Captives in Asia

Thank you for supporting my newsletter. It’s great to have you here. In the last issue I opened with the benefits of captive insurance companies to large organizations. These are mind blowing and permanently change the relationship between the risk manager and the insurance market as well between the risk manager and CEO. This is no exaggeration.?

Before we press on, for those in Asia interested in captives, consider coming to the Labuan IBFC captive conference later this month in Kuala Lumpur. Full details here: https://www.labuanibfc.com/resources-events/events/upcoming-events/the-asian-captive-conference-2024 I’ll be there too and speaking on September 19th. I look forward to meeting you in person if you can make it.?

First let’s recap 4 of the biggest benefits of captives:

1. The customer is a ‘maker’ not a ‘taker’. Flexing participation in the markets allows optimal levels of capacity, pricing and terms.
2. Natural hedge. As markets harden and soften, the captive owner gets to smooth the impact on the parent balance sheet. Keeps your CFO happy.
3. A well run captive is a profit center. The risk manager generates income. The CEO looks differently at a team that generates profitable new income streams, and promotes the successful manager accordingly.
4. Uninsured risks are now insurable. By managing capacity carefully the risk manager can provide services to the business that others can only dream of when capacity dries up.

“Why I don’t have a captive” is a theme in full for next time. It’s safe to say that Asia has underperformed with regard to locally domiciled captive insurance companies. This is changing with up to 50% annual growth in some jurisdictions but it is admittedly from a very low base.?

Depending how it's measured there are around 6000 to 7000 captive insurance companies globally. The majority of these vehicles are in USA or offshore domiciles favored mostly by US based organizations. Most notable amongst the offshore domiciles is Bermuda, but with other Caribbean locations also in the frame.?

Europe follows the US with around 25% of the global total. Asia lags far behind. With over half the world’s population - and more relevantly well over half of its manufacturing capability - we still only have around 200 captives domiciled in the region. When we consider that 95% of Fortune 500 companies have captives already, this omission becomes even more glaring.

The breakdown of these 200 is around 80 in Singapore. Catching up fast on that total is Labuan. Then there is a sprinkling in Hong Kong, Micronesia and one or two other small locations. Notably, some large organizations headquartered in Asia do have captive vehicles domiciled outside the region. This is not easy to quantify but it's likely no more than 100 or so.??

It can be difficult for a corporation to take the first step towards setting up a captive. Essentially, the corporation has to decide it wants it’s own insurance company. There are several reasons for this being a difficult decision. One of the most commonly mentioned is that the commoditization of insurance and relatively cheap pricing in the Asia market over many years has negated some of the potential savings. When the market offers what appear to be very low rates, there is a hard discussion to have before the first step can be taken.

Whilst it remains true that Asian insurance capacity is ‘cheap’ relative to some other parts of the world, the picture has been changing. During Covid19 and the post Covid19 period there were some major fluctuations in pricing in various insurance lines. Some industries and sectors are having a more challenging time than others.?

As we are all aware, much of Asia has a difficult natural catastrophe exposure profile. That is only going to deteriorate as the impact of climate change is felt more strongly across the region.?

As sea levels rise over the coming years and storm intensity worsens, it seems that much of Asia could follow a similar trajectory to the Pacific Islands. In the past there were several international markets with offices and solid businesses in the Pacific Island region. With the recent sale of the last international commercial lines in business in PNG it is safe to say the international community has voted with its feet - before they get wet. The only solutions are now local solutions. With respect, the pricing, coverage and capacity reflect that.?????

This is just one of many risks facing organizations where traditional third party insurance providers have failed to keep up as circumstances change. The traditional insurance sector is unfortunately slow to respond to many emerging risks in the board room.?

If I cast my mind back to when I was first producing corporate risk registers over twenty five years ago, something like a third of the top risks facing the organization were insurable. Today, that figure is more likely around one in ten. This data has been backed up by surveys from Lloyd’s and others.??

This leaves the risk manager who only manages third party insurance looking less and less relevant to the CEO. How to make sure your job isn't outsourced to procurement or an AI in the treasury team? Consider forming a captive and taking a strategic step change in how your organization manages risk.??

Next time I want to drill more deeply into “Why I don’t have a captive” and explode some of the myths I hear repeatedly across the region. Until then thank you for reading and do consider signing up for my Substack account here: https://tunstallasc.substack.com/

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