Are You Captivated?

Thank you for taking the time to read my risk in Asia newsletter along with over 5000 others in the industry. This week I’m turning to one of my all time favorite subjects at the intersection of risk and insurance management - captive insurance.?

The benefits of a captive to large organizations are extraordinary and I remain shocked at how few there are in Asia. For me it's one of the biggest indicators that risk management in Asia remains in its infancy for many.?

Before we dig into the details, let's stand back and take a strategic view.

Investing in an asset – the property analogy

The choice between owning the home you live in and renting is a complex one. There are many factors to consider, perhaps the most significant being the lack of flexibility. Once a property investment has been made, it is long term,? illiquid and difficult to get out of quickly.

However, given the choice, across most jurisdictions, most people would aspire to owning their own home. There is more to this than merely the satisfaction of having your own ‘castle’. The property is an investment. Though most people require a mortgage to get started, paying down a mortgage is often felt to be a good use of your regular income. Properties often increase in value. After a while you own most or all of an attractive asset which, where successful, can provide financial security and confidence.

Continuing to rent is a very viable alternative and many people do this all their lives. However, the habitual renter is always at the mercy of the landlord. An area becomes more attractive and the rent goes up. The landlord decides he doesn't want to rent out the property anymore and the tenant has to find an alternative. Furthermore many people consider rent to be ‘dead’ money. Once the money has been paid for renting accommodation it's a one way contractual transaction process. The money is consideration, occupancy for a further month or year is provided in return.

For the home buyer who is paying down a mortgage the monthly payment paid out is usually a combination of paying off interest and paying down capital borrowed. In this way for most buyers of property, the process is one of investment and they consider that they are building an asset.

Why is a captive an asset?

This analogy, whilst imperfect, has some useful messages for the CEO considering a captive insurance vehicle. Many corporations and their CEOs are happy to only buy external insurance solutions. The insurance market naturally caters for this and many companies never consider any alternative.

For those CEOs who might wish to be a little more creative in the insurance space, a captive is a very interesting option to consider. Essentially the corporation creates its own insurance company with both the advantages and disadvantages that accrue from such a decision. The primary benefit is that the corporation begins to retain some of the funding that was previously passed on to the insurance market every year.?

Assuming things go reasonably well then at least a portion of the funding will remain available for use in future years. When the captive is well designed, that funding can also be utilized for several different purposes or lines. This means there is additional use of the captive funding for more complex organizations

Captive benefits - the big picture?

4 Key benefits:

1. With a captive the customer becomes a ‘maker’ not a ‘taker’. By flexing participation in the markets to hunt for sweet spots optimal levels of capacity, pricing and terms can be identified and exploited.
2. A captive is a natural hedge. As insurance 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. For the first time the risk manager generates income from the wider organization. Everyone looks differently at a team that's adding to the profitability of the wider organization.
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.

Next time I’ll start to map out the position in Asia and explain what next steps can be considered by organizations thinking about a captive solution.

If you are a risk manager do also check out the PARIMA captives session on Monday sign up here

https://parima.glueup.com/event/the-captives-odyssey-all-you-need-to-know-114967/?pk_campaign=widget-event-list

PS.? It's free for risk managers and their CEOs.?

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