Unravelling the captive conundrum

There are a number of key motivators driving captive formation at the moment. The most important is that captives give a company greater control of its risk position. Captive owners and risk managers use captives as catalysts to establish a clear risk tolerance framework and to manage exposures broadly across their business enterprises.

Through the formation process, captive owners and companies are able to formally evaluate, quantify and monitor exposures as well as adjust retentions to align with evolving risk appetites of the owner or market, and their captive’s capital position. The hard market has certainly led to an increased use of captives, although the value of understanding and controlling one’s risk position is valuable in any market cycle.

As a professional services firm that supports captives as they seek to better understand, manage, mitigate or transfer their exposures, we see demand for our analytical, benchmarking and risk transfer-structuring advice at an all-time high. Our business has been set up to provide “cradle to grave” analytical and risk transfer recommendations and our activity spans all types of captives including sponsored cells, single parents and groups.

Whether you are a corporate risk manager looking for modelling support to select the appropriate aggregate retention for your captive, a programme manager looking to retain a portion of your business within a captive or a group captive seeking excess coverage, our dedicated team of brokers and actuaries has broad capabilities to meet your needs.

If you are a mature captive looking for rating agency advice or have an interest in proactively managing liabilities through a legacy solution, our team has the needed expertise.

A flexible option

Whether a result of the hard market or the market’s inability to address certain types of business or classes, captives remain a flexible option for clients to manage and transfer risk and protect their corporate balance sheets. For example, companies continue to use captives to help them manage unique or emerging risks. Areas such as cannabis, employee medical benefits, cyber and retained property catastrophe-exposed risks are areas where captives continue to grow.

We’ve seen captive utilisation increase from traditional insurers and managing general agents, as they aim to regain control over their premium ceded and maximise capacity from non-affiliated third-party reinsurers. This trend is expected to continue into 2024 as the hard market exerts pressure on risk capital, and traditional insurance providers seek alternatives to address their risk financing needs.

I would also note that as insurers and businesses expand utilisation of captives, there may be more scrutiny from regulators and rating agencies. This scrutiny is being exacerbated by the unfortunate situation with Vesttoo. In this environment, partnering with high-quality service and capital providers with proven track records is important for achieving long-term stability, which is a principal reason captives are formed.

Guy Carpenter has established a robust service platform for all facets of a captive’s life-cycle, ranging from formation and increasing utilisation to terminating liabilities. Our actuarial team has built proprietary models to help captive owners and insurers understand their unique risk profiles. This information helps in designing the most efficient structure, selecting the appropriate retention and further differentiating captive owners and managers in the reinsurance market.

For risk managers looking to manage reserves proactively and hedge against core and social inflation, this deep database of information helps our clients evaluate legacy solutions by identifying the reserve margin in prior years and ensuring that pricing is efficiently established.

The single piece of advice I would offer a prospective captive owner is “be creative”. Captives offer flexibility to help structure customised solutions to common and unique risks alike, from which the traditional market may shy away. With the support of robust analytical capabilities or capital modelling, the captive insurance industry can help you convert your vision into a sustainable risk or capital management solution.