Captives preparing to write more as hard market beckons

The majority of risk managers and captive owners surveyed by Commercial Risk believe a hard market is on its way, and, in response, the vast majority plan to write more business through their captive in the future.

The survey also highlighted the fact that risk managers believe it is getting more difficult to justify a captive insurer, and that there is increasing pressure on captives to prove their value. Virtually all captive owners see the main purpose of their captive being to manage risk more effectively, and many are looking at new areas for their captive to play a role, such as becoming a vehicle to reinsure employee benefits schemes.

The survey was unequivocal on the upcoming state of the insurance market, with 59.8% of respondents believing that a hard, or hardening, market is on its way, and just 18% disagreeing, with 23% unsure.

One respondent said: “The bottom of the price level has been reached. Flat or increase of pricing has to be expected.” “The business model of insurers is changing, premium is no longer sufficient to cover risks,” said another. “It has to turn at some point,” added a third.

Others were less sure. “Hard to read the market at this time. Historical fundamentals say yes; observations say no,” said one. “Certain pockets are certainly showing signs of hardening but it will not be seen across the board,” added another. “Will probably depend on the evolution of interest rates. As long as they stay low, I do not foresee a hardening market except for some coverages such as storm in the US, or flooding in general,” stated a fellow respondent.

When asked if there are currently signs of hardening in any classes/regions, a third (66.7%) of respondents said yes, with many highlighting property classes, especially on the cat side and in the US, financial lines, especially D&O, and professional indemnity – especially UK solicitors and construction.

The result of concern over a hardening market – either across the board, or in regional or class pockets – means that the vast majority of respondents are preparing to use their captive to greater effect in the future. A massive 86.4% of respondents said they plan to write more business through their captive in the future, with just 4.6% planning to write less, and none looking to write the same amount. Interestingly, two years ago when we carried out a similar survey, just 34.3% said they intended to use the captive more in the near future.

It would appear to be getting harder for risk managers to justify a captive insurer. According to the survey, more than two thirds (68.2%) said it is harder than it used to be to justify a captive insurer, while just over a quarter (27.3%) said it is about the same, with 4.5% unsure. No one said it is easier to justify a captive than it used to be. Just over two thirds (68.2%) said there is more pressure on captives to prove their value, with 31.8% disagreeing.

The survey also asked if captive owners consider the Organisation for Economic Co-operation and Development’s base erosion and profit shifting (BEPS) project a considerable new area of potential challenges to their captive from tax authorities. The survey found that 59.1% agreed, with 22.7% disagreeing and 18.2% unsure.

One area that is seen as an opportunity for the captive sector is employee benefits. More than two thirds (68.2%) of those polled said they envisage using their captive as a vehicle to reinsure employee benefits schemes. This compares to just 22.7% who said they do not intend to do so, and 9.1% who answered not sure/maybe.