US captive sector to see increased activity through 2021, says Willis Towers Watson

This year will be another strong year for new captive formations, with ongoing interest in using captives to secure gaps in coverage, according to Willis Towers Watson (WTW). In its Insurance Marketplace Realities 2021 Spring Update, the broker says it is seeing increased deployment of captives as a response to the continuing hard market in North America. Captives are being used for coverage gaps, particularly for those risks seeing the highest rate increases in North America, such as D&O, excess liability, trade credit, cyber, pandemic and property/business interruption. “While the pandemic initially dampened new captive incorporations earlier in 2020, activity has increased into 2021… Despite continuing economic stress in some industries, other sectors have weathered the pandemic reasonably well. Organisations in these sectors are now able to focus more on their risk financing programmes. We have even seen instances where the careful preservation of cash in 2020 has positioned buyers to take more aggressive risk retention positions in 2021,” states the WTW report. It notes that many US captive domiciles reported increases in new licensee numbers in 2020 compared to the last few years. However, this growth was offset by continued decline in the 831(b) captives due to the Internal Revenue Service crackdown on abuse in this sector of the market. This and closer regulatory scrutiny have caused a slight decline (roughly 2%) in the number of captives in the US to 3,107, according to the Business Insurance Managers’ Survey of March 2021. WTW says it has also heard from several domiciles that applications for new captive licenses have continued into the early part of 2021, leading it to expect 2021 will be another strong year for new captive formations. Several domiciles have also reported an uptick in the licensure of captive cells within sponsored protected cell facilities. In contrast, Bermuda and the Cayman Islands saw captive numbers continue to fall by a net 17 in 2020, with 48 new licences issued during 2020 in these domiciles. WTW says the removal of a similar number of licences was largely attributable to merger and acquisition activity as well as continuing pressure on the 831(b) captive sector, leaving net growth in the number of captives at less than 1%. WTW notes the increase in the use of analytics to support decision making and to optimise the cost of risk transfer in market negotiations in the early part of 2021. “We see this at all stages of captive development, from new captive feasibility to strategic planning for existing captives. We have seen much greater focus on risks that are driven more by severity than frequency, such as professional liability, cyber and complex products liability risks. This has created additional demand for analytical services that can better model such risks and that can assist an owner in capital and portfolio management for the captive,” the report states. In the same report, WTW examines alternative risk transfer (ART) products in North America, finding: “ART underwriters are acting conservatively in certain product categories, manifested as a preference for simplicity over the cutting edge.” The report explains that, for large corporates, the ART marketplace is offering protection for lost revenue, lost gross profit or an increase in expenses from a non-Covid-19 pandemic event. As an extension, these programmes can help manage the cashflow impact of a second wave of Covid-19 through a multiyear structured (pre-/post-loss funding) component (not risk transfer). WTW expects capacity to remain steady in 2021 at $100m, although pricing has been driven higher by loss frequency and greater clarity on Covid-19 losses. Also in ART, WTW is seeing structured solutions becoming more common wherever traditional markets are charging rates-on-line (premium/limit) of 40%+ for a layer of insurance. The broker is seeing increasing interest in fronting with structured reinsurance options to seek value outside of traditional approaches. Finally, WTW says capacity for multi-year portfolio solutions (or integrated risk programmes) has diminished as ART units are forced to adopt the same underwriting restrictions imposed on their traditional monoline colleagues. “These markets increasingly focus on multiline stop-loss protection for a captive or for a portfolio of deductibles/self-insured retentions as insureds are forced to retain more risk to limit premium increases. That said, those clients who previously established multi-year integrated programmes are benefiting significantly by being insulated from market volatility and rate increases, at least until such programmes renew,” the report states. Commercial Risk is hosting a Captives Management Conference on 10-12 May 2021. Drawing on the expertise of senior risk managers from across Europe, this conference will consider the key issues and also provide education and practical advice for those moving towards a captive option for the first time. It will also provide an opportunity for those who already have a captive to learn more about maximising their programmes. Make sure you register NOW for your free place: https://commercialriskevents.com/captives

US captive sector to see increased activity through 2021, says Willis Towers Watson

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