Management / Charities urged to consider captive insurance firms
Charities urged to consider captive insurance firms
12 August 2014 |
Large charities could increasingly look at captive insurance as a way of saving costs and controlling investments, experts argue. Setting up a captive – a firm which the parent company then uses for its own insurance needs – has long been an option for large corporations looking to bring together different forms of risk, particularly if they need to insure multiple operations across the world.
But as they look to cut costs and stick to tight rules, the bigger charities could begin to get involved. Paul Hopkin, pictured, technical director at the Association of Insurance and Risk Managers in Industry and Commerce (Airmic), says charities are increasingly looking at the financial advantages of using captives.
“We have a number of charities that are members of Airmic, and I think there is a general trend of charities looking more carefully at the expenditure in all areas around insurance,” he says.
“I think as part of that closer scrutiny there are a couple of trends. One is looking at the policies around the world and asking if it’s possible to pool all the risks into one insurance policy.
“If you can do that, you can ask about the deductibles and policies around the world and you wonder if you can take one very big deduction from this global pool. There is also a rationalisation of it to save costs and have a tighter control of how you handle risk.”
Katherine Outhwaite), commercial director for the global captive practice at Willis, an insurance broker, says: “A benefit for very large, international charities is the use of a captive as a central co-ordinating point for all insurance purchasing, ensuring that local divisions or projects get the full benefit of being part of a global community rather than having to negotiate locally with insurance providers.”
But captives are not without their disadvantages. Hopkin warns that charities should consider them “with their eyes open” and notes that initial costs are likely to exclude smaller organisations. “The difficulty, as with commercial organisations, is finding the capital,” he says. “If you are going to write a £5million insurance policy, then you have to have £5million.”
And though charities will manage to save money in their captives if no insurance needs to be paid, an unexpected claim could lead to a financial shock. Outhwaite warns: “Whenever risk is retained internally, rather than transferred externally, there is downside risk. Although many captive programmes are designed to limit this as much as possible, there will always be the chance of an unexpected, significant event.
“Appropriate reinsurance protection, and a clear understanding of the financial tolerance and risk appetite of the charity is critical, as is the use of analytical and actuarial tools and forecast losses.”
Hopkin also believes certain charities will want to ensure that their captive arrangements match their ethics and ideals. “If a charity is UK-based and feels it should run things out of the UK, it may need to be sensitive about things like setting up a captive elsewhere,” he says. “But generally, I don’t think there should be any difficulties. In terms of tax and reputation, captives are not dodgy.”