Captives hailed as hard market solution for cyber, D&O

The hard market has renewed interest in establishing captive insurance companies as an alternative, and potentially more affordable, form of insurance risk transfer to meet organisations’ insurance needs compared with traditional insurance channels. 

This is particularly the case for classes of business where capacity is currently tight and prices unaffordable, including cyber and directors and officers (D&O) insurance, finds DBRS Morningstar.

Hard insurance market conditions have continued globally in 2023 as in previous years, with property and casualty (P&C) insurance rates still increasing for most lines, especially for cyber risks, although at a slower pace.

The persistent rate increases are driven in part by inflation and limited coverage capacity as some P&C insurers and reinsurers restrict their exposure to lines perceived to be high risk, like cyber insurance and directors and officers (D&O) insurance.

Captives here to stay

Captives provide much-needed capacity as the traditional carriers reduce coverage limits, increase exclusions, or increase pricing.

As a result, DBRS Morningstar expects that captives will continue to be an important risk transfer solution for companies going forward.

However, the pace of growth may depend on how the regulatory environment around the set-up and use of captives evolves in the future.

“Captives are here to stay and will continue to provide much-needed capacity as the traditional carriers reduce coverage limits, increase exclusions, or increase pricing, especially for cyber insurance, where pricing remains significantly elevated,” said Victor Adesanya, Vice President, Insurance. 

“With cyber insurance, risk exposures will become more expansive as the world continues to move toward increased digitisation and connectivity.

”We expect that captives will continue to be an important risk transfer solution for companies going forward. However, the pace of growth may depend on how the regulatory environment around the set-up and use of captives evolves in the future.

”There are also risks to owning captives that a potential sponsor should consider before setting up these specialised risk transfer alternatives.”