Mainstream
Perception hindering captive insurance growth
Khairul Khalid 
Labuan IBFC recorded a total aggregated written premium value of US$348.6 mil for its captive insurance sector last year
THE captive insurance concept has been around in Asia for some 20 years. However, its market penetration is still very low at a mere 2% compared to conventional insurance.

Among the reasons is that many still do not understand the role and business of captive insurance companies.

Others mistakenly assume that captive insurance is a costly path compared to the conventional methods.

Captive insurance is basically a form of self-insurance where an insurance or reinsurance company is established by a non-insurance parent company.

In this respect, a captive insurer is able to insure the risks of its parent or related/associated corporations.

They can include legal risks that may be underwritten by another commercial insurer.

In return, parent owners benefit from the underwriting profits made by these captive insurance companies.

Globally, it is said that 75% of Fortune 100 companies have established a captive insurance company.

Labuan International Business Financial Centre (Labuan IBFC) recorded a total aggregated written premium value of US$348.6 mil (RM1.5 bil) for its captive insurance sector last year.

Also, nearly 75% of the total captive insurance market contribution is from risk owners in Asia.

While captive insurance is popular globally, in Malaysia it is mostly dominated by large conglomerates.

Still, there is a big potential for small and medium enterprises (SMEs) to get a slice of the pie and reduce underwriting costs in the longer-term.


Education required

Labuan International Insurance Association (LIIA) chairman Raymond Wong says SMEs should be educated on the benefits of captive insurance.

Wong says  many still think captive insurance is costly

“There is strong [mistaken] belief that the captive insurance concept is only good for large companies,” he says.

This suggests that a high proportion of potential mid-market captive insurance clients remain unreached.

Wong says most companies still do not realise they will be able to manage their underwriting costs in the longer-term by adopting self-insurance.

“They can save money when they risk-manage themselves. More SMEs should definitely look at it.

“Any company that pays RM3 mil upwards in premiums should consider the captive insuance model to save money.

“They will benefit not just from the potential savings derived from having a captive insurance, but also from enforcing a culture of risk management for employees.

“If I’m the boss of a company that is paying a RM3 mil premium for an SME, I will have to ensure everything is in place [such as safety equipment, protection, training etc] so that my business is well looked after by my employees,” Wong tells FocusM.

He was also a pennalist at a conference entitled De-Risking Asia: The Growing Role of Self-Insurance last week, organised by the Labuan IBFC.

Bank Negara Malaysia governor Datuk Muhammad Ibrahim who delivered the keynote address at the event echoed Wong’s sentiments.

He said: “Smaller and mid-sized companies do not consider captives as a feasible risk management option.

“However, this is changing with innovations in captive models, such as group and rental captives and protected cell companies.

“It is not only possible for smaller companies to engage captives. A more compelling business case is emerging for the use of captive insurers as small and mid-sized businesses evolve.”

As of Q2, there were 43 captives established in Labuan IBFC and one of the biggest is owned by national oil company Petroliam Nasional Bhd (Petronas).

Its captive insurer, Energas Insurance (L) Limited, was set up in 2005 in Labuan IBFC, a midshore financial centre located on Labuan Island.


Tax-free island

The island is also a federal territory which means it falls within the purview of the legal system.

One of three tax-free islands, Labuan IBFC was established more than 25 years ago to complement the activities of the domestic financial market in Kuala Lumpur and the development of economic activities on the island.

Labuan IBFC is home to 13,000 companies, 209 insurance companies, 54 banks and 374 leasing companies.

The parent of a captive insurance company determines the amount of risk its captive assumes and how much it transfers to other parties via reinsurance.

Often, it appoints a specialist, manager, accountant or administrator to manage the captive insurer’s affairs.

Wong is concerned about misinformation regarding captive insurance companies.

A recent study commissioned by Labuan IBFC cited a “lack of commitment” from internal decision makers.

This is a key factor holding back captive insurance utilisation in Asia by 75% of those surveyed, while the soft insurance market and a “lack of understanding” also ranked high on the list.

Survey respondents also cited the lack of understanding for the low take up rate of captive insurance companies.

The study entitled, Attitudes towards captive insurance in Asia was conducted by captive trade publication Captive Review.

“There is the impression that captive insurers are complicated and may not be worth exploring during the current soft insurance market.

“This clearly indicates that the concept of self-insurance and specifically captive insurers should be nurtured,” says the study.

Wong agrees. He says that many companies wrongly dismiss the idea of captive insurance due to misinformation on costs and ease of setting it up.

“Firstly, many think it [captive insurance] is complicated. But it is not so. Secondly, they think it’s expensive, but it’s not going to cost a lot of money.


Greater awareness

“The market needs more awareness and people need to be educated [on captive insurance companies] as an alternative,” says Wong.

He stresses that the LIIA is trying hard to attract more companies to set up captive insurers in Labuan.

Wong says it is especially problematic to convince SMEs to recognise the benefits of captive insurance companies.

Most captive insurance companies are part of large conglomerates. However, SMEs are also seen as an important part of growing the niche captive insurance market.

“Many [wrongly] think that setting up another department in an organisation [to handle captive insurance] as troublesome.

“However, there are plenty of consultants who can provide advice on the captive insurance market. There will be a learning curve for the first few years, of course, but after that it will be manageable,” says Wong.

Under the tough business climate, Wong says it may be hard to grow the captive insurance market for SMEs so such growth will be driven by conglomerates for now, says Wong.

Despite this, there can be some solutions for SMEs.

He says it will still be driven by large companies and depend on insurance brokers to come up with solutions.

“For example, a broker can plan something for SMEs in a particular industry and group them together in a captive insurance programme.

“Brokers and reinsurers have a role to play in growing the market. They have to realise that there’s a potential in the niche market for SMEs and captive insurers,” he says.

Wong says everyone wants to save money during an economic slowdown, so they might be persuaded to go for a captive insurance model (to cut costs).

This article first appeared in Focus Malaysia Issue 246.