Zurich Singapore general insurance chief executive Jonathan Rake explores the use of captives in Malaysia

A captive is an insurance company that is fully owned by a non-insurance parent company, insuring the risk of the parent company and its subsidiaries. It is a great opportunity for any company that has a strong appetite to retain risk, and a positive loss history. Additionally, a captive is appropriate for any company that would like to advance and develop its risk management and risk financing.

Malaysia is fortunate that it has its own captive domicile – right on its doorstep in Labuan. Labuan is currently the second largest captive domicile in Asia. In 2012 it had more than 40 registered captives, of which 18 are owned by Malaysian companies. While the largest Malaysian enterprises have seen the benefits of captives, other corporations have been slow to pick up and take advantage of this opportunity.

While the reasons may differ for each company, two are usually raised: insurance premiums are low, and captives are only about tax benefits. The first one cannot be argued with, as there is a persisting soft market, though this is changing. Additionally, captives are not about cheap insurance or tax benefits – they are a sophisticated risk-management and risk financing tool.

Captives enable a company to analyse and manage risk, and insure uninsurable or not yet insured interest. They do so in an economic and stable manner across various lines of business that each complement their risk characteristics to create a balanced portfolio.

Tax benefits
While there can be benefits to having a captive, they are more circumstantial. The main driver beyond the risk management side is the sharing in profits coming from a positive loss history and claims experience, which often brings a realisation and ownership of risk through all levels of the company. Insurance and investment income through the profits of the captive can be partially paid out as dividends or provided to the parent company as a loan that provides an offset to investment for capitalisation. Captives take risk management off the balance sheet of the parent company and give it its own balance sheet that allows the parent to have much more oversight and control.

Asia has the opportunity on its doorstep to take its risk management to a new level based on its risk appetite.

Next time you speak to your insurer or broker, ask them how you could profit more from your positive loss history; how could you benefit from introducing a captive as a risk financing and management tool for your company in the longer term; or how could you improve the portfolio diversification of your captive; what are your insurers’ capabilities of matching your desire for that diversification?