Captives an option amid challenging property insurance market

Captives can be used to combat challenging conditions in the commercial property insurance market, experts say.

Deductible buydown or deductible reimbursement policies, fronted policies and structured solutions are ways in which captives can participate in property programmes, they said during a panel session at the World Captive Forum.

Captives can be used to combat rate increases, capacity reductions and the desire for insureds to take more risk, said Nate Reznicek, head of US distribution at I-RE Miami.

“We’ve had a hard market cycle that’s been happening for quite some time, not only in the primary markets but also in the reinsurance markets,” Reznicek said, noting that reinsurance renewals went very late last year.

“We were at a point in late November where maybe 80% of capacity providers in the US had not completed their property cat renewals for the 2023 year,” explained Reznicek. This caused a lot of uncertainty in the market, he added.

At some point the pain of higher prices and lower limits becomes too much for business owners, who are educating themselves about alternative strategies to handle property risks, Reznicek continued.

One good thing about putting property risks in captives is property tail risk is very short, he said. “We don’t have to worry about major claims coming in at the close of the policy year. You know if something happened to the property or not.”

When property owners are subject to lender-placed insurance contractual requirements that specify a maximum deductible, using a captive insurer to issue a deductible reimbursement policy can help lower their retention, Reznicek said.

Deductible reimbursement policies can play an important role in filling coverage gaps, said Prabal Lakhanpal, vice president of Spring Consulting Group.

“They’re a powerful tool for folks to navigate the landscape where premiums are going back up, and coverage limits are becoming tighter and tighter,” Lakhanpal said.

Another advantage of using captives for property programmes is they can give policyholders more control over their policy wording and claims processing benefits, he added.

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