Captive movement gains momentum

Anecdotally, there’s been an uptick in captive use, with parents increasing their captives’ retentions or limits on existing cover, while captives are also said to be expanding into new lines of business. Is that your experience?

Yes, we are seeing captive owners becoming increasingly prepared to retain larger portions of their traditional property and casualty risks. We are also seeing clients grapple with emerging risks and considering the captive as a platform from which to build a risk financing strategy.

The results of Aon’s 2021 Captive Benchmarking Survey revealed a 73% increase in premium retentions since 2018, with significant increases in the utilisation of captives for what can be considered the more traditional risk types (including a steep 361% increase in property damage/business interruption).

Globally, we have seen a pronounced increase in captive programmes supporting more flexible employee benefits (EB) schemes, going above and beyond the coverage limitations in the market. Market capacity and pricing are driving this change, which is in addition to companies with active diversity and inclusion programmes looking for wider coverage than is available as standard in the commercial market. We expect to continue to see greater use of captives in this area to provide more uniformity of EB cover across multinational organisations.

What about new uses?
Alongside more traditional risks such as property damage/business interruption and general liability, numerous organisations are innovating and using their captives to support their risk management strategy for several hard-to-place or emerging risks, like cyber and environmental. Increased interest in captive utilisation for ESG is observable as companies become more familiar with their trading impact on the environment and their ability to reduce this impact.

In addition to sharp increases in environmental liability (up 400% since 2018), the associated ESG risks have led to conversations around ‘green captives’ and the potential for captives to play a part in the financing of transition and litigation risks, and to invest assets into ESG funds to align the captive strategy with that of the parent company.

These trends are representative of the new forms of volatility that organisations are facing and, consequently, the ways in which captive utilisation is evolving. Cyber is another line that has hardened significantly. Our data shows that during the last five years, cyber has seen a 650% increase in captive premium. This is also a trend that we expect to continue throughout 2022 as the cyber insurance market continues to be turbulent.

How is the risk landscape changing? What are the forces at work?
The risk environment within which multinational organisations operate is undergoing an unprecedented rate of change, which will have direct implications on how their captives operate.

The continued digitalisation of the global economy and the reliance on technology as a business enabler, the global pandemic and its numerous effects on how companies operate and trade, the battle for talent, the volatile geopolitical landscape in addition to climate change and the recognition of the importance of ESG in how businesses operate, have all created significant volatility challenges for organisations.

Understanding how each of these factors shapes the risk registers of organisations and how a captive can help manage these new forms of volatility is an area in which Aon is actively supporting clients. The captive has a prominent part to play across these new risk types, whether it is through using the captive to achieve better risk finance outcomes on intangibles such as cyber and IP, by using the captive as a way to gain an advantage in the battle for talent through enhanced EB programmes, or by managing and improving ESG-related risks through our proprietary ‘Green Captive’ framework.

The interconnectivity of these risks is interesting to observe and understand, noting for example that an organisation’s position on ESG will impact its IP portfolio as it develops more sustainable products, which in turn impacts its ability to attract and retain socially and environmentally conscious employees. These factors ultimately determine the ability of the organisation to operate successfully. Being able to develop a captive strategy that holistically supports a portfolio is becoming increasingly necessary.

What kind of challenges does expanding captive usage pose, for example around data availability and underwriting talent? Are there ESG factors to consider?
There will always be a need for innovation to manage the challenges associated with risk. This gives rise to other challenges around traditional versus alternative approaches to how things are done. In the context of insurance, these risks, by definition being new or emerging, have a paucity of data points and do not lend themselves to stochastic modelling.

We therefore need to create underwriting methodologies based more on scenarios and alternative quantification methods than we tend to see on lines of business such as PDBI. We also need to ‘socialise’ the new captive strategies to all stakeholders, including regulators, which is an important part of the process. We see this as an inevitable and necessary evolution of captive usage as they adapt to the new reality of the risk universe of 2022 and beyond.

In addition to greater use of existing captives, is there any evidence of new captives being formed, or more companies exploring the captive route for the first time?
We have seen a significant increase in the level of enquiry across all geographies and industry segments, during the last 18-24 months in particular. The number of captive feasibility studies we have performed during this period has increased, and the number of licensed captives under Aon management increased from 928 to 1,001 in 2020-2021.

The level of enquiries so far in 2022 suggests that growth will continue during the next 24 months. These numbers do not include individual cells, and the growth of Aon’s PCC facility White Rock continues to demonstrate exceptional growth, both as a stepping stone to a captive strategy and as a mechanism to access capital in an efficient manner.

In a European context, what are the captive domiciles of choice today? Are ‘onshore’ captives likely to gain traction?
The European domicile landscape is quite varied, with an abundance of healthy competition. The most suitable domicile is a multidimensional consideration dependant on numerous, sometimes quite nuanced factors.

Matching the correct domicile to the client’s needs is an important aspect of the feasibility study, to which Aon pays particular attention. In this context, we have seen growth across regions – enquiries and establishment activity are evident across all of our European and Middle East domiciles.

The definition of ‘onshore domicile’ is debatable but the largest domiciles by number, being Guernsey and Luxembourg, continue to show growth – suggesting that the traditional captive domicile continues to be the preferred choice for most organisations. That underlines the fact that a well-developed captive infrastructure and a domicile that can address the nuanced needs of a successful captive strategy remain of paramount importance.