Initially created to address the challenges of obtaining traditional insurance coverage, captives have evolved into highly versatile financial tools that today are increasingly being used to cover innovative risks, while the captives themselves are becoming more sophisticated in structure and operation. This evolution is particularly evident in Bermuda, a global leader in the captive insurance industry.
That was the verdict of an online panel of experts assembled for this edition of Bermuda Focus. Present on the panel were Jack Meskunas, executive director of investments at Oppenheimer & Co; Yanique Miller, vice president at Aon Insurance Managers; and Nicola Hallett, managing director, Artex in Bermuda.
Asked whether captives are becoming more innovative themselves or if they are increasingly being used to cover more innovative risks, Meskunas said: "The answer is 'yes' to both of those questions."
Traditionally, captives were established to cover specific risks that were either too costly or unavailable in the commercial insurance market, he pointed out. These risks were typically narrow in scope, such as property and casualty risks. However, as the global risk landscape has changed, so too have the functions and purposes of captives. Meskunas highlighted the significant changes in the types of risks captives now cover, pointing to cyber insurance as a prime example.
"When I started 34 years ago with captives, cyber insurance didn't exist—because the internet didn't exist," he noted. The emergence of cyber risks and other complex threats has necessitated the inclusion of these newer risks in captives, driving the growth and value of these insurance entities.
He pointed out that in addition to cyber insurance, other factors such as parametric insurance, cryptocurrency, and environmental liabilities, are finding their way into captives. This expansion isn't merely a response to market demands but also a reflection of captives' increasing sophistication. As captives take on more diverse and complex risks, they require more advanced risk management and asset management strategies.
"It gives us new challenges to duration-match and have the right liquidity profile for the risks these captives are taking on," Meskunas explained.
The role of innovation.
Current market conditions have further accelerated the trend toward innovation in captives. Miller emphasised how the difficulties in obtaining traditional insurance coverage are prompting companies to rely more heavily on their captives.
"We're seeing companies thinking about how their captive be utilised for those risks," she said. The increasing costs of traditional insurance, coupled with coverage gaps, have made captives an attractive alternative for many businesses.
Miller pointed out that the very concept of captives was an innovation in itself—a creative solution to the limitations of the conventional insurance market. As the market continues to evolve, so too does innovation within captives. For example, employee benefits, once considered outside the realm of coverage, are now increasingly being incorporated into captives. This trend reflects a broader shift toward using captives not just as a safety net for uninsurable risks but as a proactive tool for comprehensive risk management.
Hallett echoed these sentiments, noting the significant growth in captives writing environmental liability coverage. This is particularly relevant in industries such as natural resources, where environmental risks are prevalent and challenging to insure.
"Environmental, social, and corporate governance (ESG) risks are one of the new and emerging risks we're seeing captives considering," Hallett observed. The ability of captives to adapt to these emerging risks highlights their versatility and the importance of innovation in their ongoing development.
Bermuda's model of collaboration.
Bermuda's success as a leading domicile for captives can be attributed to its favourable regulatory environment and the collaborative model that underpins the industry, the panel agreed. The close cooperation between industry players, the Bermuda Monetary Authority (BMA), and the government has fostered an environment conducive to innovation.
Miller highlighted the regulator's role in this collaboration, particularly through its consultative approach to regulation. "The BMA is very collaborative — whenever there are new regulations or changes to existing regulations, it involves the industry through consultation papers," she explained. This collaboration ensures that the industry is aware of upcoming regulatory changes and has the opportunity to provide input, thereby creating a more agile and responsive regulatory framework.
One of the most notable examples of Bermuda's innovative regulatory environment is the introduction of the Sandbox regulatory framework and the innovative licence class, the panel noted. The Sandbox allows companies to test new business strategies within a controlled environment, making it easier to experiment with innovative risk management solutions. Successful initiatives can then graduate into the innovative licence class, providing a clear pathway for the development and adoption of new ideas.
Hallett, who is a director of the Bermuda Captive Network, praised the BMA's openness to innovation. She pointed to the recent issuance of a guidance note on the management of climate risks as an example of the regulator's proactive approach. While initially aimed at commercial insurers, the guidance encompassed captives, ensuring that all players in the market are aligned with the latest best practices.
"The government, regulator, and industry bodies working together is what makes Bermuda stand out," Hallett said.
Managers: the drivers of innovation.
While the regulatory environment plays a crucial role in facilitating innovation, much of the creativity in the captive insurance market comes from within the industry itself. Meskunas credits captive managers with driving many of the innovative ideas that have shaped the market.
"I see a lot of innovation coming from the captive managers," he said. These managers are at the forefront of developing new ways to utilise captives, whether by incorporating unconventional assets such as cryptocurrency or by designing coverage for emerging risks such as ESG.
The BMA's willingness to engage with these innovative ideas further enhances Bermuda's position as a leader in the captive insurance market, the panel said. Meskunas shared an example of the BMA's openness to new concepts, recalling how the regulator quickly engaged with a proposal to include cryptocurrency in a captive. The BMA's flexibility and responsiveness enabled the successful implementation of this novel approach, further solidifying Bermuda's reputation as a hub for innovative risk management solutions.
Innovation as a constant.
As the global risk landscape continues to evolve, so too will the captive insurance market, the panel agreed. The ability of captives to adapt to new challenges and cover emerging risks will be key to their ongoing relevance and success. In this context, innovation isn't just a trend but a necessity.
The leaders of the captive insurance industry, particularly those in Bermuda, are well aware of this reality and are actively working to ensure that their captives remain at the cutting edge of risk management.
The collaborative model in Bermuda, where the regulator, government, and industry work closely together, will continue to be a significant factor in driving this innovation. As new risks emerge and existing risks become more complex, the ability to quickly adapt and respond will be more important than ever. Whether it's through the inclusion of unconventional assets, the development of new coverage areas, or the refinement of existing structures, innovation will remain a constant in the evolution of the captive insurance market, said the panel.
According to the panel the captive insurance industry is at a pivotal moment, with innovation playing a crucial role in its ongoing development. As companies continue to seek more effective ways to manage their risks, captives will increasingly be seen as an alternative to traditional insurance and as a vital component of a comprehensive risk management strategy.
Read the original article published by Captive International
