Asset managers face a wide range of operational business risks, much like any other business. While coverage for many of these risks can be bought via commercial insurers at market rates, the typical commercial insurance has deductibles, exclusions, and limitations for which the management company simply bears the economic risk. There are also uninsurable risks which managers self insure, for example key personnel, business interruption, fraud, and different aspects of cyber risk, etc. Establishing a captive insurance company is a more effective way to address and manage these risks. In addition, captive insurance companies offer tax planning opportunities.
Captives insurers run an estimated $500bn of assets, but very little of this is invested into hedge funds currently. Therefore, captives are attractive prospective clients for alternative investment managers. In this new Opalesque.TV video, Joe Taussig talks about how to understand the mindset of decision makers in order to get their business.
Looking beyond managing assets, there are compelling reasons for asset managers to form their own captive insurance companies:
Premiums are deductible (self insurance is not)
Investments compound tax free (can manage your own assets)
Underwriting profits are not taxable (captives often have 30-40% underwriting margin)
Distributions are taxed at capital gains rates
Create entry point to go into hedge fund reinsurance
The origin of the captive insurance industry was to provide a solution for corporate insurance buyers as an alternative to self insurance and a way to reduce costs attributable to brokers and other inefficiencies in the market. While estimates vary, the captive insurance market is thought to made up of:
8.000 to 10,000 captive insurance companies
85-90% of S&P500 firms have captives
100+ domiciles (both onshore US and offshore)
$150 billion of annual premium
$500 billion of investable assets
With Affiliated Re, Taussig has created a platform for asset managers to easily setup and operate their own captive insurer. In this Opalesque.TV BACKSTAGE video, Joe Taussig also explains:
How has the captive industry evolved over time?
How ACE, which started as a captive in 1985, ended up buying Chubb and became the world’s largest publicly traded property and casualty insurer
Why have doctors in the US banded together to form captives after 9/11?
What are the big trends in captive insurance right now?
Do many asset managers have captives?
Cyber risk: Four examples of financial firms damages were not insurable in the commercial market, but via a captive
A realistic and attractive way to leg into the reinsurance business and the Buffett model (of making money on the “float” and getting permanent capital)
Joe Taussig is the Founder and a Director of Affiliated Re and Multi-Strat Re which allow asset managers to incubate captive insurers and reinsurers via an outsourced, less capital intense model which significantly reduces execution risk. He was involved with the formation of many reinsurers. The best known is Greenlight Capital Re, which has more than $2 billion of assets managed by David Einhorn and is publicly traded on NASDAQ (GLRE). Previously, Mr. Taussig has acted as a merchant banker for numerous financial services startups, divestitures, and acquisitions since 1990. He earned an MBA from Harvard University in 1972.