Meeting the Challenges Captives Can Present

Brown Brothers Harriman & Co. provides one-stop servicing of captives’ needs, says Managing Director Andrew Hofer.

Captives’ needs often are driven by the domicile they’re in, the type of business they write and whether they’re either reinsuring or need fronting. That’s according to Andrew Hofer, who as managing director of Brown Brothers Harriman & Co., knows what it takes to be a successful captive.

BEST’S REVIEW: Could you give us an overview on the types of services that are offered?

HOFER: In addition to investment advisory, we offer custodial and trustee services for insurance companies. Across this portfolio of services, we advise on $75 billion of insurance assets, including captives, both global and domestic.

BR: Are there differences between the different locations in terms of captives?

HOFER: The important thing in servicing captives around the world is to be able to provide the extra services--the trust, custody and banking services--that allow them to comply with their domicile’s rules. In the United States, if you’re using a U.S. carrier to front your business, obviously a letter of credit or a trust usually is put in place. So we can provide the trust and manage the assets under one roof, as well as move the money around and keep custody of the assets. It’s one phone call to cover a variety of services that captives need.

BR: What missteps have you’ve seen captive insurers make along the way?

HOFER: If you’re using a letter of credit where a trust will do the job, then that is probably a misstep, because the difference in price is pretty large. If you have a letter of credit of size, you should be looking hard at putting a statutory trust in place instead. It gives you a little more control over the underlying collateral and generally is a money savings.

BR: What types of emerging challenges for captives do you see in the future?

HOFER: There’s no shortage of challenges. One of them--and I’m more familiar with investment markets than with the underwriting cycle -- is that all my clients are anticipating a much softer market or expressing that it’s already here. We do a lot of professional liability businesses, and for captives, the cycle is always a challenge. If they’re multimember captives, there will be some members who want to return to the commercial market, but then there will be others who remember the last hard market and want to keep the captive going. Another challenge that insurance companies face, and captives perhaps more so, is their capital-market investments. There are many mature captives with built-up surpluses. The question of how much do you invest in the equity markets, or even in hedge funds or real estate, is perpetually difficult. The possibility of writing less business or returning surplus in soft markets--that becomes an even more complicated question. A third element is that the stock market is not doing that well, so capital-market investments seem incrementally scarier. The flip side of that is that we’ve got an opportunity to get into the stock market at a lower entry point than we had previously. Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13