Matthew Latham | XL Catlin

Matthew Latham, XL Catlin’s captive expert, explains where captive insurance is at the moment, and where it is heading in the future

How is the captive group structured at XL Catlin?

In 2014, captive fronting was identified as a growth initiative for the company and I was recruited as the head of captive programmes to spearhead this. XL Catlin already had a large portfolio of captive fronting programmes but wanted to grow this and also ensure that the service we provide to our existing clients is market leading.

My role is global and I work closely with the underwriters and sales teams from different product lines and territories to raise the visibility of our captive capabilities and bring in new business. There is then a strong team supporting the delivery of our services, which includes our Global Programme Centre of Excellence, Network Partners, Enterprise Operations (coordinating policy issuance and premium collection), Ceded Re (money movement), and last but certainly not least, our claims team.

How would describe XL Catlin’s captive capabilities?

According to our research, XL Catlin is the third largest provider of global programmes to clients. Some of the bigger and most complex of these programmes involve fronting for a captive and a number of our captive clients have been with us for more than 20 years.

These captive fronting programmes are produced in all regions of the world and across multiple classes of risk. XL Catlin provides one of the broadest product ranges of any insurer and we can bring this underwriting capability to bear to provide both fronting and reinsurance for captives.

The key criteria any client is looking for from its captive fronting provider is fast, efficient and accurate service. To deliver this we believe that systems and processes need to be global and consolidated, which is the case at XL Catlin.

In respect of premium movement, XL Catlin cedes the allocated premium directly to the captive and does not pool it internally.

This means reinsurance funds on complex captive programmes can be sent to captives and co-reinsurers within days, not weeks or months, regardless of where in our network the premium is received.

How does XL Catlin manage the global nature of the business?

We can issue policies in more than 160 countries. Over 92 percent of our global programme premium is handled by XL Catlin’s owned offices, so we are where our clients need us the most. Elsewhere, we engage local network partners who are ‘champions’ in their own markets—usually the first, second or third largest local insurer in the country. This means they are well resourced and have the right level of expertise and experience to deliver the services and claims management that our clients expect.

Our network partners are managed and controlled via three of XL Catlin’s offices in Austria, Hong Kong and Mexico. We believe it is critical to have people managing our network partners in similar time zones and with relevant language capabilities. This allows us to deliver local solutions aligned with XL Catlin’s global standards.

We carefully select local partners based on criteria such as financial security, servicing capabilities, willingness to follow global programme terms and their reputation in the local market. Consistent instructions and procedures for all owned offices and network partners ensure accuracy and we then constantly monitor service standards against agreed key performance indicators.

How well capitalised are captives these days? What would you attribute this to?

My perception from working with captives over the last 20 years is that they have always been well capitalised and parent companies have ensured that they hold more capital than the minimum required under the respective solvency rules. This is especially true for those captives that have been operating for a number of years and have been able to retain profits from previous years.

When deciding to establish and utilise a captive most parents take a medium- to long-term view and would not want to capitalise the captive at minimum levels, which could result in them having to return to the parent company for additional capital if loss experience deviated adversely from the business plan.

Under new solvency rules such as Solvency II, there was initially concern that captives would have to increase the capital they held. While it is true that capital requirements have typically increased from Solvency I to Solvency II, my experience is that most captives already held more capital than they needed and therefore won’t need to add any additional capital.

How are risk managers approaching emerging risks and placing them in their captives?

In recent years we have seen an increased interest in using captives to provide solutions for emerging risks and wanted to understand this trend better, so we surveyed UK risk managers attending XL Catlin’s captive workshop at this year’s AIRMIC Conference.

The survey confirmed that risk managers are increasingly considering adding new lines of business to their captive, with 21 percent of respondents saying that they had written new lines of business into their captive in the last two years. Perhaps more interestingly, when the same people were asked if they were considering writing new lines in the next 18 months, a much higher 71 percent said they were.

We believe that one of the main drivers for this has been changes to solvency regimes, which mean that adding an uncorrelated new line of business to the captive brings capital efficiency. Top of the list in terms of new risks being considered were employee benefits and cyber.

In terms of truly emerging risks where there are no, or limited, traditional insurance solutions, the results showed that 67 percent of respondents would consider adding these risks to their captive. Examples were reputational damage, cost overrun, product warranties and weather related risks.

This is very encouraging as it shows risk managers are trying to find solutions for the new and most complex operational and business risks. If, with the help of insurers, solutions can be found then this will increase the profile of the risk and insurance team within their organisation and the relevance of the captive.

What are you seeing in terms of regulation around the world that captives need to be aware of?

Multinational organisations are faced with a complex web of national and international insurance, tax and industrial laws, along with varying levels of local marketplace maturity and regulatory sophistication. This complexity has increased significantly over the past decade, primarily due to heightened regulatory enforcement and expansion among multinational companies into developing economies.

These requirements can be met by partnering with a fronting insurer that has the network to support global policies, the knowledge to ensure a compliant programme is in place and can provide the services a captive requires to participate as a reinsurer.

One particular trend that is affecting captives is the requirement in certain territories for local insurers to retain a percentage of the risk.

The aim of most companies is to maximise the amount of premium that can be ceded to the captive and master reinsurance programme. XL Catlin works with clients to achieve the optimal cession that can be ceded to captives and maintain an up-to-date database that captures information regarding these regulations, including taxes.

Where do you see captives in five years? Will they be at the forefront of risk management?

Over the next five years I would expect to see board level executives taking a closer look at their captives to understand why they are being used and what value they bring.

Captives that play an important role in delivering their company’s strategy will survive and I expect them to increase the lines of business they write to improve capital efficiency and the relevance they have for their parent company.

For those captives that are in run-off or taking minimal risk across just one or two lines, they may not pass the test of whether they are delivering strategic value and could be closed. There is going to be particular focus on captives operating in a Solvency II, or equivalent environment.

In these domiciles, capital requirements are not the only issue to consider. The demands under Pillars II and III in terms of risk management, governance, compliance and financial reporting, which will bring increased cost and management time, will be significant in deciding whether to continue with the captive.

Yes, I believe captives will continue to be at the forefront of risk management for large multinational companies.

Those captives that thrive in the coming years will be those where the primary purpose of the captive is for risk management reasons, such as facilitating the group to take appropriate retentions across all territories, driving down the cost of risk and encouraging risk mitigation and prevention.