Innovation key driver for captive insurance industry

BNM governor says the captive insurance industry may well be at a turning point and efforts should be undertaken to develop it

By Dashveenjit Kaur / Pic By : Muhd Amin Naharul

Advancements in technology will boost business growth of the captive insurance market and keep it relevant in today’s digital age, said Bank Negara Malaysia (BNM) governor Datuk Seri Muhammad Ibrahim.

Muhammad said the captive insurance industry may well be at a turning point and efforts should be undertaken to develop it.

“As an industry founded in response to an inflexible insurance market, the history of captive insurance
is very much intertwined with innovation and technology (which) will be a key driver and opportunity
for new captive models.

“Technological advancements are already driving the growth of captive insurance business due to the new risks that businesses face,” he said at the inaugural Asian Captive Conference (ACC) 2017 yesterday.

Captive insurance is an alternative to self-insurance — in which a parent group or groups create a licensed insurance company to provide coverage for itself.

“The industry should focus on better risk management, promoting macroeconomic stability and encouraging new growth, rather than purely concentrating on tax planning,” he said.

“There are promising signs, among businesses and the regulatory sector, that there is a growing space for captives to play a role. It is important that we move forward to harness this potential responsibly and thoughtfully,” Muhammad added.

Captive insurance companies insure assets, liabilities and other risks of its parent company and are
usually located in a jurisdiction where taxation, solvency and reporting requirements are less complicated.

Often managed by specialist companies that act as accountants and administrators, much of the decision-making on the risk to be retained by the subsidiary company and how much is transferred to the conventional insurance market, is undertaken by the parent company.

Opportunities, Changing Norms for Captives
“Captives can be expected to leverage on new technologies to modernise legacy processes and systems,
strengthen risk management capabilities and capture efficiency gains,” he said.

At the frontier of development, Muhammad said the evolution of big data and insurtech has opened up significant new possibilities for segmenting and pooling of risk and capital, and tailoring solutions to specific needs and profiles.

Google Inc has projected that South-East Asia’s web-generated business will multiply over six times to US$200 billion (RM860 billion) by 2025, from US$31 billion in 2015.

“The massive impact of technology on the world as we know it, will create new insurance gaps and demand for bespoke solutions. This will set the stage for captives to take on a more active role in the risk management ecosystem,” he said.

Muhammad said companies that are altering the business landscape will need creative and efficient risk
transfer solutions that address their unique business needs.

“The benefits go both ways — captives can, and should, also contribute significantly to the development
of the industries they serve. Insuring with captives enables businesses and economies to better weather the insurance market cycle,” he added.

Muhammad said captives must be seen as supporting and contributing to the broader economic transformation and growth.

Captive Insurance Gains Traction
According to Labuan International Business and Financial Centre (Labuan IBFC), over 75% of the world’s Fortune 500 companies are parent owners of captive insurance companies, with total captive premium income exceeding US$100 billion via the approximately 7,000 captives established worldwide.

In Asia Pacific, many large conglomerates are beginning to recognise captives as a key element in facilitating business efficiency.

According to the Asia Market Review 2017, the region is experiencing an unprecedented level of sophistication in captive owners, and the increase in the take-up rate of captives shows that Asian corporations are using captives as a risk management and mitigation tool.

A recent survey commissioned by Labuan IBFC showed the risk management and insurance community are confident that the midshore centre has the right ingredients for businesses to establish their captive insurance companies.

The survey conducted by captive trade publication Captive Review found that close to 70% of the respondents are “very comfortable” using Labuan IBFC as their captive domicile.

They agreed that access to regulators and strong legal, as well as regulatory provisions, are found to be the main consideration of 61% respondents when choosing a captive domicile.

The availability of local captive infrastructure is also an essential requirement for 75% of the respondents.

On the back of these requirements, more than half of those surveyed agreed that Labuan IBFC retains a favourable reputation as a domicile, with more than 30% agreeing that the midshore jurisdiction is a strong captive domicile.

“We are pleased to see such positive responses and this reaffirms Labuan IBFC’s position as a business-
friendly, yet well regulated jurisdiction for the region’s risk management needs,” said Labuan IBFC Inc Sdn Bhd chairman Datuk Mohammed Azlan Hashim.

He said Labuan IBFC last year recorded a total aggregated written premium value of US$348.6 million
for its captive insurance sector, and close to 75% of the captive market contributions are from risk owners in Asia.

“We expect this positive trend to continue as Labuan IBFC is very focused on strengthening its presence
in the captive market of Asia.

“We have been cultivating this niche in self-insurance, particularly in captive insurance, and will continue to do so,” said Mohammed Azlan.

He said Labuan IBFC is also well positioned in the captive market, as it is the only jurisdiction in Asia that offers protected cell companies and Shariah-compliant captives for those who prefer captives to be governed by Islamic principles.