Now is the time for captives to shine, says new report from Commercial Risk Europe

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There has been a lot of talking up of captives during the last few years, with momentum growing in the last year or two, and a feeling that a new dawn was approaching for the sector. According to Commercial Risk Europe’s Captives Report 2020 – Captives: Next Generation, that time is now here.

The traditional insurance market has properly hardened – in some cases, such as D&O, rapidly and severely – and it is not just higher pricing, as tougher terms and conditions and an increasing number of exclusions are being imposed. This, combined with the insurance industry’s response to the pandemic, and to emerging risks such as cyber, has led many risk managers and insurance buyers to look to their captives to help close the gap between the risks faced by organisations and the insurance cover offered by the market.

“The past two decades have shown that captive formations occur during all phases of the insurance cycle and throughout varying economic climates,” said Stephen Morton, head of multinational for Europe and UK, AIG. “Traditional reasons – including a hardening commercial market – remain relevant drivers for captive formations. However, alternative risk transfer has developed into a longer-term strategy for sophisticated companies to leverage financial and coverage benefits over time.”

He added: “Existing captive owners are likely to expand the use of their captives during a hard insurance market, particularly for difficult-to-place coverages. But the benefits of self-insurance (including having greater control over risk financing and risk management, as well as customisation of loss control and claims mitigation strategies) remain relevant when prices soften again. The most successful insurance programmes maintain a balance of traditional and alternative risk transfer, with a strategy that adapts to changing market cycles.”

But there are opportunities too to look beyond property and casualty, and there is considerable scope for captives to move into the employee benefits arena, if only risk management and HR departments can find common ground and stop working in silos.

“There’s a need for further experience-sharing in line with the amount of control and cost savings a captive affords,” said Damian Ross, regional manager, UK, Ireland and Nordics, Generali Employee Benefits (GEB) Network. “Often, employee benefits are not part of the corporate risk management framework. This is because risk managers are not so familiar with employee benefits and HR managers don’t get to know how to manage people risks. It’s important for risk and HR management to look at things much more holistically. That said, the situation is improving. We’re seeing interest from risk managers. They’re looking at employee benefits, realising the risks and looking at where their skills can help with regards to controlling costs.”

Reto Heini, global employee benefits solutions, Zurich Insurance, said: “Linking the risk managers and HR functions together to tackle these issues moves the company away from some of the older silo-based thinking, which is in part why employee benefits is lagging behind in terms of use within captives. The good news is that the insurance networks and consultancies are already working together to help close these gaps.”

This year’s captive report explores the possibilities for captives in the third decade of the 21st century, looking at how to bring the captive to the centre of an organisation’s risk financing programme and even take on an expanded, strategic role.

As Paul Wöhrmann, head of captives services, EMEA, APAC and Latam at Zurich Insurance Group, explained: “In current market conditions there is a greater opportunity to explore the reinsurance and alternative capital markets and access capacity. We have seen growing interest from risk managers with captives to start a dialogue with insurance-linked securities providers. We see more companies viewing their captives as a strategic vehicle to manage the insurance market cycle. Captives can be viewed as a strategic door-opener to reinsurance and alternative capital markets when there is a shortage of capacity or an increase in rates.”

Commercial Risk Europe’s captive report brings together the views of captive owners, risk managers, captive managers, brokers, consultants and fronting insurers to discuss the growing role of captives, with a particular focus on Europe and Asia-Pacific.

Commercial Risk Europe’s Captives Report 2020 – Captives: Next Generation is available here