2016 Trends in Captive Utilization

Transcription

1 2016 Trends in Captive Utilization Philip Stack, Vice President, Marsh Captive Advisory Jason McMillan, Senior Vice President, Marsh Captive Management

2 Agenda Introduction Captive Vitals: What do you need to know about captives? Industry: What types of organizations are utilizing captive and what are they using them for? Global Events: What global risks can captives protect against? Captive Spotlight: What are specific examples of how captives can flourish? Investment Spotlight: Will my cash be trapped? Q&A

3 Captive Vitals Captive Utilization Financing Retained Risk #1 Fund Retained Risk with Long Payout Streams & High Frequency of Claim Activity such as: Workers Compensation. General Liability. Products Liability. Automobile Liability. #2 Fund Retained High Severity/Low Frequency Risks, such as: Property. Professional Liability. Product Recall. Pollution. Crime risk.

4 Captive Vitals Captive Utilization Accessing Reinsurance Market Capacity Direct #3 Provides access to commercial reinsurance markets: Risks difficult to insure in the direct commercial marketplace (for example, wind and quake). #4 Provides access to the US Government Sponsored Terrorism Risk Insurance Reauthorization Act of 2015 (TRIPRA), reinsurance pool for risk transfer protection for US terrorism risk related to: Nuclear, biological, radiological, and chemical risks. Property/business interruption. Workers Compensation. Profit Center (Underwriting Third Part Risk) #5 Means to participate in underwriting the risks of third parties such as subcontractor or customer risks #6 Reinsurance of Employee Benefits

5 Captive Vitals Capital Value Drivers Funding Corporate Retained Risk Accessing Reinsurance TOP CAPTIVE VALUE DRIVERS Formal regulated vehicle. Ability to access reinsurance. Underwrites employee group or customer programs (unrelated/third party business). Provides evidence of insurance. Unrelated Risk

6 Captive Vitals Type of Risk-Financing Vehicle Special Purpose Vehicle by Domicile A majority (67%) of captives benchmarked utilize the single parent structure. The rise of SPVs and other innovative risk-financing vehicles, such as catastrophic (CAT) bonds, insurance linked securities (ILS), and other nontraditional strategies have allowed organizations to expand their risk management programs.

7 Captive Vitals Global Captive Onshore and Offshore Domicile Comparison (Captives and Branch Captive) Last Five Years The number of captives domiciled onshore increased by 3% in 2015, essentially reversing the slight decline we saw in This echoes the trend we have observed in redomestications, where organizations are beginning to assess and realign their captive strategies based on shifting business needs.

8 Captive Vitals US For-Profit Captive Owners That Treat Their Captive as an Insurance Company for Tax Purposes In 2015, we reported that 48% of US for-profit companies took a tax position with their captive. Case law from 2014 (Rent-A- Center and Securitas) reminds us that organizations should continue to review their facts, circumstances, and risk distribution elements to determine if their captives could qualify as an insurance companies for federal income tax purposes. The 1% increase this past year is evidence of this, along with the growth of small captives in the US and other larger captives realizing some of the tax efficiencies surrounding captive ownership in light of these new precedents.

9 Captive Vitals 831(b)/Small Captive Small Captives Making the 831(b) Tax Elections Approach to Achieve Insurance Tax Status for All Small Captives A significant number of small captives rely on unrelated risk (25%) in the form of a welldeveloped and prudent risk pool. This is because so many middle market and small organizations are structured as Limited Liability Companies (LLCs) or Subchapter S corporations, which necessitate a strong and stable risk pool to meet tax requirements.

10 Capital Vitals Captives That Write Some Amount of Unrelated Risk 18% (down from 19% in 2014) of captives write some degree of unrelated risk/premium. Reasons to write unrelated risk business include capturing underwriting profits and risk diversification. Examples of unrelated risk could be risk pool premium, customer risk such as extended warranty, agency captive business, and vendor or contractor risk. Nearly 5% of the captives benchmarked reported accessing a risk pool. Both large and small captive risk pools, which are lower in premium and higher in severity, remained flat from 2014 to 2015.

11 Industry Top Five Fastest Growing Non-Traditional Risks in 2015 In 2015, multinational benefits represented the fastest growing coverage with growth of 143%. Supply chain closely followed with 133% growth in 2015; nearly triple the 2014 growth for this coverage. Cyber liability, political risk, and medical stoploss experienced less explosive growth at 30%, 27%, and 14% respectively.

12 Industry Top Five Industries Utilizing Captives Captive drivers: Limited market capacity for key coverages. Large casualty loss pics due to large employee and customer bases. Unique exposures the commercial market hasn t gotten quite right. Potential for third-party program to capture underwriting profits. High marginal tax rates.

13 Industry Growing Industries Using Captives (Unique and Emerging Industries) Captive drivers: Improved economic conditions have rebounded certain industries. Certain high-severity exposures are costly to insure; captive use is a more efficient use of capital. Captives offer more control and budget stability. Provides insurance for unique exposures that the commercial market hasn t gotten quite right. Potential for third-party program to capture underwriting profits.

14 Industry Growing Industries Using Captives (Unique and Emerging Industries)

15 Global Risk Stage How Captives Are Being Used to Address Risks Across the Globe TOP RISKS HOW ARE CAPTIVES BEING UTILIZED TO ADDRESS THESE RISKS? EMERGING AND EVOLVING CYBER RISKS Offers tailored captive policies that address gaps in risk-transfer policies. Adds catastrophic (CAT) limits in captive as a capital efficient alternative to risk transfer. Provides access to reinsurance market, which may provide more comprehensive and cost effective coverage. TERRORISM CATASTROPHIC EARTH EVENTS Writes coverage for perils typically excluded from risk-transfer policies (i.e., Nuclear, Biological, Chemical, and Radiological (NBCR), cyber, non-property damage (PD) business interruption, etc.), providing access to the government backstop. Provides access to reinsurance program to cover potential gaps in TRIA trigger threshold and/or TRIA deductible. Allows formal funding for catastrophic earth/weather events that can help stabilize the parent company s balance sheet after an event. CAT bond access. Insurance Linked Securities (ILS). ECONOMIC DOWNTURN Flexibility to retain risk in formalized vehicle if market hardens. Access to reinsurance markets. Build of surplus in capital with flexible investment strategies. POLITICAL UNREST Writes coverage unavailable or cost prohibitive in commercial market. Proactively writes coverage based on unique business needs/geographic spread.

16 Captive Spotlight TRIA Coverage US/Branch Captive Writing TRIA Coverage Captives by Industry Writing TRIA Coverage There are 109 US captives accessing TRIA through their captives. TRIA is essentially a free form of subsidized terrorism protection (although there is a recoupment provision within the law) that undisputedly provides economic value, addresses currently self-insured perils, and adds overall protection to organizations should a terrorism event take place.

17 Captive Spotlight Captives Writing Multinational Pool Benefits by Domicile Strong momentum is now gathering in the number of captives writing employee benefits 143% growth between 2014 and Captives are being used to achieve more advanced risk management objectives, such as: Retaining risk in line with group risk appetite. Getting cash flow back in the business and preventing unnecessary profit leakage. Getting access to actionable data to support strategic benefits management objectives. In essence, the captive is invisible to local employees and benefit administrators and simply acts as a mechanism to direct cash flow, risk, and data back to the organization.

18 Captive Spotlight 2015 Cyber Insurance Growth Rates by Industry (Marsh Clients) Cyber Growth Rates by Industry Captives Writing Cyber Insurance Source: Marsh Global Analytics

19 Captive Spotlight Captives Writing Environmental Coverage

20 Captive Spotlight Captives Writing Trade Credit Insurance & Reinsuring Trade Credit

21 Captive Spotlight and Predictions Continued Growth INTERNATIONAL EMPLOYEE BENEFITS NONTRADITIONAL RISK TERRORISM POOLS/TRIA/ NBCR EMERGING GEOGRAPHIES LATAM AND ASIAPAC SMALL CAPTIVES SOPHISTICATED INVESTMENT STRATEGIES

22 Investment Spotlight Weighted Asset Allocation Including Intercompany Loans 2

23 Investment Spotlight Average Asset Allocation vs. Total Investments & Asset Allocation by Industry 2

24 Q&A Contact Information: Philip Stack, CPCU Jason McMillan, CPA Vice President, Captive Consultant Senior Vice President, Account Executive Marsh Marsh Captive Solutions Marsh Marsh Captive Solutions 3560 Lenox Road, Suite 2400, Atlanta, GA 30326, USA 151 Meeting Street, Suite 301, Charleston, SC,