More organisations are considering a captive for insurance protection and financial flexibility in response to an increasingly difficult risk and insurance landscape, according to the Marsh 2020 Captive Landscape Report.
The report highlighted the trend of increased captive use continuing in the first half of 2020 amid an increase in challenging insurance market conditions and the impact of the global COVID-19 pandemic.
Marsh-managed captives saw steep growth in gross premiums in various lines of coverage in the past year due to the tightening global insurance market conditions.
Supply chain, business interruption and contingent business interruption premiums written saw an increase of 283 percent on average in 2019.
The results also showed a 64 percent rise in all-risk property premiums, led by the energy and financial institutions sector, which saw all-risk property premiums increase 151 percent and 104 percent, respectively.
Over the past five years, mid-size captives have seen the most growth, from 11 percent in 2013 to 23 percent in 2019. Meanwhile, jumbo captives have remained relatively stable with growth percentages between 61 and 54 from 2013 to 2019.
Meanwhile, financial services and healthcare remain the top industries by the number of captives and premium volume, however, it was noted that many other industries are expanding their use of captives.
As a result of the transitioning insurance market, industry-specific trends are starting to emerge around the increased use of captive in certain lines of business, the report noted.
While there was a 64 percent year-over-year increase in all-risk property premium across all industries, the energy; financial institutions; communications, media and technology; and construction all reported higher than average all risk premium growth when compared
to Marsh-managed captives as a whole.
The energy sector saw a 151 percent increase, financial institutions recorded a 104 percent rise, communications, media and technology noted a 98 percent increase and finally construction had a 97 percent increase.
Transitioning insurance market
In Q2 2020, commercial insurance rates globally rose by an average of 19 percent, according to the Marsh Global Insurance Market Index, which represents the largest increase since the index’s inception in 2012.
The report found that a majority of captive owners plan to increase their use of captives in response to changing insurance market conditions.
More than half, 59 percent, expect to expand their captive use by adding more lines of coverage, increasing retentions in the captive, or forming an additional captive, while 38 percent said they had no plans to make changes.
It was highlighted that the evolving risk environment and the COVID-19 pandemic continue to challenge organisations and their directors and officers.
Since 2019, pricing for directors and officers liability (D&O) insurance for public companies has increased by double digits — and grown each quarter, the report noted. In Q2, the US saw D&O pricing increase 59 percent on average.
It also reported that more than 90 percent of Marsh clients experienced an increase, a figure that reached 99 percent among publicly traded companies.
Employee benefits
The report revealed that in the last five years, the number of Marsh-managed captives writing medical-stop loss coverage has increased by 50 percent.
Marsh explained that COVID-19 exposed inconsistencies in multinationals’ benefit programmes, showing that benefits available to workers in a few countries could vary greatly from those offered elsewhere.
During the pandemic, companies placed a high value on employee assistance programmes and telemedicine, which are likely to become more widely available, the report noted.
Another emerging trend found employers providing additional indemnities, and, in some cases, concierge services for employees hospitalised with the virus.
In the past, a key factor in adding benefits to a captive was an owner’s desire to achieve cost savings, according to the report, and while that remains an advantage, it suggested that an employers’ main reason to write benefits through captives has shifted.
It revealed that multinational companies especially are looking to create customised and consistent benefit programmes that enhance the value proposition for current and prospective employees.
Captive innovations
The report also focused on captives embracing technology and third-party risks.
It suggested that US domiciles have seen significant growth in the number of captives over the last five years, 20 percent, compared to the 1 percent growth from other global domiciles.
A Marsh survey found that domiciles around the world are seeing several trends in risks and lines of business as captives adopt increasingly sophisticated technologies.
It showed that almost all regulators surveyed were open to the use of cryptocurrencies in captives, however, 21 percent expressed uncertainty around its regulation.
The survey also revealed more captives are writing cyber insurance, even though regulators thought the trend represented both an opportunity and a threat. The threat is believed to come from the additional risk it presents to captives, as well as the governance and compliance it requires.
In addition to cyber, regulators are seeing captives write more employee benefits, professional indemnity, and environmental liability.
Elsewhere, third-party risks that domiciles see increasing include employee benefits, extended warranties, customer coverages, and supply chain.
The 2020 Captive Landscape Report is based on approximately 1,240 Marsh-managed captives around the world.
