Flourishing Captives
Captives Flourishing
Hard market has seen an increase in captive formations. Historic growth seen since 2020 is definitely continuing in 2022. Marsh alone formed more than 200 new captives globally in the last two years and the formation activity is not slowing down.
In challenging market cycles new formation activity tend to happen in a handful of domiciles, but this is the first time new formations are seen in every domicile, even in some of more mature locations
Hard markets – Pandemic start – Captives value perception
Through 2020/2021, Brokers And Risk Managers often faced a situation whereby there was no economically acceptable market solution available/, adding that the speed of the market change and the scale of the hardening caught many risk managers short with no alternative options.
Captive, therefore, provided an alternative that enabled the group to mitigate the effects of the hard market. In many cases, the captive was used to manage the volatility effect on premiums and deductible levels.
The response of captives to the significant challenges encountered through the hard market has resulted in validation and internal buy-in as to the value a captive can provide.
Captive represents a longer-term risk financing strategy and one that delivers stability in costs and a buffer against market cycles. Even as the hard market abates, rates remain high, supporting captive formation, and the desire to protect against market cycles is front of mind. It will be a while until risk managers feel confident in the ability of the insurance market alone to provide stable risk financing solutions.
The expectation is that, as long as challenging terms exist within the commercial markets, corporates will continue to explore ways in which they can reduce their dependence on these markets
Deepening awareness of Captive concept
The hard market may be moderating but ?buyers are approaching their fourth renewal with the bar set considerably higher, at a time when
More and more companies looking for alternative risk financing mechanisms to lessen their reliance on the commercial insurance market.
Enquiries are coming from companies of all sizes and not just those with large premium spend that would have been more traditional players in the captive space.
Over 70% of new formations globally in 2021 were captives writing less than $5m in premium. This signals a trend of increased sophistication around the approach to risk financing among smaller companies, along with an increased awareness and understanding of the captive concept.
The level of new enquiries coming to consulting teams around the world is still high, indicating that formation activity will continue even as pricing moderates.
Greater utilisation of existing captives
Those with existing captives are keen to understand how the captive structure could be used to further support the group’s overall insurance placement, while those without captives wish to evaluate and understand the potential financial and strategic benefits which could be derived from a captive vehicle
Insurer has seen an increase in cessions to captives these last few years. Clients are exploring new ways to transfer and manage their evolving and emerging risks using their captives.
New uses or traditional focus?
With the growth in captives and the greater use of existing captives, clearly many captives are focused on traditional property and casualty (P&C) lines where the hard market has most impact. But there are also signs of expansion of the use of captives into new areas and new risks, and greater innovation in the sector.
Cyber
The first is cyber risk, where prices and capacities are becoming unrealistic but the risks are still there and are increasingly being scrutinised by boards and top executives. This trend will give room to a lot of innovation for all digital solutions to be covered, including perhaps their impact on business interruption
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Parametric
There is an increased interest from those more sophisticated captive clients for parametric solutions
Affinity
There is continuing rise in affinity business, where companies are entering the insurance business via a captive to offer competitive insurance to their customers and influence total product cost.
Employee benefits - Social Perspective
Captive utilisation for employee benefit can be done where companies are keen to enhance D&I positive benefits across their organisation. It is also expected that captive investment strategies being used to support sustainability and socially responsible activities in line with parent ESG frameworks
D&O
D&O was not historically a common coverage written by captives. Just over 50 of the more than 1,500 captives managed by Marsh are writing the coverage. D&O premium has increased 50% in the last year to more than $75m, showing that many captive owners are using their captives to fund increased retentions
Indexes & Rankings
The other major change to be expected is the growing influence of the multiple indexes and rankings that all large corporates are trying to match, such as the Dow Jones Sustainability Index, or FTSE4Good Index
All these rankings contribute to a better understanding of the values of the mother company, and captives can play a role in supporting the risk analysis and the mitigation processes. This will strengthen the insurers and financial markets’ trust in the company, and will push captive owners to improve their prevention schemes and to develop their risk anticipation processes. There is no doubt that this will help in creating new coverages.
ESG and captives
Captives have an intrinsic role to play across all aspects of ESG, in fact the opportunities are endless for this transformative financing mechanism
Within a transitioning energy context
When ESG is embedded in a company’s operations, there seems to be a strong [positive] correlation to their loss ratio. And captives are well positioned to contribute to identifying a company’s ESG challenges and helping them address these
Captives Role In ESG Framework
Captives drive corporate behaviour, reducing risk through awareness and reward. Captives also facilitate the centralisation of data and governance, which allow corporates to ensure that they are engaging and supporting specific, measurable, achievable objectives for their corporate goals
There is an increasing number of clients that have been including ESG information in their risk presentation, which is a welcomed trend for insurers.
Captives tool for new Risks
Captives are efficient tools to understand, measure and mitigate new risks that traditional insurers do not want to bear. Through their enterprise risk management, most large captive owners have found ways to measure the impact of certain risks and can design products with no or little risk transfer to the market, to support some of their critical risks. This has been the case for years in environmental risks, with remediation financing.
This could and should be extended to all kinds of climate risks, to pandemic issues, to scarcity issues relative to water or energy.
If captives cannot be involved in risk bearing at the beginning – due to the lack of existing data – they can be very active in risk monitoring and strategy implementation of actions until they can cover them, and their impact on other aspects of the business. This is another positive chance for captives to contribute to their mother companies’ global strategies