An estimated one fifth of captives are dormant
Companies are questioning the value of running a captive, partly as they are anticipate greater capital and time costs as a result of the pending insurance directive, Solvency II, claimed an AM Best report.
Yvette Essen, report author and head of market analysis at AM Best, explained that as an estimated one fifth of captives are dormant, some companies may consider demands from the new regulation to be too onerous.
She said, “The cost of complying with increased regulation, combined with the general desire to achieve greater capital efficiency in the wake of constrained capital markets, has resulted in parent companies increasingly evaluating the effectiveness of using captives.
Specialist insurers are consequently developing exit models to run off captives, or to purchase some of the liabilities associated with them.”
The report said there were other factors causing companies to reconsider operating a captive, such as a need to determine the best way to deploy capital in the wake of the global economic crisis.
Some businesses may be looking to release trapped capital for use elsewhere, perhaps to expand their core business, while others may be seeking certainty on historical liabilities.
AM Best’s report added that captive formation has been “sluggish” in recent years, largely reflecting a soft market for rates and a reduced need for alternative risk transfer.
“However, there is an understanding that the inherent value of captives extends far beyond merely obtaining lower premiums by acting as a catalyst for enhanced risk management,” said Essen. “The use of a captive is recognised as a long-term strategy, not a short-term solution.”
The report also concludes that some parent companies are looking at ways to utilise their captives more fully and are considering using them to provide cover for risks that include credit insurance and employee benefits such as long-term health and long-term disability.