Page 249 - M97TB9_2018-19_[low-res]_F2F_Neat2

Chapter 9 Reinsurance market 9/17

Figure 9.1: Risk financing

Low frequency
Transfer
High severity

Higher frequency
Retain centrally
Manageable severity

High frequency
Retain at operating company level
Low severity

Original figure by Willis Towers Watson, reproduced with permission

In reality, consideration must be given to the availability and cost of insurance, the financial strength of
the parent and its ability and willingness to retain risk, and the amount of capital available to commit to
the captive.
Captives will typically begin by participating in the high frequency/low severity losses and, as it
becomes more experienced and stronger financially to support the retention of risk, it will look upwards
to the next layer. It is the remaining low frequency/high severity, or peak risk, that captives transfer to
the external insurance market or elsewhere. The captive market has also prompted the growth of ART
and represents a fundamental shift in the financing of risk.
Reinforce Reference copy for CII Face to Face Training
Before you move on, check that you understand the difference between risk retention and risk transfer.

C4 Domicile

The world’s largest captive domiciles are Bermuda, Cayman and the US state of Vermont. These
locations are primarily focused on US corporations and attract a limited amount of business from
outside the USA. Elsewhere, the captives of European parents tend to be located in Guernsey,
Luxembourg, Ireland and the Isle of Man. Lloyd’s has also admitted captives as member syndicates.
There is much competition to attract captives between these locations and, as a domicile, there is a
Much competition to
balance to be struck between being ‘friendly’ and providing incentives for businesses to locate there, attract captives
and maintaining credibility as, for instance, a regulator of, and legislator for, those businesses. between these
locations
The choice of domicile by a parent will depend on, among other criteria, physical proximity to the parent
domicile, the quantity and quality of transport and communication links, operation costs and fee levels,
infrastructure for business, applicable taxes, regulation (in particular, capital requirements), political
stability and legal framework.
The parent company’s industry may also impact on domicile as some specialise in particular types of Chapter
risk; for example, Vermont is a leader in captives for medical malpractice coverage and risk retention
groups, and Cayman in captives for healthcare. 9
Activity
Captives are also rated. Find the current financial strength rating for a captive that you are familiar with.

Example 9.2
Since its foundation as a haven for captives in 1981, Vermont has become the world’s third largest captive domicile,
despite other states competing aggressively for the new formation business.