Asia-Pacific captive numbers on the rise - Aon

Asia-Pacific firms are increasingly turning to captives as a preferred risk management tool.

According to research from global broker Aon, captive owners in the Asia-Pacific region have increased to 23% in 2015, up from 17% in 2013.

Globally, the trend is the same, with just under 18% of 1,418 respondents having an active captive or protected cell company (PCC), up from 15% in 2013.

“These sophisticated solutions have many benefits, but they also underscore the need for risk managers to work more closely with company leadership to ensure everyone understands which risks are being retained, and which are being transferred,” Aon chief executive Greg Case said.

In Asia, the main reason for setting up a captive, cited by 31% of respondents, was to use it as a strategic risk management tool. This was followed by achieving cost efficiencies and having a control on insurance programmes (both at 19%). See table, below.

Reasons for captives (Asia)

Strategic risk management tool	31%
Control on insurance programmes	19%
Cost efficiences	19%
Ability to establish reserves	6%
Access to reinsurance market	6%
Reduction of insurance premiums	6%
Risk finance expense optimisation	6%
Tax optimisation	6%

 

Lloyd’s Hong Kong general representative Dylan Bryant told StrategicRISK that all multinational firms in the region should be “having the conversation” about setting up a captive.

“Whether they set one up is another thing, but they should definitely be having that conversation,” he said. “We need more captives. The ability that a captive has to change an organisation’s approach to risk is quite profound. It can be the key for creating resiliency within a business.”

Bryant added that setting up a captive in Asia-Pacific was now much easier thanks to the support available through regulators, captive managers and brokers.

“You don’t have to be a multimillion dollar entity right from the start. You can set up a captive in Hong Kong for about HKD$2m (US$258,000), for example,” he said.

Having a plan and purpose for the captive is also crucial, he said.

“Captives can be extremely strategic and serve bespoke business needs, or they can be generous captives that support your entire organisations,” Bryant said.

“You need to understand your risk appetite and understand the types of coverage that you want to build into [the captive].

“The other thing to do is to have a five or 10-year plan of what you want the captive to be able to deliver – whether that’s funding for the risk management function, risk management improvements and risk mitigation programmes, or whether it’s to fund large deductibles – but have that clear strategy.”

But NMG Risk Solutions partner Daniel Koepfer said firms needed to think carefully before setting up a captive.

“It’s a long term strategy – you’re setting up a legal entity, a small insurance company – so you don’t do that just for a year and you also don’t try to do that two weeks before renewal,” he said.

Koepfer added that while the number of Asian firms setting up captives was increasing, the soft insurance market would continue to keep numbers relatively stable.

“If you look at the typical Asian markets, the premiums are very cheap, so risk retention does not always necessarily make sense,” he said. “Often what is more important, in setting up a captive, is having access to the reinsurance market.”

The key ingredients

Koepfer said there are three vital steps to setting up a captive.

“The first is you need to have a certain minimum amount of premium. Different people use different thresholds, but I would say you probably don’t need to bother about [a captive] if your premium is below $1m for your two main risks,” he said.

“The second is you need to have a good loss ratio. If you have a loss ratio below 80% it’s worthwhile having a look. If it’s very high – if you have a lot of losses compared to the premium – then there’s no point.

“The third, is you need to have the back-up of the senior management and a risk management strategy that is consistent with the captive approach.”

Uninsurable risks

Another key reason for companies to set up captives is that risk profiles are changing and some company’s top exposures are now uninsurable in the traditional insurance market, Lloyd’s Bryant said.

A risk manager from a major airline agreed that firms should consider captives and other forms of self-insurance as a way to cover new exposures, such as cyber.

He told StrategicRISK: “When the price of insurance on the traditional market for a cyber policy is deemed to be too high, self-insurance is a great way to manage the risk and own it on your balance sheet.”