Why is the increase in focus on Asian captives not being reflected in solid growth in the market?
Until last year, Daniel Koepfer was running Aon’s captive-management and consulting business in Asia. Then he left to establish a captive-management division at the much smaller independent firm, NMG Risk Solutions.
While you might assume that such a move would indicate that the captive-management business is booming, Koepfer says that quite the opposite is true. “One of the main reasons that we thought it was worthwhile starting NMG Captive Management is the lack of growth caused by the absence of independent captive managers in the region,” he explains. “Until we started, there was no independent captive-management or consulting firm in Singapore. That is particularly relevant for the mid-sized market where many clients are served by brokers who do not have their own captive-management offering.
“These brokers would be very hesitant to support the set-up of a captive structure knowing it’s going to be managed by a global broker, because they know what will happen in one or two years.”
Koepfer says the captive market in Asia has remained relatively static over the past decade. “Singapore, as the major captive domicile in Asia, is a good example. Around 60 captives are domiciled there and, apart from smaller deviations, this has been the case for a decade,” he says. “Labuan has grown more, however the growth rate is still much lower than usual growth rates in Asian economies.” Koepfer says that the “up and coming” captive hub is Micronesia. “It has gone from zero to 12 captives, but it is very specific to Japanese clients,” he says. Koepfer actually formed the first captive in Micronesia back in 2010.
Nevertheless, changes are afoot in the Asian captives market, the Swiss-born chartered financial analyst says. “Interestingly, China’s first onshore captive has just been set up, and we have observed more interest in captives over the past three to four years,” he says. “However, not much of this interest has actually led to new formations. I think what we need is a hardening of the insurance market for the captive market to take off.”
Certainly, a rise in premiums in Asia would raise interest in captives. An increase in the number of companies in the region becoming multinational and taking on new exposures is another possible catalyst for new captive business. Then there are the recent tax changes in Hong Kong, which mean captives will be taxed as reinsurance companies. The Malaysian market is also one to watch, with many captives in Labuan already owned by Malaysian companies.
However, Koepfer points out that the captives market in Asia suffers from a lack of qualified consultants who can provide tailor-made advice to clients. “The major brokers, in my view, are focusing more on administration, reporting and accounting, as it’s only one part of their business and the broking yields much higher returns than the captive-management business,” he says. Koepfer believes that captive managers that are independent from the brokers will examine an organisation’s insurance structure from a different perspective. “It’s like going to another doctor to get a second opinion,” he says. “Many times the doctors will agree, which gives you comfort that you’re doing the right thing. But sometimes you get a different opinion and then it starts to become interesting.”
To the casual observer, it might appear strange that while Singapore is the leading domicile for captive insurers in the region, very few Singapore-based firms have formed local captives. Koepfer says the main reason for this is actually quite logical. “Singapore has a specific tax law that distinguishes between on- and off-shore business,” he says. “Off-shore is defined as non-Singapore business. This means that neither the location of the insured risk or the place of incorporation of the policy holder can be in Singapore. Therefore, Singaporean companies are often better off forming a captive in another domicile.”
NMG Risk Solutions forecasts that as the sophistication of risk management increases throughout the region, so will the demand for alternative risk-financing solutions such as captives. Koepfer points out that the setting up of a captive can act as a catalyst for “pushing through some risk-management initiatives”. “I know that one of the main reasons that a particular captive was established was to streamline the insurance program and to enforce certain risk-management policies,” he adds.
“It’s a good message to say: ‘Hey, we’re retaining the risk ourselves; it’s in-house’.”