Seriously! Captive Insurance – A Foe or Friend?

Risk-based Capital (RBC) framework has taken effect since 1st Jan 2009. With all Captive insurers (“Captives”) registered under the Offshore Insurance Act (OIA, 1990) having no approved financial strength rating (fsr), it is difficult to see how “Captives” can generate interest among the (re)insurers operating in the country especially to provide a fronting platform for the malaysian domiciled risks. The sole purpose of the Captive vehicle is totally to save dollars which can be detrimental to the local insurance industry….

Why is this so? canary wharf

A captive insurer is prohibited from dealing with direct Malaysian risks other than the reinsurance of Malaysian risks or from those for which approval has been obtained from LOFSA. So if a Malaysian conglomerate or multi-national decides to consolidate its insurance accounts under their newly set-up “Captive”, they would have to appoint a locally registered insurer (under M’sian Insurance Act 1996) to “front” the Malaysian portion of the accounts. The size of those value-at-risks runs into hundreds of millions in ringgit and is broker-packed on Large Specialised Risk (LSR) Scheme. A big chunk would then be ceded back to their registered “Captive”.

The Captive company would in turn tweak and restructure those risks profiles including further revising their retrocession terms and conditions, and retaining a comfortable portion of the risk before retro-ceding to a list of targeted reinsurers. In the process substantial amount were saved.

I am not sure this is anything of detrimental to those retrocessionaires, who are either (re)insurers under the Insurance Act or OIA. At least I have seen some terms offered where the Malaysian LSRs were packaged with the overseas domiciled risks at dizzying low rate with a very low first loss and on a worldwide floater cover.

The crux of the matter or the mechanism in the whole process – has also to do with the “fronting” insurer’s willingness to cede in an obligatory manner a sizeable portion of the risks to the Captive. Under the RBC framework, this translates into higher than normal credit capital risk charge (in this context is 12% on all outstanding due from the (non-rated) Captive) in any event of a sizeable claim. I am not sure what the Central Bank would say if the fronting insurer retains a mere 10% and cedes 90% to the Captive. What would they further add when this risk subsequently comes back into the underwriting books of the IA insurers and OIA reinsurers? And at a much lower rate and perhaps on lopsided coverage terms….. But then can we complain when premiums still find their way back on Malaysian shores?

Captive insurance revenue did record substantial growth with premiums increased by 47% to USD186.9 million as the end of 2008. This was substantial….but wondering how much does this amount actually flows back to Malaysian shores. Or flowing back is not too possible given the fact that most local insurers do not have the necessary facility to write on retro basis and having treaty capacity that is limited in scope. No wonder the Malaysian conventional insurance (non-motor) premiums base is merely growing at just about a single digit!

Can our Captive be more friendlier with the retro terms? Or are our thoughts too preoccupied with tariff-typesetting and TakenCaptivethus taken captive?

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