Unleash the captives

Published on Wed, 20/10/2021 - 12:45

Captives are no longer the preserve of the multinational, or a niche, monoline vehicle for hard-to-insure risks. An increasing number of small and medium-sized firms are considering captive ownership, while existing owners are expanding their use, says Karen Jury, UK Head of Multinational at AIG

Captive use is on the rise. In spite of an overall global decline in the number of wholly-owned captives and fewer new formations last year, compared with 2019, the industry is experiencing a continued increase in the use and diversification of existing captives. According to research by Marsh, more than half of captive owners (56%) plan to increase their use of captives (Source: Marsh Global Insurance Market Index; Marsh Captive Landscape Report 2020). For the most part this relates to owners expanding their usage of existing vehicles, but in a small number of cases it involves adding additional captives. 

While there is an obvious appeal to existing owners in expanding the use of their captives during a hard insurance market, particularly for difficult-to-place coverages, alternative risk transfer has also developed as a credible longer-term strategy for more sophisticated insurance buyers, looking to leverage the financial and coverage benefits of the captive solution over time. Those benefits include having greater control over their organisation’s approach to risk financing and risk management, as well as providing the ability to customise loss control and claims mitigation strategies.

A strategy that maintains a balance of traditional and alternative risk transfer and which can adapt to changing market cycles has never been as relevant as in today’s shifting risk landscape. The impact on global supply chains due to the acceleration towards digital transformation is causing many organisations to re-evaluate current insurance protections and consider expanded use of captives. Alternative risk transfer solutions are also a key component of addressing emerging and intangible risks such as cyber and reputational risk, providing a firm capital base for parent companies, who can also benefit from improved data capture for assessing and managing these risks. 

Captive diversification

Captives are increasingly playing a more central role in clients’ overall risk strategies, largely via increased participation in risk transfer. In recent years, the doubling of captive retentions has become a more common occurrence, and parent companies have also deployed captives to fill gaps in coverage, particularly in capacity-constrained markets such as energy and property.

There is a growing awareness of the pivotal role of fronting in managing global risks as part of an organisation’s insurance programme, and also in streamlining the efficiency of a complex multinational programme by allowing captive owners to retain some of the risk.

Companies are also expanding use of their existing captives to encompass additional geographies and other traditional business lines such as accident and health, trade credit and marine. The growing interest in parametric insurance solutions could also find purchase in the captive market.

At the same time, third-party coverages, such as warranty and tenants’ liability, are becoming more popular as captive lines, with parent companies increasingly viewing their captives as a separate business unit and an additional source of revenue. 

Considering cell captives

While captive ownership has historically only been a realistic option for large multinationals, the proliferation of jurisdictions offering an ever-wider array of cell companies has opened up captive solutions to a wider world.
The price of owning a standalone captive insurer can be prohibitive, due to the significant capitalisation and collateral requirements and start-up, operating, and management costs. However, cell captives, with their lower barriers to entry, may offer a simpler and more cost-effective alternative. Indeed, there is growing interest in captive cell programmes among smaller and mid-sized companies, with cell company formations in Vermont having exceeded those of standalone captives for the first time last year. 

Not only are cell captives a relatively quick, easy and inexpensive way for a company that is new to the alternative risk transfer sector to ‘dip a toe in the water’ and experience many of the benefits of a risk retention mechanism, cells can also be easily converted to standalone captives should the owner want to scale up in the future.

One thing is certain, with a range of captive options available, interest in these vehicles is set to increase as companies concerned about the impact of increasing insurance rates, higher deductibles, and receding capacity look for other solutions to financing risks and reducing balance sheet volatility.

Airmic has a vibrant Captive Special Interest Group that is designed for members that run their corporate’s captive insurance company or have previous experience with captives. The SIG meets quarterly and is Chatham House rules. For more information on the Captive SIG, please email Airmic’s Captive Ambassador Richard Cutcher: Richard.cutcher@airmic.com