Increasing use of existing captives to tackle hard market, Marsh survey finds

The majority of captive owners plan to increase their use of captives in response to changing insurance market conditions, according to a survey of 1,240 Marsh-managed captives. More than half (59%) expected to expand their captive use by adding more lines of coverage, increasing retentions in the captive, or forming an additional captive, while 38% said they had no plans to make changes.

Marsh’s 2020 Captive Landscape Report: Captives Offer Value in Uncertain Times reveals that captive utilisation continues to soar globally, as evidenced by growth in the various lines of coverage written. For the period 2018-2019, supply chain/CBI/BI premiums grew by 283% to $185.9m, while contractor/vendor P&C grew by 117% to $222.4m. Surety premiums written by Marsh-managed captives increased by 110% to $89.2m, with trade credit up by 86% to $67.0m.

Marsh says the main reason for this increase is the tightening of the insurance market. “Increases in ‘all-risk’, D&O, supply chain/BI and CBI point to a dramatic change on the horizon for next year. Coverages written by Marsh-managed captives that have shown steep growth in gross premiums by percentage in the past year include many non-traditional lines. Exposures influenced by changes in credit markets, investment yields, tariffs and trade can make commercial insurance options less financially attractive. As a result, more captives are insuring risks such as trade credit and surety, and funding longevity risks,” the report states.

A survey of regulators carried out by Marsh and highlighted in the report found that more captives are writing cyber insurance (30%), employee benefits (27%) and professional indemnity (21%). On the third-party side, regulators see captives increasingly writing employee benefits, customer coverages and extended warranties. Nearly all regulators surveyed were open to the use of cryptocurrencies in captives, but 21% expressed uncertainty about its regulation.

The captive client survey found that the key value driver in maintaining a captive was acting as a formal funding vehicle for risks the parent organisation has elected to assume, followed by designing and customising policy forms, and accessing reinsurance capital. Other value drivers include realising tax benefits, providing means for subsidiaries to buy down corporate retentions to desired levels, centralising the global insurance programme and providing evidence of insurance to meet contractual requirements with third parties or statutory obligations.

The report suggest that captive growth during the past five years has largely occurred in emerging markets, led by Latin America and Asia-Pacific, although their overall number of captives remains low. In Europe, the overall number of captives has remained flat, but premium volume has increased by 8% year over year, the report states.

In terms of domiciles, US domiciles have seen significantly more growth in the number of captives during the last five years (20%), when compared to other global domiciles (1%). In 2019, US-domiciled captives accounted for almost half (45%) of gross premium written by Marsh-managed captives.

In terms of parent-company industries, the largest share of captives and premium volume are to be found in financial services and healthcare but many other industries are expanding their use of captives, says Marsh. “As a result of the transitioning insurance market, industry-specific trends have begun to emerge around the increased use of captives in certain lines of business. While there was a 64% year-over-year increase in all-risk property premium across all industries, the following industries have seen higher than average all-risk premium growth when compared to Marsh-managed captives as a whole: energy (151% increase); financial institutions (104%); communications, media and technology (98%); and construction (97%).”

Marsh notes in the report that in the last year, excess liability capacity began to shrink in the commercial market, and some organisations are filling gaps in their excess liability towers by using their captives, notably in healthcare. Increased market pricing for construction saw a 200% increase in professional liability premium being driven to captives in 2019.

Looking at D&O, a particularly stressed line, Marsh says that given commercial market conditions, organisations are increasingly seeking alternatives for D&O insurance. “Although a number of clients have insured Sides B and C (corporate risk) in a single-parent captive, financing Side A (non-indemnified loss) in a captive has proved challenging. Side-A D&O coverage generally responds in the event that the company cannot, or will not, indemnify a director or officer. The reasons for the inability to indemnify are generally due to legal or corporate prohibitions, or to corporate insolvency. A concern with placing Side-A D&O in a single-parent captive relates to the actual or potential conflict that could arise in the event that the captive, a subsidiary of the company, is asked to pay a claim for a director or officer that the company is not permitted to indemnify.”

Marsh says that a protected or segregated cell facility (PCC) is more arms-length from the company and therefore better suited to funding Side-A losses than a single-parent captive, although a cell’s ability to successfully pay a claim has not been tested in court.