does the future look?

The leading domiciles in Asia have historically been Singapore and Labuan. Both remain very active but have recently been joined by a newly invigorated Hong Kong. India is also actively exploring regulatory opportunities for captives in Gift City.?

Many of the topics detailed above were covered by attendees at the recent Asia Captive Conference in Kuala Lumpur Malaysia last month where several hundred participated from across the region and beyond. This was one of the latest captive conferences in the region in recent years and the topic is gaining traction and support from brokers across the region too. The supporting ecosystem of expertise (captive management, directors, audit, legal, broking) is necessary to give CEOs the confidence that their business can be successfully supported.?

In a further ecosystem development, captive owners in Singapore have recently formed a captive owner association. More details at captive.sg There is already demand to expand this to an Asia wide membership. Watch this space for more details. As these trends evolve, and regulatory flexibility and options improve, it looks like captives will have a bright future ahead in Asia and beyond.?

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Next time the newsletter will turn to a fresh topic, technology in risk management and insurance. Exciting times ahead for arguably one of the slower adopters of tech in recent times.

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