Each asset management company faces countless business risks during its operation, like any other business. For many of these risks commercial insurance at market rates can be bought. There are many risks however that are left uninsured. The existing commercial insurance has deductibles, exclusions and limitations for which the management company simply bears the economic risk. There are also uninsurable risks associated with key personnel, business interruption, fraud, and different aspects of cyber risk, etc.
For each of these uninsured risks, the asset manager is essentially self insured – or he can address and manage these risks much more effective via a captive insurance company. In addition, captive insurance companies also offer a unique tax planning opportunity.
Captives also run an estimated $500bn of assets which so far aren’t invested in hedge funds. They could also be prospective clients/investors for hedge funds / alternative investment managers. In this new Opalesque.TV video, Joe Taussig also talks about how to understand the mindset of the decision makers to get that business.
[drizzle]But, the most important reason is that asset managers can fund their own corporate risk programs:
- You get a deduction for all the premiums
- You can invest yourself those premiums and compound on pre tax basis
- Most captives have a 30-40% underwriting margin
The origin of captive insurance is to provide a solution to a lot of regulatory, accounting and tax issues around either the prolific self insurance or to obtain better insurance protection than the market offers. 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: How the US caught up
- $150 billion of annual premium
- $500 billion of investible assets
With Affiliated Re, Taussig has created a easy to launch platform solution for asset managers to operate their own captive insurance. In this Opalesque.TV BACKSTAGE video, Joe Taussig also explains:
- How have captive insurers evolved over time?
- How ACE, which started as a captive in 1985, ended up buying Chubb, becoming 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 partner with asset managers to incubate captive insurers and reinsurers in an outsourced, less capital intense model which significantly reduces execution risk. Prior to forming these platforms, Mr. Taussig has acted as a merchant banker for numerous financial services startups, divestitures, and acquisitions since 1990. 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).
Prior to 1990, Mr. Taussig took significant stock, option, and warrant positions in troubled companies and served as their CEO or COO in an effort to turn them around. Better-known companies included United Press International, Data Broadcasting (now known as Interactive Data and was recently sold for more than $3 billion), Cabletek (acquired by First Data Resources, then a subsidiary of American Express), and Instinet, which was bought by Reuters in 1987. He earned an MBA from Harvard University in 1972.