Towers Perrin: The Financial Crisis and the Captive Industry

We are in the midst of recovering from the worst financial crisis in the U.S. since the Great Depression. Its effects have been felt worldwide. Captive insurance companies have not been immune to this crisis, yet they are uniquely positioned to help their parent organizations manage through these challenging times.

Source: Source: Towers Perrin | Published on December 14, 2009

Evolving Financial Landscape

The U.S. financial system is recovering from significant stress, which has led to an evolving financial landscape. As a result, there are a number of regulatory and insurance industry reforms on the horizon that may affect captives. Many of these regulations are focused on the financial integrity of the enterprise, i.e., capital adequacy.

For example, the financial framework Solvency II, scheduled for implementation in Europe by 2012, will likely get worldwide traction and serve as a guidepost for global standards for accounting and levels of capital. Solvency II provides a principles-based supervisory framework focused on a uniform solvency/capital adequacy standard, similar to the trend toward IFRS accounting standards.

Furthermore, additional attention and discussion have been focused on captives' investment portfolios and asset allocations. Since the investment portfolio is relied upon as a major source of revenue, the capital/surplus position of captives has been adversely affected by declines in asset values due to stress in the financial markets.

What We Are Seeing

Captive owners are taking a fresh look at their operations. They are conducting re-feasibility analyses that address issues such as:

* Does a captive still make sense?

* Is our captive's capital/surplus level appropriate?

* Are there ways to improve the efficiencies of operating our captive?

* Are there opportunities to write other coverages for risks of the enterprise?

* Do we maintain good communication with senior management?

* What is our counterparty exposure to risk?

* How will regulatory and insurance industry changes affect our operations?

* How do we add value elsewhere in the organization?