Captives have been around for more than 20 years and remain just as popular today. Rodney Wicks discovers untapped potential in Asia
The captive market has been growing steadily for more than 20 years, with no signs yet that the market has reached saturation point. Indeed, recent research shows that whilst the market is still expanding there remains a large percentage of compatible organisations without a captive - even amongst the largest companies in the world.
Recent research carried out by Aon into the proliferation of captives reveals that of the Global 500 companies, only 64% have a captive at parent level, while for the G1500 companies, just 47% have a captive. Given that the captive concept began with the larger companies, and slowly filtered down to smaller and medium-sized organisations, it is likely that below the G1500 level, the take-up rates would be lower still.
Looking at the Global 1500, the real growth started in the mid-1980s and has continued consistently year-on-year ever since. The captive concept started out as a fairly simple one, but is constantly evolving.
The captive industry has developed new products, which have increased their appeal to new markets such as:
• Rent-a-captives to better avail the benefits of captive utilisation to smaller and medium-sized organisations;
• Special purpose vehicles for sophisticated capital market alternative risk transfer products; and
“The strongest growth period was from 1995 to 2000 during the very soft market, a fact that would surprise many in the insurance industry who always assumed that the number of captives grew during a hard market
• Agency captives, which are becoming popular in the US, in particular.
Looking at present day growth opportunities, one of the key conclusions of the G500/G1500 reports is that Asia shows the greatest potential. Of the 243 Japanese companies in the G1500, only 34 have a captive at parent level, of the 39 Korean companies, just two have a captive, and of the 24 Chinese companies, only two have captives.
On this evidence, it seems Asia is primed for growth after a relatively slow start. Japan, in particular, is more fully embracing the captive market. Changes to Japanese insurance business law is one of the key reasons behind this new interest.
In Europe, the recent EU Freedom of Services and Freedom of Establishment Directives created the conditions for a single market which a large number of companies have taken advantage of. This has been through either a wholly-owned captive or a protected cell rent-a-captive, writing all of their European business from one domicile. Low tax Gibraltar and Malta, both of which are in the EU, are well positioned for continued growth due to the "passporting" legislation.
In terms of industrial sectors, even those with the greatest use of captives (amongst G1500 companies) have room for further growth. This includes mining and oil and gas extraction which has a take-up rate of 61%, and pharmaceutical and chemical manufacturing, with a take-up rate of just 60%. It is these industries, which traditionally experience difficulty in buying insurance, that could really benefit from captives.
“Low tax Gibraltar and Malta, both of which are in the EU, are well positioned for continued growth due to the passporting legislation
Exception to the rule
One of the most interesting conclusions from the G500/G1500 reports is that captive formations haven't followed insurance market trends, the underwriting cycle or major losses in the insurance market.
Indeed, the strongest growth period was from 1995 to 2000, during the very soft market. This would surprise many in the insurance industry as it always used to be assumed that the number of captives grew during a hard market, and slowed during a soft market. Rather than being driven by the volatility of the underwriting cycle, therefore, it seems captives develop for strategic reasons.
With 20 years of consistent growth in the captive sector, driven by constant innovation in the market, it is difficult to foresee a time when the captive market will decline.
Rodney Wicks is business development manager at Aon Global Risk Consulting.