Captive owners, like commercial insurers, face an increasingly difficult reinsurance market as interest rates rise sharply and capacity shrinks.
To cushion the impact of the tough market, companies need to use a larger panel of reinsurers and adopt other strategies, experts say.
Commercial reinsurers have suffered significant losses over the past year, leading to a tightening market for cedants, including captives, said Michael Woodroffe, CEO of Kirkway International Ltd., a Bermuda-based reinsurance broker.
Catastrophe reinsurance rates rose 30% at year-end renewals and retrocessional reinsurance rates rose 50%, he said last month during a session of the World Captive Forum, which is sponsored by Business insurance.
In the difficult market, captive owners need to use more reinsurers on their programs, said Anne Marie Towle, Carmel, Indiana-based CEO of global captive solutions at Hylant Group Inc.
“If you had two or three partners before, you might have five, six or seven on your slip or even more. So there are some of those pain points that are still coming through on the reinsurance capacity, and I think that will continue in year, she says.
The tightening captive reinsurance market also results in less available capacity for more complex structures, such as integrated pooled reinsurance covering multiple lines of business, said Peter Kranz, senior vice president at Alliant Services Inc. in Burlington, Vermont.
“We can still do some of these integrated programs, but if it needs a $30 million cap, you might have to find three reinsurers for $10 million or two for $15 million to get it together,” Kranz said.
Captive owners can use different strategies to deal with the difficult reinsurance market, Woodroffe said. For example, start-ups may stagger premium payments over the year or look for a semi-annual adjustment, based on the amount of business written.
Prisoners should also adopt realistic limits, he said. “If you’re a small prisoner, don’t be those travelers; you don’t need $1 million for cyber, $100,000 can be good,” he said.