Captive ownership increasing in attraction as Lloyd’s looks to provide a new option

In February this year, Nick Frost, President at Davies Captive Management and Keith Nevett, Head of Business Development at Asta, attended the World Captive Conference in Miami where it became clear the demand for captive solutions is testing the appetite of fronting underwriters. However, a new initiative is looking to offer a solution.

Keith Nevett

Head of Business Development

Nick Frost

President, Davies Captive Management division

As a hardening insurance market continues, increasing numbers of businesses are questioning whether their insurance premiums would be better allocated to a captive.

As one of the leading global captive managers Davies has built strong relationships with fronting markets across the world and continues to work with corporate clients to create captive solutions.

The traditional captive operating structure requires the owner to partner with a “fronting” insurer who in effect will provide the regulated paper on which the risk is indemnified.

For companies creating a captive that is seeking to insure a small number of risks in a single country the number of insurers willing to front such captives remains adequate to meet demand. However, for larger firms who are seeking multinational risk coverage the ability to find fronting underwriters is becoming increasingly challenging and it can create uncertainty for captive owners, and for those companies who are increasingly viewing the creation of a captive as an ever more attractive option.

However, a new option is now on offer. Last year Lloyd’s agreed a new framework that allows the creation of captive syndicates allowing companies to operate a captive within the world’s oldest specialty insurance market.

The use of Lloyd’s as a home for captive risks is not new. In the 1990s the market attracted a number of captives that, through no fault of Lloyd’s, ceased and the market’s role as a home for captive risks dwindled. The recently agreed captive syndicate framework has been designed to encourage new capital to better access the market, a key aim of Lloyd’s future blueprint. They are also viewed as a significant opportunity to grow the Lloyd’s market as the industry looks at new ways to remain relevant to its clients and the changing ways in which they wish to manage their risks. As Lloyd’s leading third party managing agent, Asta played a key part in the process to create the framework, which has resulted in this new option for the captive sector.

Establishing a captive syndicate at Lloyd’s comes with a number of benefits. The captive syndicate can access Lloyd’s licences across the globe enabling the captive owner to create a truly worldwide solution for their risks. The company is in effect the owner of the syndicate and provides the capital and funds at Lloyd’s with which it operates. A captive syndicate cannot write third party risks but has the capability to act as an option to the traditional fronting structure. This allows the captive owners to match their risk appetite within the syndicate and, like a traditional captive, the option to access reinsurance capacity remains. The captive syndicate model will also allow the owners to have more control of their risks, given they do not need to rely on the risk appetite of their fronting market. It can also deliver a continuity of cover given that the fronting arrangement does not need to be renewed on an annual basis.

The costs of a captive syndicate are also set to be lower than the traditional “fronting” arrangements. The commission for a fronting partner is between 5%-10% whilst the estimated costs of the captive syndicate are between 5.5% - 6.5%. The company’s risk manager will be the de facto active underwriter for the captive syndicate. They know the risks, and they understand what it takes to manage those risks.

As a third party managing agent, Asta’s role is to act as the regulated entity, providing the vital link between the captive owners and Lloyd’s. It is clear the captive syndicate could be seen in certain instances as an attractive alternative to fronting, and we are working with Lloyd’s to identify a “pilot” captive syndicate. This can then be used as the working example of how they will operate and the benefits they can offer as another option alongside the traditional fronting structure.

At Davies we recognise the challenges for captives. Our role has always been to manage the relationship between our clients and the fronting market, using our experience, expertise and reputation to secure the best arrangements possible. Alongside Asta, and the leading role it has played in the creation of the captive syndicate framework, we can now offer an even broader range of solutions, creating greater certainty for clients looking to benefit from what captive ownership can bring.