There is nothing quite like a hard insurance market, a global crisis, and new and emerging risks to make risk and insurance managers take a serious look at the alternatives to insurance, writes Tony Dowding
When it comes to alternatives to insurance, the obvious place to start is a captive. Not just for those without one, but also for those with an established captive that has probably been underused, understandably, during the long (well over a decade) soft market.
So it is no surprise that 2020/2021 has seen a surge of interest in captives as the hard market kicks in. Captive development has been steady in the US over the years, but much more sluggish in Europe. But now, domiciles are reporting increased interest, as are captive managers. The sector is being talked up by ratings agencies such as AM Best, which states in a report that large rate increases in commercial insurance will drive a surge in new captives among European firms and see risk managers turn to existing captives to ‘plug’ programme holes as they retain more risk.
Globally, the captive sector has been growing in the last year or two, largely in the US, and a recent Economic Insight from Swiss Re Institute points out that there are now more captive insurance companies than traditional insurers globally, estimated at more than 7,000 captives domiciled in more than 70 jurisdictions.
So, are we actually seeing a rise in captive formations and usage in Europe or is it all talk? There is certainly more interest in captives according to captive specialists, and the expectation is that this will translate into growing numbers and more business written through exiting captives.
“There is certainly an increasing interest in the corporate market to explore the use of captives or protected cell captive solutions,” says Paul Wöhrmann, head of captive services for Europe, the Middle East, Africa, Asia-Pacific and Latin America, Zurich Insurance. He says existing captive owners view their captives as strategic assets to manage the insurance market cycle: “They use their captives as a strategic door-opener to reinsurance and alternative capital markets when there is a shortage of capacity or an increase in rates.”
He adds that he is seeing an increasing demand for ‘captive health’ services like retention studies and benchmarking: “We are observing that several captive managers and consultants based in Europe are currently very busy with captive feasibility studies, which is an indicator for later captive formations. It is likely that the European captive domiciles of Luxembourg and Ireland will benefit from this market development.”
He also notes that the hardening market is also prompting more large and mid-sized companies to explore captive related opportunities like protected cell captive (PCC) solutions, and adds that emerging risks like cyber might become a more widely included line of business.
Claude Weber, captive consulting leader, continental Europe, Marsh Captive Solutions, says there is a lot of interest in new captives and in the extension of existing captive programmes. Marsh saw a number of new licences in European domiciles before year-end 2020, and it is working on more in 2021. “In addition, a number of companies that did not have captives are currently considering a feasibility study, while others that have already finished their study are working on the submission files in view of obtaining a licence before their next renewal,” he says.
Mike Matthews, commercial director – international, Artex, agrees, noting that the momentum begun in 2020 has continued unabated. “In the first quarter of 2021 we saw a significant uptick in the number of captive enquiries, feasibility study engagements and, most telling, formation activity from feasibility work completed in 2020,” he says.
Fronting insurers see the same picture. Stephen Morton, EMEA head of multinational, AIG, says it is seeing a continued increase in the use and diversification of existing captives. “Overall, captives are playing a larger and more important role in clients’ overall risk strategies, largely via increased participation – for example, seeing a captive doubling a retention is not uncommon, and filling gaps in coverage, particularly in the energy and property space where capacity is a challenge,” he says.
He continues: “The global fronting business also continues to grow as companies expand the use of existing captives to encompass additional geographies and lines of business such as cyber, A&H, trade credit and marine. We’ve also seen an increase in third-party coverages, such as warranty and tenants’ liability, as companies look at their captives as a separate business unit and source of revenue.”
Another fronting insurer, AXA XL, has seen a growing interest in captives in Europe since 2019. “This accelerated in 2020 and the trend is still going strong so far this year,” says Marine Charbonnier, global programmes and captives regional director, Europe, AXA XL. “We are seeing a rise in demand from across Europe in both wholly-owned captives for larger organisations, and cell captives, primarily for middle-market companies.”
But the overall picture for captives is less obvious. It seems that while captive formations are on the increase, the overall numbers of captives were down in 2020. According to Peter Carter, head of global captive practice, Willis Towers Watson, the picture is mixed. “While we see an increase in demand for cell captives for point risks such as D&O and cyber benefiting domiciles with cell captive frameworks (Guernsey and Malta), the net picture for pure captives in Europe is more nuanced. While market conditions are driving continued interest in new captive formations, economic challenges arising from pandemic together with M&A are also driving licence surrenders, contributing to an overall decline in captive numbers in Europe during 2020,” he says.
Derek Bridgeman, managing director of captive manager SRS Europe, says: “I would say that the formation of captives in Europe has certainly lagged behind the numbers of captives being created in the US and offshore islands such as Bermuda and Cayman. That said, there has certainly been an uptick in formations in the first half of 2021. The reason for the time lag is likely due to the implementation times, which are longer in Europe; where a captive implementation was not possible ahead of renewal then it may have been pushed out to the following period.”
And for independent captive consultant Francoise Carli of Zakubo Consulting, former vice-president, insurance, at Sanofi: “The rise is not yet there, but there are increasing demands regarding captive and cells interest and setup process. Obviously, the market conditions for the 2021 renewals have put insureds in difficult positions, adding up pricing and deductible constraints on top of the Covid consideration. So it is not talk, it is clearly more than that, but it is not yet visible.”