Modern risk transfer solutions: Captives in focus

PwC and Versicherungsforen Leipzig study: An analysis with recommendations for action – Status quo, challenges and opportunities

Your expert for questions

Simon Dia, Director, Financial Services Consulting, Industrie- und Rückversicherungsexperte bei PwC Deutschland

Simon Dia
Director, Financial Services Consulting, Industry and reinsurance expert at PwC Germany
Tel: +49 1511 6780963

Alternative risk transfer instruments – captives on the rise

In today's rapidly evolving business landscape, industrial companies face a multitude of challenges in managing and mitigating risks that can significantly impact their operations, profitability, and long-term sustainability.

The ability to identify, assess and proactively address these risks has never been more important. We see this not only in emerging risks such as Cyber and ESG, but also in the light of global events such as the COVID-19 pandemic and its aftermath, as well as the latest political developments in the Israel-Gaza and Ukraine-Russia conflicts. It is within this context that our comprehensive study on risk analysis in industrial companies and the potential for founding or operating captives emerges as a valuable resource for forward-thinking organizations.

“I believe that the trend for industrial companies like ours is to set up even more captives, to use existing captives in an even more exposed way, as well as to consider other ways of risk financing.”

Stephan Schröder,Merck

The study at a glance

This study delves deep into the world of captive insurance market. By exploring the innovative strategies and alternative risk transfer mechanisms available, we provide a holistic view of how companies can safeguard their interests and gain a competitive edge in the face of an hardened insurance market. With a particular focus on captive insurance as a strategic risk management tool, we unravel the complex intricacies of its foundation and operation.

Infographic: By using captives, broad benefits can be achieved for a company

Our research methodology comprised a two-fold strategy that brought together the invaluable perspectives of industry experts and insiders. We conducted a quantitative Computer-Assisted Telephone Interview (CATI) survey, engaging with over 60 seasoned experts in the industry, representing a broad spectrum of companies from various industries.

Complementing this quantitative approach, we embarked on a series of in-depth interviews with the individuals at the forefront of captive insurance management in major German industrial companies. These interviews, along with insights from experts hailing from academia, the industrial insurance sector, reinsurance, and brokerage, offered us a qualitative perspective that delved into the practical challenges, opportunities, and complexities faced by those operating in the captive insurance realm.

“I believe that for some risks there is actually no possibility to hedge on the insurance market, for example business interruption due to the failure of supply chains. You can intervene with your own precautions, you can build up redundancies.”

Prof. Jens Mörchel,FH Dortmund

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Modern risk transfer solutions: Focus on captives

Our research is not just an information source but also a practical guide for industrial firms looking to enhance their risk management practices and delve into the realm of captive insurance.

Infographic: Most frequently mentioned reasons for companies to consider founding a captive

Top recommendations for action for founding a captive

Know your own risk situation

Before embarking on a start-up, it is important for companies to know their risk situation - both for the past, present, and future. This results in the need for centralized risk management in the company. Ideally, data on claims and their development should be available within the company itself. Internal resources should be permanently available for this process. If necessary, it may be necessary to seek external support.

Awareness of the complexity of a captive

Captives are a long-term risk management tool. Establishment and implementation are not trivial and are associated with costs or capacity requirements and a high level of capitalization. This awareness must be present or communicated within the company.

Good communication is crucial

All internal and external stakeholders should be involved at an early stage before and during the establishment process. Good communication is crucial, which on the one hand is technically and factually well-founded, and on the other hand considers that the process is comprehensible for persons outside the field or decision-makers. This is important because captives and insurances are usually not part of the company's core business and little knowledge can be assumed.

Internal insurance know-how is necessary

In human resource management, it must be considered that internal insurance know-how must be available for the establishment and operation of captives. This will usually be expertise outside the core business. Therefore, new staff may have to be recruited and retained. If the captive knowledge is concentrated in one person, there is a risk of losing the knowledge in the event of a change or retirement. Precautions should be taken here. However, it is also possible to manage the establishment and operation of a captive through a captive manager.

Clarify feasibility

An important part of the captive decision-making process is the feasibility study. It is important that the process is open-ended, i.e. the result of the feasibility study can also be a decision not to establish a captive.

External Finance and Regulatory support

The topics of accounting, taxes and regulation should not be underestimated and must be clarified in advance. For these topics, most companies seek external support through consultants, brokers, or captive managers, as this knowledge is very specialized and not automatically available in every company.

Become part of the captive community

Within Germany and Europe, there is an active “captive community” that regularly exchanges information at the European Captive Forum, for example. But informal exchange rounds also take place. It is therefore advisable to actively seek contact with this community and engage in exchange.

Top recommendations for action for operating a captive

Check for new risks

The risks and risk situation of a company should not only be focused on during the foundation of the captive. It is also important to regularly check current or newly emerging risks and regulations during operation - with regard to the effects on the own company as well as the captive.

Review of objectives and processes

Captives continue to develop, for example by insuring new risks. Therefore, objectives and processes should be subject to regular review, if necessary, externally. This also includes the insurance partners, whose offers and services are regularly reviewed and adjusted or put out to tender.

Keeping an eye on costs

A captive also must function economically. Therefore, costs should be reduced through better processes, automation, etc.

Thinking captives ahead

A captive can have more functions than risk bearing. Claims minimization and prevention are increasingly in the focus of the insurance industry. These topics can therefore also be part of risk management, and thus of the captive.

Outlook – Theses on the future of captives

Due to the hardened insurance market, alternative risk transfer is becoming more attractive for companies overall. Therefore, an increase in captives is to be expected in the next few years. Should the market soften again, however, interest in captives could decline again in the long term.

Own captive solutions will always remain a niche product for large companies, as they involve a lot of effort and know-how in initialisation and high capital requirements.

Own captives are generally not an option for SMEs. But here, too, new solutions are currently being sought to insure risks. Virtual captives, protected cell captives and mutuals are examples of this.

Claims and risk assessment has changed in recent years. New technologies and AI-supported functions should be examined with regard to their use and risk assessment and used if necessary.

“In the beginning, it is worthwhile to exchange ideas with like-minded people, with companies that have just founded a captive or through captive networks such as the European Captive Forum. Afterwards, it makes sense to get external support in order to have a standardized procedure and to get an outside-in view.”

Simon Dia,Director, Financial Services Consulting, Industry and reinsurance expert at PwC Germany

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Modern risk transfer solutions: Focus on captives

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The methodology

The study is based on a two-stage survey design. Based on extensive desk research, a quantitative telephone-assisted online survey (CATI survey) was first conducted among 61 experts from the risk management of industrial companies. In terms of content, the focus of this industry survey was on the hedging of corporate risks both via the classic insurance market and by means of alternative hedging models. The survey was prepared, and the data collected in cooperation with Statista.

The quantitative survey was followed by eleven qualitative expert interviews with captive owners of large German industrial companies as well as experts from science, industrial insurance, reinsurance, and brokers. The interviews focused in particular on issues related to the establishment and operation of captives as well as the development of the captive market.

The Versicherungsforen Leipzig inspire and motivate the insurance industry to transform. Together we shape the future of the industry. We identify the topics that will move and change the industry. From this, we develop an understanding of the impact this will have on the various areas of the company. On this basis, we explain what options for action the industry has for the future. Together with the companies, we design customised and tailor-made solutions.

In addition to R&D projects such as studies, market analyses and strategy consulting, Versicherungsforen Leipzig is also known as a provider of exchange and training formats such as specialist conferences, trade fair congresses, user groups and seminars. Through our many years of activity, we have also built up a unique network that includes over 250 companies in the insurance industry and industry-related service providers.

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Simon Dia

Simon Dia

Director, PwC Germany

Tel: +49 1511 6780-963