Marsh Reports on Power and Utility Companies’ Captives

Marsh has released a “benchmarking” report examining the use of captive insurance companies by power and utility companies in four regions: the US; Europe, the Middle East and Africa (EMEA); and, Asia Pacific.

Marsh said its report – Power and Utilities, Captive Analysis, – “is the first detailed examination of how captives usage compares by region and domicile in the power and utilities sector. The report reveals that captives owned by power and utilities companies have higher equity levels than in other industries across both EMEA and globally.

“The report also found that power and utilities companies captives have a higher proportion of retained equity over issued capital than captives of EMEA companies, suggesting they have experienced a greater return than captives from the region generally.”

Jonathan Groves, Head of Captive Consulting for Marsh in EMEA, observed: “The majority of captives owned by power and utilities companies have very low expense ratios. Usually a captive’s equity level will have built up over a period of time following the initial injection of capital required to form the captive. Higher ratios suggest that greater amounts of profit have been retained in the captive over time. Over 25 percent of captives of power and utilities companies have equity upwards of $20 million, which is higher than the global and EMEA norms. The significant level of equity in these captives supports the findings that a higher number of captives are underwriting with higher aggregate limits.”

Other key findings in the report include the following:
— The line of business most frequently underwritten by the captives of power and utilities companies globally and in EMEA is property damage. Property damage and general/third party liability account for more than 50 percent of the lines underwritten in EMEA.
— Luxembourg is the most popular domicile in EMEA with more than twice the number of lines as Bermuda. Guernsey and the Isle of Man are twice as popular in EMEA as they are globally.
— The captives of power and utilities companies have greater exposure in Europe and globally when compared with other industries and are more likely to assume higher per occurrence limits and higher aggregate limits.
— Captives of power and utilities companies purchase reinsurance in line with global and EMEA norms. The structure of captives of power and utilities companies is more likely to be reinsurance than insurance and a fraction write both.
— The captives of power and utilities companies tend to have lower expense ratios than the global and EMEA norms: almost 90 percent of power and utilities captives cost less than 10 percent of gross written premium to operate.
— The gross written premium of the captives of power and utilities companies is concentrated between $5m to $50m whereas other industries tend to have more even distribution or a greater concentration towards lower values (below $3m).
— The captives of power and utilities companies tend to be profitable and also retain a larger proportion of their earnings than other industry groups.

Gordon Springett, Power and Utilities Practice Leader for Marsh in EMEA, noted: “This report demonstrates that captive vehicles continue to form an important part of the risk financing strategy in the power and utilities sector, particularly as part of property and third party insurance programmes. This is especially interesting during a period of prolonged market softness for these classes and perhaps belies the theory, for the power and utilities sector at least, that captives are largely formed and maintained as a hedge against hardening insurance rates.

“It is also interesting to note that captives of power and utilities companies have lower expense ratios than global and EMEA norms, making higher profits and retaining a higher proportion of their earnings than captives in other industry groups. This is testimony to the efficiency of power and utilities companies in running their businesses, the generally high risk management standards of the sector and a naturally prudent approach to risk finance.”

Source: Marsh – www.mmc.com or www.marsh.com

Topics Energy