MIAMI – Captives can be used to combat challenging conditions in the commercial property insurance market, experts say.
Deductible buyback or deductible replacement policies, fronted policies and structured solutions are ways captives can participate in real estate programs, they said.
Captives can be used to combat interest rate increases, capacity reductions and the desire for policyholders to take on more risk, said Nate Reznicek, head of US distribution, I-RE Miami. He was speaking Thursday during a panel session at the World Captive Forum, sponsored by Business insurance.
“We’ve had a tough market cycle that’s been going on for quite some time, not only in the primary markets but also in the reinsurance markets,”
; Reznicek said, noting that reinsurance renewals were very late last year.“We were at a point at the end of November where maybe 80% of capacity providers in the US had not completed their 2023 cat renewals,” causing a lot of uncertainty in the market, he said.
At some point, the pain of higher rates and lower limits becomes too much for business owners, who are educating themselves about alternative strategies for managing real estate risk, Reznicek said.
“One good thing about the captive property or property risk in captives is that the property risk is very short,” he said. “We don’t have to worry about big claims coming in at the end of the policy year. You know if something has happened to the property or not,” he said.
When property owners such as condo owners are subject to lender-placed insurance contract requirements that specify a maximum deductible, using a captive insurer to issue a deductible refund policy can help reduce their retention, Mr. Reznicek.
Deductible replacement policies can play an important role in filling coverage gaps, says Prabal Lakhanpal, vice president of Spring Consulting Group.
“They’re a powerful tool for people to navigate the landscape where premiums are going up again, and coverage limits are getting tighter and tighter,” Lakhanpal said.
Another benefit of using captives for property programs is that they can give policyholders more control over their policy wording and claims handling benefits, he said.
Fronting and structured solutions are “just hitting the page when I look at the landscape of what we’ve done in the alternative market in the captive space,” said Raymond Roccio, vice president of Keystone Risk Partners, a unit of Ryan Specialty Group Holdings Inc.
While captives were traditionally associated with workers’ compensation, general liability and auto programs, property was never part of the discussion, Roccio said. “The mindset was more predictable losses. Real estate, obviously you’re not, right?” he said.
If a company has had a few bad losing years, where the real estate market has declined and prices have risen sharply, structured solutions give it an opportunity to make it back over a multi-year period, Roccio said.
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