The intersection of the legacy sector and the captive market, particularly the options available to exit a captive or reduce the liabilities on the balance sheet of an ongoing captive was the topic of the presentation entitled “Captive Finality Solutions.” Steve McElhiney, Senior Vice President & Director of Reinsurance, Artex chaired the panel of state regulators, stakeholders, and experienced professionals who shared their views about the various finality solutions and the tools and frameworks for captives to unlock capital, free-up operational resources, de-risk and focus on growth ambitions. The panelists included Benjamin Blume, Partner, Kennedys, Sandy Bigglestone, Deputy Commissioner – Captive Insurance, Vermont Department of Financial Regulation, Steve Kinion, Captive Insurance Director, Oklahoma Department of Insurance, and Jose Martinez, Senior Legacy Origination Expert Americas, Vice President, Swiss Re. A video replay of this presentation is available “on demand” to members on AIRROC’s video library platform.
Steve McElhiney kicked off the presentation with an overview of the types of captives, the players in the captive transaction, as well as a rundown of some of the reasons why captives would need a runoff/legacy solution. Globally there are about 8000 captives and the estimate is that about 20% of those captives are dormant. Companies should regularly evaluate the utilization of their captive to ensure that it remains a viable and useful tool in their risk management program. Redundancy from M&A activity, change of purpose, parent company changes and management of capital are just some of the reasons a company may seek to exit a captive vehicle. Also, there are a host of emerging risks that have caught the attention of the C-suite. Emerging risks may cause some companies with retained liabilities residing in captives to offload these liabilities via runoff sale transactions.
Sandy Bigglestone, the Vermont Deputy Commissioner added her view that they are seeing quite a variety of interest in legacy solutions. Many of the solutions are specifically tailored to the needs of the specific company. Adverse development covers and LPTs are common risk management solutions that captives are utilizing. Exiting a captive is also an option in terms of an outright transfer to a legacy liability company or a segregated cell facility. However, from a regulatory perspective the focus is different because it is not a typical insurance company writing prospective business but rather more akin to a claims management company. There are many factors that the regulators will assess in reviewing these transactions such as governance, accounting considerations, systems, qualifications and market reputation of the buyer. On a ongoing basis, regulatory compliance, actuarial, audit and financial wise, many of the requirements still remain the same.
Steve Kinion, Captive Insurance Director for Oklahoma, concurred with Sandy’s comments and added that engagement with regulators and use of outside experts can be vital in terms of explaining what you are trying to do to get regulator buy in.
Steve also walked through a case study of asset recovery obligations in the oil and gas industry. This case study illustrates how OneNexus, an Oklahoma captive, in partnership with Munich Re was able to secure the costs of plugging and decommissioning oil wells; in essence proving life insurance for an oil well. With Oklahoma’s historic association with oil and gas production, there is strong potential for captive growth in Oklahoma through energy companies. Oil and gas is an industry that is ripe and should be targeted for captive growth.
Another key takeaway from this session is that emerging risks represent a growing area of opportunity for legacy transactions. The next presenter, Benjamin Blume, a Partner with Kennedys, spoke about PFAS, one of the emerging risks referred to as the “forever chemicals” because they do not break down in the environment. PFAS is an acronym for Per- and Polyfluoralkyl substances, which is shorthand for more than 4,000 man-made chemicals. These chemicals have been linked to health effects, including certain cancers, weakened immunity, thyroid disease, and elevated cholesterol.
Although around since the 1930s, PFAS has become a big issue in the last few years because the EPA has taken a hard looked and came up with a roadmap to combat PFAS pollution. The roadmap focuses on research, restriction and remediation. The EPA issued a drinking water health advisory and in its latest action is proposing the first-ever national drinking water standard to limit six PFAS substances.
Jose Martinez of Swiss Re explained his experience with the captive community. Understanding the strong and protective nature of the relationship between the captive managers and the client is key because the captive manager typically serves as gatekeeper. There remains a pervasive lack of awareness in the captive industry of the benefits of legacy solutions and the sophistication and variety of tools to provide beneficial solutions. There is a lot of opportunity to provide a service, provide solutions and originate in the captive space. Educating the closely-knit captive network is essential to assist them in leveraging these legacy solutions.