Risk managers turning to captives in challenging market conditions

Risk managers are increasingly using non-traditional methods to manage their risks.

The rise of captive solutions comes in the face of challenging insurance market conditions, Marsh data has revealed.

In all regions, captive premium growth over the past two years continued to trend upward.

Even mature captive markets, such as Europe, have seen growth. 

For instance. Guernsey and Luxembourg, two leading European domiciles, have seen premium growth of 13% and 36%, respectively.

Meanwhile, in the UK, premiums increased by 8%, the broker said.

Historically, captive growth has occurred during periods of rising commercial insurance pricing as buyers retain more risk.

However, even as rate increases began to slow for certain lines of business and regions, captives continued to grow — a trend Marsh says it foresees continuing.

What are the benefits of captives for risk managers?

Catherine Dorrien, southeast captive consulting keader, Marsh Captive Solutions, identifies four key advantages of the captive approach for risk management.

These are:

• Improved risk management:   Captives can improve a business’ ability to manage the retentions and deductibles associated with traditional risk transfer programs. By forming its own subsidiary insurer to handle some of its risk, a company is freed from the control and restrictions of the commercial insurance market. Businesses that create a captive insurance program also have the flexibility to fund traditional coverages — such as general liability, workers’ compensation, auto liability, property insurance, and employee benefits — as well as difficult-to-insure exposures, including environmental and cyber risks.
• Financial flexibility:   By retaining the premium for unexpected losses, a captive can help reduce the overall cost of an insurance program. Captives can also hold and invest premiums for unpaid claims, which are otherwise kept by a commercial insurer. This allows the captive owner to take advantage of the time value of money and can put cash back into the organisation.
• Strategy:   A captive insurance program offers organisations several strategic benefits, including enhanced group purchasing power and an improved negotiating position. Employers are increasingly using captives to finance healthcare and employee benefits risks, gaining greater control over costs and access to data.
• Operational insight:   Through data analysis, companies will be able to make more accurate predictions of future claims trends, helping to reduce costs and improve risk management.

How risk managers can decide if a captive is right for them

Risk managers will need to assess their organisational vulnerabilities and strategic goals carefully, to assess whether a captive will meet their needs.

The vehicles can be costly and time-consuming to set up, so they’re not for everyone.

Marsh has a handy checklist of questions that risk managers can use to help decide whether a captive solution is right for them:

1. Are deductibles and/or rates likely to increase at the next renewal?
2. Are business units unable to absorb increased retention levels?
3. Is capacity and/or coverage becoming limited in the traditional market?
4. Are there any contractual requirements to provide evidence of insurance to facilitate business?
5. Does the organisation have uninsured catastrophic type risks?
6. Is the organisation incurring sizeable excess that could be mitigated with the use of a captive?
7. Is there frustration with the insurance market? Is there an interest in capturing third-party customer risk?
8. Is there an appetite to get more visibility and control over claims management?

Dorrien concluded: ”If the answer to all or most of the above questions is “yes,” then a captive insurance program may be a viable option for your organisation’s strategic risk management program.”