Read on for key takeaways from the recent joint conference held by Labuan IBFC and Swiss Re Corporate Solutions on why captive insurance is becoming a crucial risk management tool
Why set up a captive?
But first, why consider captives? The hardening market, especially post hurricanes and wildfires of the 2017 and 2018, has been a painful one for the insurance industry. The rapidly changing business landscape due to disruptions from advancing digital technologies, has additionally seen the overall move from physical to intangible assets, resulting in new esoteric risk exposures such as cyber or reputational risks that are more expensive to insure via commercial insurance.
Such changes have sent insureds to look for other alternatives to fill in the gaps as traditional insurance pulls back. With current trends indicating progressively hardening market conditions in addition of the growing need for incubators of emerging risks, captives have begun to be seen as a noteworthy alternative.
Captives are able to act as incubators of risks through aggregation and “warehousing”, allowing them to be vehicles to diversify the risk portfolio of businesses, especially for emerging or “uninsurable” risks. Diversification brought about by utilising captives reduces the cost of capital and ultimately total cost of risk.
Other financial benefits include realisation of tax benefits, in addition to having underwriting profit and investment gains remaining inhouse. Captives also have organisational benefits such as enabling a formal and centralised risk retention vehicle, which enables risk data sharing across the organisation. Captives can also provide for related third party business that may generate additional revenue streams.
Factors to consider when setting up a captive
Captive as an integrated risk management strategy