Change is in the air

Distressed markets and unjustified increases

Overall, says Woytowicz, the Artex team is seeing growth in clients seeking solutions for property, professional liability, and auto liability.

“These are mostly as a result of the hardening market and increasing commercial insurance market rates, but it is also driven by what clients perceive as unjustified renewal increases based on overall industry risk versus their actual experience,” he says.

“In that instance, clients are becoming more inclined to take an active role in their insurance programmes so that they can be rewarded for their good performance versus being penalised for the performance of others.”

Bailie adds that while there’s not a lot of activity in terms of people wanting to start primary casualty programmes, the property side is heating up. In recent months, Willis has helped to set up two captives with the primary objective of getting involved in a property programme.

“We have several clients who have been or are in the middle of extending their captive’s participation in property programmes. Some are increasing the retention that’s run through their captive at the primary level layer while others, who have struggled with excess layers on the property side, are using a captive to help plug those layers.”

In some cases, according to Bailie, the excess layers involvement seen over the last year may tail off as and when the market improves, with commercial insurance becoming available generally and subsequently becoming more commercially appropriate.

D&O liability

There is also a lot of interest and consequently some activity on the directors’ and officers’ (D&O) liability side. Andy Hulme, executive vice president and director of underwriting at Strategic Risk Solutions, explains: “Professional lines seem to be in particularly difficult phase so while there is interest in all business lines, there is particular attention on professional lines.”

Bailie adds: “It’s a very distressed market. One of the big problems here is that the Side B and C coverage has historically been a somewhat underpriced risk.”

Side B coverage is for the benefit of the company and provides for reimbursement when the company indemnifies directors and officers, while Side C is entity coverage. In Bailie’s view, putting the Side B or C coverage into a captive can be done, but typically it’s better placed as part of a larger portfolio in a captive, rather than standalone coverage.

However, Side A coverage—which provides direct coverage to the individual director or officer—is something that doesn’t work in a wholly-owned captive, he cautions.

“There are instances where a company is not allowed to indemnify its directors and officers, and it’s considered that having the risk in your own captive would be indemnifying and therefore might be against the law in particular states or countries,” he explains.

The other issue arises in the event of the bankruptcy of the parent company. The captive is consolidated back into the parent, so there may not be any assets available to pay a claim at a time when there is most likely to be a claim.

“D&O is an especially hot topic right now and while Side A D&O risks in a captive used to be the solution of last resort we are now seeing corporates looking to electively find captive insurance solutions to provide shelter from unequitable market premiums,” adds Hulme.

Driven by these factors, solutions using captive cells (known as segregated accounts on Bermuda) are being developed as a possible way to tackle Side A coverage.

“Solutions for that would be fully funded upfront and with a structure that allows the segregated account to remain separate from the parent company. It’s not going to be a solution for everyone as it is very funding intense, but some companies are extremely distressed and we’re seeing real activity in that area,” he notes.

Do your homework

On the other hand, the pandemic has played in role in the shrinkage of certain lines, says Bailie.

“A typical captive programme out of North America would be primary casualty covering workers’ compensation, general liability and other types of liability,” he explains.

“We’ve seen shrinkage on that side because of the pandemic. This includes a fall in workers’ compensation coverage where there have been layoffs. However, we don’t expect this to be a long-term situation.”

Daley adds that esoteric lines are dropping in focus, while corporates look at traditional coverages and expanding capacities to take bigger retentions and fill towers.

“Back in 2020 some captives were looking to dividend cash back into their group, which limited growth, although this seems to have been a short-term practice,” he says.

Daley notes that the insurance market is somewhat unresponsive to increases in per-occurrence retentions, and premium reductions within this retention have been modest.

“Conversely, and generally speaking, commercial underwriters seem more responsive to increased aggregate retentions which protect underwriters from multiple losses rather than increased severity,” he adds.

The market is also seeing a greater use of sophisticated analytics being used to help people with their risk financing decision-making.

“This is something that’s going to grow—there’s a lot more activity around things such as portfolio optimisation and modelling individual risks. Being able to ‘get your arms around’ those and to understand what the risks are and the possible costs has been useful for people with large captives with a considerable portfolio of risks.

“Portfolio optimisation is starting to take hold here and I expect that to accelerate in time,” says Bailie.

“Portfolio optimisation can help when you’re dealing with regulators and you have portfolio risks, as it can demonstrate you’ve applied proper modelling around the portfolio. On individual lines of coverage, captive owners can take a single line and use modelling on a standalone basis to find out what exposure exists.”

That, according to Bailie, is why we’re seeing greater captives involvement in some specialty lines.

“Not only is there a market that is reasonably distressed or strained but there are better tools available. If you want to use your captive, you’re able to do that as a matter of informed consent. You’re making good decisions based on solid data, rather than guessing at what you think will happen,” he explains.

Bailie adds: “People want better data and better decisions. They also want to be better prepared when dealing with commercial insurance companies, so that the insurer doesn’t have an unfair advantage in terms of being able to value risk.”

As a product of this ability to better model portfolios, he expects to see some captives writing more lines of coverage than they were previously. Captive owners will do this, he says, “on the basis that they have good data to support the fact that a portfolio of coverages isn’t simply a sum of the constituent parts but that you get to benefit from the fact that you have a portfolio overall and you can leverage these benefits in your portfolio”.

Captive International does not have a crystal ball to look into the future, but it seems clear that the captive re/insurance market will continue to thrive, with companies turning to captives as the hardening market and the repercussions of the COVID-19 pandemic bite.

Hulme believes that the market is unlikely to normalise in the coming year or two. “We have seen more capacity enter the market but underwriting returns are still not where the market needs to be,” he says.

Looking ahead, he sees great potential in climate-related risks.

“There are aspects of climate risk that are nat cat in profile and realistically not suitable for a captive, so they require a commercial solution, but climate risk is a significant environmental, social and corporate governance (ESG) focus and captives can be an important player in supporting ESG initiatives,” Hulme explains.

“We can imagine captives utilising or investing in carbon offset credits or incentivising green and low-energy solutions.”

Woytowicz, who also expects the hard market to continue and, with it, the growth in captives and coverage developments, summarises: “Clients with an existing captive are looking to see how they can strategically revise and extend its use, while prospective captive insurance clients are finding ways to evaluate their future needs and design a captive that can grow to accommodate seen and unforeseen needs.

“Both current and potential captive clients will need to continuously adapt to the ever-evolving insurance market and global economy.”