Captive insurance: for and against

CSCL Venus

Following the news that China Cosco Shipping has established its own captive insurance vehicle, China Cosco Shipping Captive Insurance Co. Are such moves toward corporate self-insurance likely to increase?

Captive insurers are not unknown in the maritime sector. Maersk and Columbia Ship Management have run such entities for years. Amongst oil majors, BP, Pemex and PDVSA are known for employing their own captive insurers.

The chances of captive insurance units becoming more common in the maritime sector would be dependent upon a number of factors, one of which would be the size of the company looking to set up a form of corporate self-insurance.

Given the on-going consolidation of a number of maritime sectors it seems there might be scope for growth. But, as Martin Hubbard, director, Marine at London-based brokers Tysers points out, there are a number of other considerations to take into account.

 

The prerequisites for a captive include:

 

  • Top management commitment (the shipowner must be committed to the concept of running his own insurance company)
  • Sufficient premium volume (only a few, very large owners have the scale to make a captive worthwhile)
  • Effective loss control/risk management
  • Retention capability
  • Cooperation of the insurance market

 

General benefits of a captive include:

 

  • Access to reinsurance markets. The captive can seek protection from the vast capacity available in specialised reinsurance markets which, being wholesale, have reduced overheads compared to the retail market
  • The cost of insurance with a captive would be based entirely on the line’s own performance and not be influenced by other parties’ claims
  • Reduced overheads on premium
  • Potential underwriting and investment profits, which would otherwise be earned by the insurers
  • Reduced premium volatility caused by the general market conditions
  • Proper valuation of retained risk
  • The ability to insure risks normally excluded under standard insurance policies and to control the accumulation of risk from large deductibles
  • Tax – there is no tax saving in having large deductibles, but there would be on premium paid to a captive

 

Possible disadvantages would be:

  • Reduced spread of risk
  • Management time required in the establishment and possible running of the captive
  • Meeting regulatory compliance

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