Manufacturer leverages captive for affinity extended warranty programme

The challenge

A global heavy machinery manufacturer required a solution to provide extended warranties to its customers as part of an affinity insurance programme. Marsh helped the manufacturer develop a programme to increase revenue by 20% that could be rolled out in other regions. The programme is insured by a captive, providing the client with further revenue generation and greater control over its insurance needs.

The solution

Marsh’s Affinity team set up a working group to gain a comprehensive understanding of the manufacturer’s current operations. During this process, the team posed several key questions for the manufacturer to consider before building the affinity insurance programme for extended warranty including:

Risk appetite

Is it more effective for the manufacturer to transfer the risk to an insurer or to a Managing General Agent (MGA) or take the risk by establishing a captive?

Insurance knowledge

How well does the manufacturer understand the market and the insurance products it intends to offer?

Licensing capability

If the manufacturer participates in the risk by setting up a captive, what is the regulatory position and/or is a “fronting” insurer — an insurance company that issues policies on behalf of another insurer — necessary?

Geographic coverage

If the programme is implemented in other countries, how will the manufacturer collaborate with insurers across different territories?

Laws and regulations

What legal considerations should be taken into account in each market? If a captive is being considered, what are the legal requirements regarding the fronting arrangements in the relevant jurisdictions?

Through this consultation process, the manufacturer realised that an extended warranty programme could lead to an additional 20% in revenue. The Marsh Affinity team discussed the option of creating a captive that would enable the manufacturer to retain the revenue typically received by an insurer. The manufacturer was introduced to the Marsh Captive Solutions team and decided to proceed with the solution.

The results

By structuring the affinity insurance programme as a captive, the manufacturer can manage retentions and deductibles more effectively by forming their own subsidiary insurer, reducing reliance on the commercial insurance market. This structure provides greater visibility and control over the claims management process, allowing it to be streamlined, which can result in faster payouts and an enhanced customer experience.

The key benefits of a captive are:

Flexible coverage options: Captives can fund traditional coverages (such as general liability and employers liability) as well as emerging and hard-to-insure risks (such as environmental and cyber), providing broader protection.
Customisable insurance solutions: The manufacturer can tailor coverage to its specific needs, resulting in simpler policies and more manageable risks, along with increased control, improved claims handling, and loss control.
Revenue generation: Reserves for unpaid claims and unearned premium, typically retained by a commercial insurer, can be held by a captive and invested. This allows the captive to establish reserves from pre-tax income, a benefit not available to non-insurance entities. Premium paid to the captive can also be invested while waiting for claims to be paid.
Options to fund risk management: The captive can be used to fund risk management programmes and services. This may include using its surplus to take on additional limits, write new lines of business, and fund loss control and other projects that support the captive or the manufacturer’s overall risk management strategy.

The manufacturer valued Marsh's insight on Using captives to unlock value in affinity insurance programmes. Marsh's transparency also aligned closely with the manufacturer's core values. As a result, it appointed Marsh to develop the extended warranty within its affinity insurance programme for one region, with potential plans for expansion into other regions.

Furthermore, the manufacturer commissioned the Marsh Captive Solutions team to conduct a feasibility study and provide regulatory guidance for establishing a captive.

The manufacturer ultimately opted to establish a captive, enabling it to manage risks more effectively while maintaining control over its insurance programme.