Captives.Insure
Empower businesses to take risk and earn real rewards
Natural catastrophes that have hammered large parts of the US have opened the door to captives, explains Nate Reznicek of Captives.Insure.
“By providing tailor-made solutions, captives can effectively address the specific risks faced by parent companies.”
Nate Reznicek
Captives.Insure
The property insurance market in the US is undergoing a transformation amid a changing climate, evolving risks, and technological advancements. From hurricanes and wildfires to floods and tornadoes, the frequency and severity of such incidents have tested the resilience of insurance providers and amplified financial risks.
Many insurers have reduced capacity and imposed stricter coverage terms, higher deductibles, and forced increases in valuations, all of which has further burdened policyholders.
As a result, property insurance premiums have soared, leaving businesses and their broker advisors struggling to cope with mounting costs. As traditional insurance models grapple with rising costs and increased volatility, companies are increasingly turning to alternative risk management solutions, with captive insurance companies taking centre stage.
The emergence of captives
With the uncertainties of the traditional insurance market, an increasing number of companies are exploring the option of forming wholly-owned captive insurance companies. Utilised for casualty lines of cover for decades, captive insurance companies can provide greater flexibility in coverage options and pricing. Traditional insurers’ premium rates are often influenced by general market trends and the collective risks of a diverse client base. Captives, on the other hand, offer the advantage of tailor-made coverage and personalised underwriting, based on the specific risks faced by the parent company, leading to more favourable premium rates in the long run.
Additionally, captive insurance provides companies with the ability to retain a portion of the risk they insure. By assuming some of the risks themselves, businesses can reduce their reliance on the volatile insurance and reinsurance markets to potentially achieve cost savings in the long term. As these businesses are formally retaining risk inside their captive, they receive significant portions of their policy premiums for claims, investment income, and underwriting profit.
A solution that works
Over the past several years the hard market has resulted in a significant increased interest in captive insurance arrangements to close gaps in coverage, overcome the lack of market capacity, and reduce costs of coverage. Without the ability to evidence insurance from AM Best “A”-rated carriers, captives have historically been limited in their ability to provide viable solutions for property coverages.
Limited fronted options exist and they often have very restricted appetite for the industries that need it most: eg, the inability to write cat-exposed properties, restrictions on affordable housing/habitational accounts. Compounding the issue of appetite constraints, historical solutions are also non-viable as they utilise capacity providers that do not meet minimum insurance requirements as stipulated in lending agreements: they lack at least an “A” rating from AM Best; have the inability to meet financial size requirements; return minimal amounts of premium due to extremely high operating costs; and frustrate US-based brokerage teams with foreign-based underwriting teams.
The good news is that there is now a true captive insurance solution to help with the challenges presented by the current insurance market.
Meaningful premium returns
As captive insurance companies become formal reinsurers of the issuing carriers, they receive significantly more reinsurance premium when compared to deductible credits offered by the standard market. As an example: captives underwritten by Captive.Insure’s EmpoweredRE programme provide reinsurance premium of up to 85 percent of the gross written premium for the issued policy (for both property and casualty lines), nearly triple that of historic solutions.
Ease of doing business
The benefit of brokers and captive managers using the expertise of a US-based solution cannot be overstated. A deep understanding of the challenges faced by US insureds and the complexities/intricacies involved in a captive insurance transaction is a non-negotiable for sophisticated insureds and their advisor teams.
Miscommunications due to translation issues, confusing verbiage, and underwriting delays caused by international time zone differences are all frictional costs that are no longer required within a captive transaction. Captives that participate in the EmpoweredRE programme have flexibility for licensure after binding and allow for significantly reduced operating expenses.
Business as usual
Even the most sophisticated insureds rely upon consultation and service from their broker and captive manager partners. These advisors provide advice that can be central to the operations of their insured/captive owner clients and deserve to be compensated for their work and expertise without the additional burden of another wholesaler relationship.
For example, EmpoweredRE pays full brokerage commission on all policies without requiring a sub-broker arrangement. EmpoweredRE also allows captives to be formed and operated by independent captive managers, providing them the opportunity for increased revenue and service offerings. Existing captive insurance companies can also reinsure risks within the programme, eliminating additional capital requirements and reducing operating expenses for shareholders of the captive.
Appetite where it’s needed most
The inability/unwillingness of historic solutions to provide appetite for insureds in tough trades, regardless of how well they manage their risk, can seem like a slap in the face to business owners and shareholders of captives. Having to carve out cat-exposed properties due to appetite often makes a solution non-viable due to the increased costs of a cat-only standard market placement.
Captives underwritten by Captive.Insure’s EmpoweredRE programme allow insureds to participate in risk where it matters most to them, regardless of the location of the property—including cat and international exposures.
Coverage that works
In addition to the hardened insurance market, insureds are facing ever-increasing insurance requirements from lenders. The small financial size, low loss limit, sublimits and requirement to use excess and surplus lines paper of historic solutions can also make a transaction unattractive or non-viable. Via EmpoweredRE, captives are able to participate in significant limits, anywhere in a tower.
The use of “A+” AM Best FSC VX admitted paper (including flexibility for deductibles, and full limit coverage for earthquake, flood, and named windstorm) avoids unnecessary excess and surplus lines tax and makes the placement of any needed additional coverage in a tower as easy as possible.
The current state of the US property insurance market is characterised by increasing risks and rising costs, necessitating a fresh approach to risk management and risk transfer. Captive insurance companies have emerged as a compelling alternative for businesses seeking greater control over their insurance needs and more flexibility in coverage options.
Even in this emerging captive market not all solutions are created equal. By providing tailor-made solutions, captives can effectively address the specific risks faced by parent companies and promote a proactive approach to risk management. As the insurance landscape continues to evolve, captives are poised to play an increasingly vital role in safeguarding businesses against an ever-changing array of perils.
Nate Reznicek is president & principal consultant of Captives.Insure. He can be contacted at: nate@captives.insure
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