The increased interest in captive formations and greater use of existing captive insurers seen in 2022 is likely to continue into 2023, experts say.
Owners are using captives more as commercial insurance rates for lines such as property and cyber liability have skyrocketed over the past two years and insurers have pulled back available limits.
Increasingly, owners are using captives to fill gaps in higher program layers rather than just using the vehicles to fund deductibles and lower layers of coverage, captive managers say.
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7;s been very busy in terms of captive utilization as well as new formations, so we’re still licensing captives like crazy,” said Nancy Gray, regional managing director-Americas at Aon PLC in Burlington, Vermont.Captive growth has continued to be robust and growth has been across industries, covered risks and domiciled, said Jason Palmer, head of US captive management at Willis Towers Watson PLC in Burlington.
“It’s really across the board, rather than being specific to one sector of the business,” he said.
The trend is likely to continue, said Peter Kranz, senior vice president at Alliant Services Inc. in Burlington.
“The insurance market is fundamentally changing, with traditional markets backing further away from risk,” he said, resulting in premium credits for captives who retain that risk.
Sharply rising real estate prices have led to more companies using captives.
In some cases, policyholders use captives to obtain coverage that is difficult to find in the commercial market, Gray said. For example, a policyholder formed a captive to cover the risk of forest fire and obtained a rating for the captive so that it could meet its debt obligations.
“It’s an example of unique ways a prisoner can help manage various risks within an organization,” she said.
Owners are using captives to fund rising property deductions and covering inventory in excess towers, where capacity is limited or too expensive, across a wide range of property risks, Palmer said.
“It’s the whole marketplace rather than being specific to windstorm or flood or other types of property risk,” he said.
Owners use captives to take a quota share or a layer up in a program, says Anne Marie Towle, Carmel, Indiana-based managing director of global captive solutions at Hylant Group Inc.
“People are taking more risk and leveraging their excess, if it’s an existing business, or, if they’re setting up a new one, deploying capital in a more meaningful way, because otherwise some of these stocks can be costly.” said Ms. Towle.
Cyber
Cyber liability is another area where owners are adding risk to their captives in response to commercial price increases.
Marsh has seen a more than 50% increase in cyber premiums placed in captives over the past two years, said Ellen Charnley, president of Marsh Captive Solutions in Las Vegas.
Captives are used to fund cyber deductibles, establish policy language for primary coverage that insurers follow in excess inventory, to fill capacity in excess inventory of programs through quota share arrangements and at the top of towers to complete limits that parent companies seek, Mr. Palm trees.
“We see that all over the placement and you don’t see that often with trapped coverage lines,” he said.
Organizations that need to use a large panel of cyber insurers can use a captive to fill in coverage that is excluded by some of the insurers, such as ransomware losses, Mr. Wreath.
“For example, you throw in your captive and the captive writes the entire coverage and just returns to the market everything but the ransomware,” he said.
Responsibility
By 2022, owners also added more casualty risks, where rate increases were often more moderate, but coverage remained relatively expensive, to reduce their overall cost of risk by retaining more, Aon’s Gray said.
More owners are using captives to cover auto liability risks because the commercial auto insurance market remains challenging for buyers, Charnley said. In addition, Marsh has created several risk retention groups in the past year to address auto liability risks, she said.
Other areas of captive premium growth include life insurance, voluntary benefits and medical stop loss coverage, where the reinsurance market has been difficult, Charnley said.
Captives are also used to cover supply chain risks, such as by offering coverage to suppliers and vendors or by taking on higher layers of risks related to the supply chain, Towle said.
Some captive managers said owners are also considering using existing or new captives to cover liability risks for directors and officers.
Some states have laws that prevent companies from retaining the risk, but last year Delaware amended its corporate law to allow Delaware companies to purchase Side A D&O coverage from captives. More than 50% of publicly traded companies are incorporated in Delaware.
D&O rates have dropped significantly since the law took effect, discouraging many owners from moving out of the commercial market, several executives said.
But there has been interest in monitoring D&O, others said.
The change in Delaware law generated a lot of interest, says Alliant’s Kranz. However, some business leaders remain wary of moving from paying a premium to a D&O insurer to using a company-owned captive. Retaining the risk could potentially open them up to further claims from shareholders if a significant loss occurs, he said.
“It’s a big change in the law and there are potential benefits to it, but I think there was a rush to it and then a pause to understand the implications,” he said.
Marsh set up a protected cell facility in Delaware for companies that wanted to use a captive structure to cover D&O risks at “arm’s length” from the covered directors and officers, which has generated interest from owners, Charnley said.
“We’ve had people set up cells, but it takes time because it’s a big decision because they have to be fully funded,” Charnley said.
Onshore/offshore
The year-long trend of more companies establishing captives in domestic residences in the United States, which has increased over the past two decades, continues.
In particular, companies are increasingly forming captives in their home states to minimize the risk of being charged taxes on proprietary procurement premiums, Palmer said. Some states impose these taxes on non-approved insurance coverage.
U.S. companies that do not have international operations have little reason to choose an offshore domicile because the costs of dealing with international jurisdictions are often higher, Towle said.
However, while some offshore homes are reporting lower captive numbers, some are still seeing significant premium growth due to the business they write. For example, Marsh is seeing significant premium growth in offshore life insurance homes, such as Bermuda, Charnley said.
“The premium volume indicates what people are doing with their captives, and that indicates the strength of the market,” she said.
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