The last ten years have been something of a lost decade for the investment portfolios of niche insurers such as captives and mutuals. The recession of 2009 and the ultra-low interest rate environment that has persisted in its wake, has translated into precious little opportunity to generate meaningful returns. Given the arid investment landscape, many management boards put the thought of investing to one side and placed captive assets in bank deposits or loaned the money back to parent companies. However, as interest rates continue to creep up and corporate governance regulation tightens, boards need to be able to demonstrate they have reviewed all options and come to a well-informed decision on how best to invest their assets.
By their very nature insurers have a conservative risk profile. Capital preservation is key in order to ensure sufficient cash flow to pay claims as they fall due and to protect the value of the assets. The irony is that, despite this conservative bias, the default option over the past decade has been to loan insurance assets back to parent companies or put the cash in the bank, both of which can carry significant risk. However, the introduction of the Solvency II regulatory regime for EU-based insurers in 2016, and the enforcement of risk-based assessments in other territories, has served to concentrate minds on risk management. The collapse of several parent companies, most recently Carillion, has also caused pause for thought on the prudence or otherwise of lending to parent companies, many of which are unrated and run on thin cash cushions. When Carillion went into liquidation in January 2018 the company’s £1.5 billion debt burden included a loan from its Guernsey-based captive. The courts subsequently deemed the loan irrecoverable and found the captive had failed to satisfy the balance sheet and cash flow aspects of the applicable solvency test under Guernsey law i.e., the own capital solvency assessment, which must include the directors’ view on the company’s current and projected solvency.
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