Captive insurance to grow beyond tradition
KUALA LUMPUR: Captive insurance is poised to move beyond the predominant focus on the single parent-captive model and the exclusive domain of large corporates, said Bank Negara Malaysia.
BNM governor Datuk Muhammad Ibrahim said many non-profits entities in the United States, for example, and an increasing number of small and medium enterprises (SMEs), are accessing captives via group captive models that pool assets and share risks across its members.
“Parallels can be drawn with the mutual, which also shares similarities to takaful (Islamic insurance).
“During the 1700s and 1800s, the earlier forms of captives were mutual insurers, formed together by firms from a particular industry that shared similar exposures.
“Today, mutual models are still very much alive. Their contributions to global premiums have risen recently after years of decline, and include captives set up as mutuals,” he said in his keynote address at the Asian Captive Conference 2017, titled, “De-Risking Asia:The Growing Role of Self-Insurance”.
A captive insurer is an insurance or reinsurance entity, whollyowned directly or indirectly by an industrial, commercial or financial entity.
It provides insurance or
Parallels can be drawn with the mutual, which also shares similarities to takaful (Islamic insurance).
reinsurance coverage for the risks, assets and liabilities of its parent company.
Muhammad said the takaful industry is also thriving and poised to continue growing, in large part driven by growth in Asia.
The overlapping markets of the mutual, captive and takaful industries, is likely to provide an important impetus for the wider use of group captives among midsized and smaller companies, he noted.
This region is especially wellplaced to harness this potential, given the vibrance of SMEs and fast growing takaful market.
“Southeast Asia alone contributes almost 30 per cent to global takaful contributions, and this offers an opportunity, as Malaysia has long sought to develop a facilitative regulatory environment to drive an innovative, competitiveandsustainablegrowth of Islamic finance,” Muhammad said.
He also said moving forward, technology will be a key driver and opportunity for new captive models and technological advancements are already driving the growth of captive insurance business, due to the new risks that businesses face.
He added that as an industry founded in response to an inflexible insurance market, the history of captives is very much intertwined with innovation and the first captive can itself be seen as a disruption to the market.
Captives, according to him, can be expected to leverage on new technologies to modernise legacy processes and systems, strengthen risk management capabilities and capture efficiency gains.
At the frontier of development, 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.
Online platforms based on the group captive model and P2P insurance concepts are a case in point.
Given that captives aim to provide specialised coverage that is not typically available in the traditional market, it is only natural for captives to operate in this space.
“We are likely to see greater traction in efforts to understand captives from a regulatory and supervisory perspective,” said Muhammad.
At a global level, there is a greater appreciation of the role and importance of captive insurers, including by the International Association of Insurance Supervisors (IAIS).
The IAIS published two papers in 2006 and 2015, addressing the economic benefits of captive insurance and its relationship to traditional insurance and reinsurance markets.
A primary objective of regulation for captives is promoting financial stability.
Muhammad said in this respect, regulators will continue to be concerned with risks that may be created as a result of arbitrage and distortions to the broader insurance market.
“Captives have an important contribution to offer. However, understanding risks related to captives at a much deeper level, will be important to deliver regulatory outcomes that are proportionate and economically efficient,” he added. — Bernama
Datuk Muhammad Ibrahim, BNM governor