Shape shifting: The multifaceted role of a captive insurer

22 May 2019

Managing a captive insurance company demands a balance between doing what’s right for the captive while serving its parent company. It’s a challenging dynamic, one Barclays Captive is looking to explore further by providing coverage to its parent’s customers. We sit down with the Barclays’ captive team to discuss the risks and relationships shaping their business.

Cyber and intellectual property insurance products may be offered to Barclays SME clients, with some of the risks covered through its captive.

“We’re working with our corporate and UK bank to look at insurance offerings for Barclays customers, particularly SMEs that are assessing their risk landscape,” says Farhad Jamooji, Barclays Managing Director of Group Insurance.

“One area that SMEs are concerned about is cyber. On the basis that we’re lending to these organisations, it’s clearly helpful if they’re as resilient as possible,” he explains.

Barclays would be able to offer not only risk transfer, but also support SMEs with the identification, quantification and management of risk.

“In packaging that risk, we could take elements of it through the captive, if we have an appetite and desire to do so,” says Jamooji, whose role includes overseeing Barclays’ captive.

“It’s quite early days,” he adds.

Another risk currently gaining credence is intellectual property. “As a bank, that’s an area we’re beginning to identify, quantify and measure,” says Jamooji.

“If we created an intellectual property insurance product, then we see the captive playing a role, particularly from an incubation perspective,” he comments.

While these new exposures are still being considered, the captive is beginning to cover pensions risk via a longevity swap. This offering will see the captive being used as a special purpose vehicle (SPV) to access capital markets.

Banking and insurance: brothers in arms

Both Jamooji and Rob Fletcher, Aon Executive Director and Barclays’ captive manager, are always looking out for new risks they could take in-house.

Their strong working relationship is enhanced by the fact that Barclays and Aon, a global insurance services firm, face relatively similar regulatory environments and corporate cultures.

“Fundamentally, we’re both in the business of managing risk. We have financial and operational risk at the bank and the insurance industry underwrites operational risk,” says Jamooji.

Fletcher adds: “What’s unique about a banking captive is that you know your banking relationship will be with Barclays because it’s a Barclays captive. If you’re going to have an investment portfolio, it will be going down that route as well.

“That’s a unique element that takes away some of the choice but it doesn’t change the Board’s duty to consider what is best for the captive,” he comments.

In addition to being on the captive board, Jamooji heads up Barclays’ group insurance function.

“We’re here to mitigate the financial impact of operational risks. We work very closely with our operational risk colleagues in Barclays because they identify, quantify and stress the risks,” says Jamooji.

“The data that they produce ultimately goes towards the bank’s capital planning and its regulators.

“We become the recipients of that data which helps us decide on the shape and size of a risk transfer portfolio, where we can use the captive, in part,” Jamooji explains.

Keeping overheads low

Barclays’ Guernsey-domiciled captive is structured as a protected cell company (PPC) and is “an advanced structure”, according to Fletcher.

Each broad line of business is written through a different cell, for example there is a general cell writing tangible, everyday risks such as liabilities and property. There are also a couple of other cells writing more niche lines.

By design, captives don’t have the infrastructure to directly cover risks worldwide, so the captive has a fronting arrangement with Zurich.

This means that Zurich insures Barclays’s global risks and then the Barclays’ captive reinsurers the risk. This allows Barclays to retain premiums in the group with potential for retained dividends.

“We keep things very slick and try to keep our overheads low,” says Fletcher. “When Farhad [Jamooji] tells me he has an operation in a challenging territory and I’ve got to somehow write it - that’s where Zurich comes in. They have the structure to front that risk and then reinsure it to us.

“We’re a reinsurance captive in that respect, but there are other risks that we write direct - bespoke ones,” he adds.

Credit exposure is another important factor: “It’s not something we strive for and, as an insurer, we don’t want it, so we act as a reinsurer to the insurance companies,” explains Jamooji.

Brexit: Change brings risk

Another benefit to this fronting arrangement is that it reduces Brexit’s disruptive potential for the captive.

“Brexit shouldn’t have a big impact because we’re acting as a reinsurer. We’re not writing direct paper. Contractually, it’s all manageable. The real question for a British bank is: what will happen to the British economy?” says Jamooji.

The fact that Barclays’ captive is already situated outside of the EU – in Guernsey – also reduces any risk associated with underwriting post-Brexit.

Barclays recently established Ireland as its European base in the event of a no-deal Brexit.

This London and European base means that two sides of an insurance contract are written separately and then joined up when reinsured to the captive, explains Fletcher.

However, the broader business ramifications of Brexit are yet to pan out, he says.

Investments can fall in value; you may get back less than you invest. This article does not constitute a recommendation or advice of any kind. Past performance of investments is not a reliable indicator of their future performance. Further information can be found within the Important Information page.


Captives under the spotlight

Economic turbulence, interest rates and captive regulation means managing captive insurance is no small task. Our series looks at the role of today’s captive insurer and reflects on the events shaping the industry.