Coverage
New solutions on the rise
A hardening market and a growing need for solutions to newer types of risk have fuelled heightened interest in captive insurer formations. Captive International explores the current trends and what lies ahead.
The current hardening market has coincided with a rise in captive insurer formations, and this is not unusual—it’s long been observed that the two phenomena are linked.
Jeff Kenneson, president of captives in the US Davies Group, notes that it is possible to gauge the hardening of the market by how property coverages are handled through the use of captives.
“As markets harden, more property exposures are introduced to captive arrangements,” Kenneson says.
“Property is not known as a typical captive coverage due to its short tail claims nature. We see companies putting their property exposures into a captive when traditional pricing for the coverage gets out of control, hence a hardening market.”
Anne Marie Towle, global captive solutions leader at Hylant, agrees.
“You’ll always see a spike in formations when there’s been a hard market,” Towle says, adding that these can appear due to specific challenges in certain sectors. “For example, in the US during the medical malpractice crisis in the 1980s, we saw a big change, with the Risk Retention Act being passed and people looking for alternative structures.
“In the early 2000s there was another spike in captive insurer formation due to the medical malpractice rates; there were captives being formed after 9/11; and then of course today we’re looking at the hard market affecting multiple lines of coverage around the globe, with the COVID-19 pandemic on top of it.
“This has certainly caused an increase. That being said, captives are still formed in soft market periods because people are forming them for the right risk management reasons,” she adds.
“Many are looking to captives and the alternative market for more cost-effective solutions.”
Jeff Kenneson, Davies Group
Areas of interest
Kenneson has observed interest in all lines of captives coverage recently, but he especially notes increased interest in property, D&O, E&O and cyber risks. He attributes this directly to the hardening market.
“Companies are looking for more creative ways to cover this exposure and with the traditional carriers increasing the rates significantly, many are looking to captives and the alternative market for more cost-effective solutions,” he says.
Towle agrees that interest in cyber is soaring, adding that general liability and automotive liability are still major concerns.
“The one area that we haven’t seen too many increases in the US is workers’ compensation,” she adds. “Meanwhile, medical malpractice is just starting to catch up—we’re starting to see some increases with renewals this year and as we go into 2022.”
Matt Atkinson, senior vice president–business development for Artex in North America, highlights healthcare, transportation and higher education as areas of increased interest all over the world.
“Whether it is in a group captive, single-parent captive or other alternative risk structure, clients who combine a strong culture focused on safety, aligned with business objectives and an appetite to take on risk, are benefiting from non-traditional insurance solutions,” he says.
“A blended approach is the answer for new captives.”
Matt Atkinson, Artex
Upcoming trends
Towle predicts that the pandemic will impact healthcare as costs change around the globe and employers start bearing more of those costs for employees. She also expects increased interest in workers’ compensation linked to more employees working remotely. She sees cyber as an ongoing trend, and predicts ongoing interest in business supply chain interruption.
“We’re seeing, for instance, that it’s not easy to get a laptop at the moment because of there are not enough workers to be able to create the chips that go into the laptops,” she says.
“It’s the same with automobiles—they’re not getting the chips so you can’t sell the cars right now, even though there’s an active market. Supply chain has had a big disruption, and I think we’ll continue to see that trend with people looking to handle the business interruption aspect or a decrease in sales.”
“The challenge is sometimes how to price that intellectual property.”
Anne Marie Towle, Hylant
What can new captives address?
When it comes to new captives, Towle notes that starting a captive for a monoline coverage can be challenging, so it’s best when starting out to look at several different lines where you have predictable risk, combined sometimes with low frequency and high severity.
“You blend it out to help support the captive for the initial years. Mature captives have a lot more flexibility with evaluating and bringing in additional lines of coverage, because many times they have sufficiently capitalised and built enough surplus to be able to evaluate from a very healthy position of taking on more risk—whether it’s a primary layer or even looking at filling in gaps in excess coverage,” she says.
Atkinson agrees that a blended approach is the answer for new captives. “It’s all about balance and the lines of coverage complementing one another,” he says.
“You may have lines of business that are shorter tail in nature and others that are longer tail; the more mature a captive becomes over time the more flexibility owners have.”
While Towle urges caution around certain lines of coverage, such as offering insurance to homeowners, she sees the possibilities in terms of what you can cover with a captive as virtually endless, depending on how innovative you can be with your structure. However, she adds, the amount of each risk you take on needs to be limited.
“You’re not going to be looking at taking on unlimited property risk, earthquake or terrorism coverage. Be smart about it, put protections and only take a certain layer or quota share per se,” she says.
Kenneson also urges caution. “Like anything else, it’s always good to walk before you run,” he says. “This is related to the risk appetite of the captive owner. A captive may not be a comfortable arrangement for an entity that is very risk-averse.”
When it comes to setting up a captive, the type and amounts of risk it takes on need to be shaped by conversations about risk appetite and captive structure, as Atkinson explains:
“In reality, there isn’t anything we would rule out for a captive,” he says. “It is an interesting time, given the pandemic, the hardening market and other changes taking place. It becomes more of a conversation about the types of captives and what is appropriate for each risk.
“We are talking with our clients about whether they want to investigate a cell structure, a single-parent captive or even want to investigate divesting themselves of some risks and look into a loss portfolio transfer or legacy liability exit plan.”
The impact of technology
As technological advances continue apace, Atkinson predicts that this will drive demand for captives. “Technology has increased an organisation’s risk exposure and that naturally creates potential gaps in coverage that may be insurable via a captive,” he says.
Towle, however, acknowledges the ability of certain types of technology to reduce losses.
“With things such as wearable devices for workers and cameras in autos and trucking, there’s a lot of benefit that can happen with the data and being able to monitor things from a safety perspective,” she says.
“We’re going to see in the future additional data that will really help drive informed decisions and how people are buying their insurance. If you can start tracking information from the data you’ve collected and are able to prevent and quickly mitigate some of these losses, that’s a benefit to the corporation.”
Areas of future growth
Kenneson is seeing a lot of interest in the cyber space, but he notes there has not yet been much movement.
“This is a relatively new exposure for captives, and no-one’s got their arms around the variables that might go into underwriting these exposures at a captive insurer level,” he says. “There are several traditional carriers offering this coverage, but not many captives, due to the unknowns and the potential catastrophic nature of the exposure.”
Towle agrees that the level of interest in cyber is strong—Hylant now receives questions about cyber on a weekly basis.
“The question for everybody out there is: ‘how much is enough?’. Typically, it’s never going to be enough when you think about cost-effective insurance versus the increases with the number of breaches and the number of ransomware attacks,” she says.
“Cyber can be done smartly in a captive, taking on the primary layer—especially when you’re looking at credit monitoring and credit risk and some of the reactive types of services that you obtain when you secure a commercial policy.
“That’s an important element—even if you have a small deductible, you could insure that in a captive; but I think where it’s going to be beneficial with a lot of the companies is purchasing an excess layer that goes over the top, and then financing the deductibles.
“You have to work very closely with your advisor and really look at your economic costs for risk and how that can be beneficial for organisations.”
Another hot topic is the use of captives to cover intangible assets, particularly intellectual property. “The challenge is sometimes how to price that intellectual property,” says Towle. “If you have, for instance, trademarks or a set process you have trademarked—for instance, the way Wendy’s or McDonald’s make their burgers—pricing it and insuring all of that within a captive could be a little challenging.
“As we grow in the future and see the emergence of the new Googles of the world, issues around the whole internet of things and how you transact are going to be a challenge. However, captives are probably going to step up to the plate.
"With cyber risk, many years ago you couldn’t get it commercially, so people would try at least to insure a layer of risk within the captive to get started and have some money set aside if a claim if that were to happen.
“This approach is probably going to be used a more in the future when you think about intellectual property and the technology that’s yet to be developed in the future, so using a captive to insure at least a layer could be a viable option,” she concludes.
