Shareholder Value: The Case of Japanese Captive Insurers

Abstract

We examine how a Japanese firm can derive the most value from a captive insurance company. We use actual data on losses, captive operating costs, interest rates and foreign exchange rates to simulate cash flows from a hypothetical pure captive. We examine three domiciles popular with Japanese firms: Bermuda, Hawaii and Guernsey. We find a high likelihood that the captive generates economic value for its Japanese parent firm especially when it operated over multiple years. We find that when the captive reinsures its entire book of business thus acting as a pass-through vehicle to the global reinsurance market, it normally delivers economic value but near to break-even. We also find that the captive can generate high levels of economic value but only by taking on higher levels of operating risk. We find that the value-maximizing strategy is for a Japanese corporation to establish its captive in Bermuda while the risk-minimizing strategy is to establish its captive in Guernsey. We also find that Bermuda would be a better choice than Hawaii for Japanese captives from the viewpoint of risk-return tradeoff.