Insight

Innovating Captive Insurance

Premiums Rising

According to Swiss Re, total premiums written worldwide totalled to 6.3 trillion USD in 2019. In 2000, that number was 2.4 trillion, revealing a 163% increase.

This article will delve into the lesser-known but much more intriguing business of captive insurance in a post-COVID world; where risks are rising, incomes are falling and revenues are plummeting. 

What is Captive Insurance?

The first recorded instance of a captive insurance scenario was at Lloyd’s Coffee House of London’s Tower Street in the 17th century. Various shipowners pooled assets together to share the risks inherent with shipping during the Age of Sail. Prior to then however we can reasonably assume the essence of captive insurance was already well-known to all merchants or sailors pooling assets together and self-insuring their collective risks, likely as far back to the grain trade under the Roman Empire.

A captive insurance company is a wholly-owned subsidiary of the parent company licensed to insure that parent’s business activities. It is specifically formed by the parent to insure certain or all risks of what it simply does as a going concern. 

The term captive insurance was coined by Frederic Reiss in the early 1950’s when he formed Steel Insurance Company of America solely for writing insurance for Youngstown Sheet and Tube Company in Ohio. The former insured the “captive mines” (supplying Youngstown’s own ore) of the latter, thus earning the name, captive insurance. 

Mr Reiss later established the first dedicated captive insurance company in Bermuda in 1958 with American Risk Management. Bermuda’s regulations against the overly restrictive and expensive of the USA’s at the time propelled his success. By 2017, there were 6,647 captive insurance companies worldwide.

Source: www.captive.com, ‘SRS Charts the Total Number of Active Captives for 2018’

How Does Captive Insurance Work?

A captive is structured to alleviate the risks and potential liabilities ailing the parent company. Its capital is funded by the parent alongside a completely tailored insurance policy addressing any mixture of possible business risks. Often, the small and predictable claims are insured by the captive, and the catastrophic, unpredictable claims, by the reinsurer.  

Source: http://www.stopbeingfrustrated.com/captive-basics.html

A ‘fronting’ insurance company simply issues the policies, with all risks going to the captive insurance and reinsurance companies. The captive insures a flexible amount of risk, entirely to the choice and purview of the parent, with the remaining risk allocated to the reinsurer. Premiums are paid by the parent all the way through to the reinsurer, while claims go in the reverse direction. 

While all of this is generally set up and paid for by the parent, there are numerous benefits to using a captive insurance company. 

Complete customisation. Any risk can be insured with any policy term specifying a particular process for handling a claim. 

Tax optimisation. Accumulating premium income can be invested in international markets while in a tax-friendly domicile, such as Bermuda, Cayman or The Bahamas, and while there is the potential to deduct such paid premiums depending on the home tax jurisdiction of the parent company. 

Cost reduction. Traditional insurance companies apply mark-ups to their premiums reflecting: acquisition costs, commissions, administration, overhead, and so on. You’re not simply paying for your relevant risks. 

Access to reinsurance. At favourable rates, reinsurers only have to insure those risks not covered by captives themselves. 

Coronavirus and What’s Next

Captive insurance is most successful when traditional solutions cannot offer adequate protection at reasonable rates. The collapse in global economic activity due to coronavirus not only depresses insurance demand through limited individual income, but amplifies the risk of corporate bankruptcy. Current premium revenues will fall in 2020 but business risks will on the other hand, rise. 

And especially for smaller or innovative enterprises taking part in high-growth industries—such as, digital assets or legal cannabis farms. Despite their recent growth and their growth to come, incumbent insurers are slow to offer competitive protection for these industries. 

Not Relm Insurance, which specifically creates bespoke insurance solutions for such emerging businesses. There are now more than 5,000 cryptocurrencies in the world and 33 US states have already legalised medical marijuana. Relm sees the need for a trustworthy partner in the search for affordable protection.