CAPTIVE INSIGHT
During the growth of the captive market regulators have attempted to recognise
differences in the types of captives as they have moved to a risk based form
of regulation, so for example single parent captives are regulated with a lighter
touch in many domiciles than those writing true 3rd party business. In many cases
regulators around the world in seeking to maintain their competitive advantage
have been forced to become innovators, for example Guernsey was the first
domicile to introduce cell legislation in 1997 and this concept was quickly imitated
by many other competing domiciles. The emergence of Catastrophe Bonds during
the 1990’s has also resulted in regulatory innovation, as given these structures
are fully collateralised they are seen as being less risky, therefore capital
requirements and license fees have been lowered in recognition of the risk based
approach, while even audit waivers are permitted in some domiciles.
Looking back over the years it is clear that captives have been at the forefront
of the ART (Alternative Risk Transfer) market and there is no reason that going
forward this will change as new technologies and the use of social media develop
there will be new risks that need to be covered. Captives have traditionally filled
the gap in the market as traditional insurers have been reluctant or slow to react.
Captives will therefore continue to flourish as their uses develop, so for many it’s
an exciting time for the industry, as insurance finally awakens to the new dawn of
innovation which could result in a boom time for captives who remain ready and
willing to fill any lack of capacity from the traditional market. With the increasing
purchasing power of millennials more insurance is being purchased directly online.
In addition capital is flooding into hundreds of new insurtech start-ups around
the world. Technology has the potential of transforming the entire insurance
value chain including product development, customer acquisition, underwriting
and claims management.
Recent examples of captive innovation include HyreCar who have formed a
captive for on demand Uber and Lyft drivers, while a New Zealand based peerto
peer cryptocurrency exchange platform is participating in a cell arrangement.
At Artex we have been working on new formations covering online e-commerce
retailers who are providing insurance solutions to their customers along with
those working in the renewable energy field. In addition, a pent up demand exists
in the US cannabis industry that is looking for captive solutions however this
is being frustrated by the Federal Government’s treatment of marijuana as a
Schedule 1 substance under the US Controlled Substance Act (CSA) and therefore
no domicile wants to be the first to form a US parented captive, although captives
have been formed for risks located outside of the US.
Innovation and creativity is what captives do well, however captives are reliant
on both cooperative regulators and insurance managers who understand the
business and risks of their clients. It is therefore essential that regulators and
managers continue to cooperate in partnership if they are to continue to flourish.
Cayman is fortunate that such cooperation has existed over a period of many
years so regulators, government and industry continue to work towards the same
goal to make Cayman the clear domicile of choice.