Hardening rates in the global commercial insurance and reinsurance markets have prompted the Gulf Co-operation Council, or GCC, to increasingly scout for establishing new captives, according to AM Best, a global insurance rating agency.
There has been "an increasing interest in the creation of new captives in the region, with multiple potential owners undertaking feasibility assessments or seeking regulatory approval", AM Best said in a report.
"A wider gamut of companies is now investigating self-insurance solutions in response to hardening rates in the international commercial insurance and reinsurance markets," it said, adding companies in the region are becoming increasingly sophisticated in their risk management.
The report highlighted that many primary insurers responding to hardening reinsurance market conditions by opting to retain more risk.
At the same time, this is prompting large insurance buyers in the region to look for more cost-effective ways of managing their insurable risks, and potentially recapturing some of the underwriting profit and commissions which would otherwise be enjoyed by external insurance carriers and intermediaries, it said.
The rating agency said it is easier to establish a new captive because of the introduction of captive-specific regulation and the availability of experienced third-party captive managers to oversee the operations.
Several GCC financial services regulatory authorities – including those in Qatar, Abu Dhabi, and Bahrain – have introduced dedicated captive-specific legislation recognising the particular dynamic between a captive and its parent.
With the anticipated crop of new captives in the GCC, AM Best believes that an attractive licensing and supervision regime will play an important role in determining which financial centres attract the most business.
The GCC captive rulebooks prescribe different minimum capital requirements for captive classes which are often below those applicable to commercial (re)insurers, require less stringent regulatory submissions and have lower reporting requirements.
Additionally, they entail attractive application and annual fee levels, commensurate with both the smaller scale and complexity of the captive model.
Outlining a "strong" outlook for the development of the captive sector; it said an alignment of factors is creating an attractive environment for captive development across the region.
The rating agency identifies these as a hardening commercial (re)insurance market, positive regulatory developments, maturing risk management among regional companies, and the availability of professional management services.
Finding that the existing GCC captive sponsors typically operate in sectors where the business model requires a large insurable fixed asset base; AM Best said the property, engineering and energy risks tend to dominate captives’ portfolios, with policies often including substantial business interruption limits.