NU Online News Service, Dec. 17, 12:08 p.m. EST
Although the ongoing soft market has damped the formation of captive insurers, market trends are cyclical and the growth of enterprise risk management may encourage captives because of their long-term consistency, according to an industry report.
The ACE Group of insurance and reinsurance companies' new report, "Darwinism at Work? How the Current Economy and the Market Impacts Captives and Risk Managers," addresses the challenges, implications and alternatives available for risk managers when they are evaluating continuing or forming a captive insurer in the current economic and business environment.
The report is authored by Carol Frey, vice president, ACE Risk Management, and Linda Kane, senior vice president, ACE Risk Management, a division of the ACE Group.
Captives definitely can grow in today's marketplace, the authors said. Once considered simply an alternative risk strategy, captives have proven to be "a broad and formidable solution, providing leverage for companies when navigating an ever-changing risk management landscape," according to the report.
Ms. Frey said in a statement that she has confidence captives will continue to survive and evolve to fulfill an organization's unique business needs.
"Captives can support a global enterprise. Captives are not predatory but can live side-by-side with, and even enhance, traditional insurance products–all to support the health and prosperity of the parent organization," she said. "These evolutionary characteristics are sure to outlast the current economic downturn and will undoubtedly drive the next generation of captives."
While market cycles and political, financial and regulatory requirements present new challenges for captives, "savvy risk managers know these challenges also represent opportunities," the authors said.
"The unavoidable waxing and waning of market spurs new, creative thinking and suggests different approaches, such as the formation of a captive, to manage both traditional and newly emerging exposures," notes the report.
Threats and challenges to captives include re-evaluation of capital use in the global recession–such as limited resources for risk managers, financial reforms that could impact insurer and captive capitalization requirements, and availability and cost of credit.
Ms. Frey said the primary purpose of a captive is to assume predictable risks as well as unique or enterprise-related risks, "which otherwise could not be supported or for which coverage was priced conservatively or unavailable in the traditional marketplace."
In some cases, she said, these exposures can be more challenging to commute or transfer, especially if a fronting structure is involved. One consideration, she added, is transferring liabilities from one captive to another to consolidate management costs and liabilities.
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