Asian demand for captives grows, but hurdles remain

The report, released last month, reveals that more clients have begun to utilise captives, or seek advice on them, to complete placements for directors & officers’ insurance, particularly Side B and C covers. 

More organisations across Asia have started to retain employee benefits by self-insuring through captives, Aon added.

According to the major broker, live enquiries from organisations are set to increase further in the coming years, owing to a range of insurance market conditions and external factors.

“Captive owners will reassess their programmes to optimise risk retention and return on investment,” the broker said in its latest report. “The general upward M&A trend will lead to risk finance optimisation reviews for risk retention and captives.

“Based on current activity, more captives will be formed in 2022 to help organisations manage their total cost of insured risk.”

”Asia is an immature captive market and we expect it to grow.”

Uptick in interest

StrategicRISK spoke with Alastair C Nicoll, APAC regional director, captive management at Aon, to gauge his predictions for the Asia captive market through 2022 and beyond.

“We have been receiving enquiries regularly in the recent three to four years, but they are often requests for education on how captives work, and its benefits to business performance,” Nicoll says.

“The engagement takes time to develop, and it can take more than the annual cycle to establish a new captive. Several client discussions are ongoing and each renewal brings changes that will impact decision making.” 

A host of different factors have driven interest among Aon’s corporate client base.

“It varies by sector and business issue,” Nicoll explains. “For example, the ongoing ESG concerns in the coal industry have certainly caused a reaction, as have the natural catastrophes around the region and rising prices for some risk classes, like D&O and other financial lines.”

Hard market solution

Captive demand is higher in certain classes, with general liability remaining a key area, Nicoll says.

“The most common risk classes in captives remain property damage & business interruption and general liability but captives can be used for any in-house risks once they are up and running.”

However, Asian demand for captives remains low by global standards, and a relatively small percentage of client arrangements. Clients’ demands are largely driven by local capacity and pricing, which vary country-by-country.

“We continue to educate our colleagues and clients on the captive concept through our Asia Captive Development Council which operates in 11 Asian countries, which leads to more opportunities. Recent feasibility studies have been commissioned from Japan, Singapore and Indonesia,” the Aon executive adds.

In a relatively immature market, hurdles remain for organisations going down the captive route. Barriers include a viable long term business plan to manage the captive, regulatory standards for license approval, and return on investment.

Securing professional advice is also a barrier for companies in many Asian countries, though markets like Singapore, Labuan, Hong Kong, and Micronesia are well-stocked for experienced captive advisers.

Nicoll says “establishing business rationale” is the biggest challenge for many companies, and ensuring the new captive will be profitable.

According to Aon, time is also crucial. Corporates need to discuss captive plans with brokers straight after their last renewal, not just before, in order to allow enough time. It can take up to nine months to set a captive up, the Asia Market Report noted.