ROUNDTABLE: CAPTIVES
Q2: WHAT ARE THE FORCES DRIVING NEW FORMATIONS?
“We are also seeing segregated account companies.”
Paul Bailie
Bailie: In terms of people coming to Bermuda, I’m not sure the dynamics have changed massively. Our regulatory environment remains the attraction. We’re still a good home for larger, more complex captives. In terms of the expertise on the Island, we’re probably ahead of some of our competitors.
The bigger, more complex accounts that want international programmes tend to come here. Perhaps companies that write purely domestic business in the US are more onshore now and there’s a lot of competition for that type of business.
But we are still seeing growth in the complex and the global, and in areas that are maybe a little newer, where people are doing more innovative things, for example, around climate change and cyber, as well as lines where there have been perennial challenges such as directors & officers liability.
Hard market conditions in the wider markets have probably driven interest and people are being a little more aggressive about how they approach the particular barriers to form a captive programme. The numbers of startups isn’t massively overwhelming but we are also seeing segregated account companies—cells. That’s definitely an area where there is growth driven by hard market conditions.
Some companies are taking a more holistic view to their use of capital to help them better manage capital and risk financing. Perhaps previously they have not used their captive as extensively as they might.
“These are risks captives really weren’t involved in a decade ago.”
Michael Parrish
Parrish: There are clear challenges in market conditions. Marsh Global Placement gives a summary of the growth in composite insurance pricing quarter on quarter. Interestingly, it looks like increases in rates peaked in quarter four 2020 at 22 percent.
Throughout all of 2020, it rose 14 percent, 19 percent, 20 percent and 22 percent respectively. This year, prices increased in the first quarter 18 percent and in the second quarter 15 percent.
So while prices are still going up and the market is still very challenging, it does look like the peak of the market was last year, and that it’s starting to stabilise. These are averages across all lines. In certain cases such as cyber and D&O and professional lines the increases would have been vastly more.
It is clear, there are certain lines of business which have been very challenging for buyers, and in those cases they tend to look at captives.
The number of captives managing cyber risk in some form increased 54 percent over the same period. Medical stop-loss increased 81 percent.
These are risks captives really weren’t involved in a decade ago. There are a lot of new programmes being written by captives as a result of challenging market conditions. When the commercial market is difficult, expensive, companies will look at alternatives, and the most common alternative is a captive.
The gross written premium in captives under our management went up in 2020. Again, that occurs as the market hardens, as the market becomes more challenging. That is evidence that market conditions impact captive growth not necessarily in terms of new formations, but certainly in terms of the increased usage of captives.
“They didn’t feel that loyalty was rewarded.”
Séadna Kirwan
Kirwan: The hard market definitely prompted a broader look at what captives could be used for; in a number of cases, they had no choice. The mindset within organisations was when the market was very soft, some felt that they never chased rates right to the very bottom, and they had some loyalty to their carriers. But they didn’t feel that loyalty was rewarded when the hard market came.
In some cases the long-term relationships that they have historically had with carriers have been severely and potentially irreparably damaged.
They are looking into the captive now thinking we actually have control of this over the long term. It’s a much more holistic, strategic look at the captive, trying to remove that reliance on the external market so that they don’t have to follow those peaks and troughs. >>>
“These are exciting discussions for us.”
Matt Carr
<<< People are setting budgets for the next 12 months and getting a 20 percent premium next June that’s not in their budget, is very hard to manage.
That is changing the underlying behaviour of captive owners and of the large corporates utilising them.
Carr: We hear from our clients that they’re expecting to see some continued hardening of rates for the foreseeable future.
That may be a driver for continued activity in the Bermuda captive insurance market and we are seeing further conversations and discussions, many around emerging risk areas for example, digital asset risks and cyber.
These are exciting discussions for us as practitioners, but also for Bermuda as a leading captive insurance domicile.
“There is obviously an appetite for new captives.”
Brian Quinn
Quinn: Our main focus is on employee benefits outsourced underwriting and management for captives in multiple domiciles including Bermuda, and we have doubled our premium under management in the last year.
A lot of the reasons for the increased interest in captives have been covered already, but once companies start assessing they are looking at how to use their captives in other ways because they’ve been forced to reconsider their captive strategy due to the hardening market.
I have many discussions with clients and potential clients asking me about using their captive to cover multiple different risks. This is not our focus but there’s a lot of interest because the market has made them reconsider. I have seen a lot more interest in setting up captives but also using cell captives structures to facilitate easy access to a captive solution.
There is obviously an appetite for new captives out there and people are expanding those captives. In the soft market we had for probably well over a decade, people weren’t using their captives as efficiently as they should have, and now they’re refocusing.
“Supply chain management and business interruption are more of an issue.”
David Gibbons
Gibbons: A lot of companies are more focused on risk than they have been before. The chief risk officer’s voice around the C-suite is being heard more. Therefore, you find people looking at their captive and the best ways to utilise it to mitigate risk.
It’s not only the pricing component, it’s also the impact of culture, and the way people are looking at risk now.
Further, as business environments and risks change, supply chain management and business interruption are more of an issue in the new dynamic of the world.
That is where we’re seeing a lot of discussion on how you can change what your captive is doing and cover not just the pricing and limits, but the new way we’re working in this environment.
Image courtesy of Shutterstock / Willyam Bradberry
