Canadian corporates expected to create more captives

It seems a safe bet there will be captive growth in the future, with select sectors contributing much of the related activity over the coming year.

“The reality is that for the vast majority of Canadian companies, their captives are well-capitalized,” Trevor Mapplebeck, managing director of alternative risk solutions for Marsh Canada, said in his opening address for the Captives & Corporate Insurance Strategies Summit in Toronto on May 16-17. “They’ve been financially quite strong. Canadian corporates are going to be creating captives as opposed to shutting them down.”

In particular, the energy, agriculture and base metals/minerals sectors are expected to generate the most activity in the captives area, given the state of the market and the strength of commodities, Mapplebeck said.

Most Canadian companies with captives are multinationals that have operations outside the country. “There’s general appetite for risk, of financial willingness and ability for the organization to accept risk on the balance sheet,” Mapplebeck said.

Captives can help provide a cushion in a hardening, firming or tightening marketplace, he suggested. “There’s an opportunity for you to internally insulate the organization from some of the impact of the changing markets.”

Although 2011 was a rough year for captives in the financial, construction and real estate sectors, investment returns for captives were about 3% overall. “Captives undoubtedly are a very favourable and effective tool in the risk management arsenal for Canadian corporations,” Mapplebeck said.

Still, he cautioned “the larger the organization or the captive, the more opportunity it has to diversify its investments. A lot of the smaller, less-insured captives still need to focus on safety and liquidity of the investment.”

A changing approach to compliance and governance make it critically important that captives adhere to all regulatory and tax requirements. “We’re aware of a number of Canadian captives that are being asked for more and deeper information as it relates to the premiums they’re paying within this inter-company type of relationship,” Mapplebeck said.