2020 marked “a year of historic growth for captives”, according to Marsh Captive Solutions’ annual Captive Landscape Report.
Surveying more than 1,300 captives across Marsh’s client base, the annual benchmarking report identifies increases across the board in terms of the total number of captives, overall net premium volume, third-party premium volume and parent company regions, among other indicators of growth.
Marsh cites that these increases are attributable to challenges in the commercial insurance market, ongoing disruptions from the COVID-19 pandemic, higher natural catastrophe frequency and severity, increased risk transfer costs and liability claims inflation.
Ellen Charnley, president of Marsh Captive Solutions, explains: “The COVID-19 pandemic disrupted supply chains and put enormous financial pressure on nearly all industries and companies worldwide. Captives thrived as the events of 2020 showed that these vehicles continue to respond to challenging insurance market conditions. For these reasons, captives experienced record growth in virtually every area.”
In addition, captive formations have been spurred by the proven success of the structures in tackling business challenges, reinforcing strategic objectives, and addressing emerging and future risks, according to Marsh.
The captive manager notes that the majority of parent companies implement a captive to supplement, rather than replace, their insurance purchasing as a component of a wider risk financing programme that considers specific risks and exposures, as well as risk tolerance and risk management strategies.
Nevertheless, Marsh observes that it helped clients complete more than 100 formations of all types of captives in 2020, which is expected to be repeated in 2021 with 65 new formations already completed.
Of these new formations, Marsh clients with large captives (totalling more than US$20 million in annual premium volume) placed more risks in the lines of excess liability, directors and officers (D&O) liability and products liability, while property insurance was the most popular coverage written in the first half of 2021.
Notable non-traditional risks include medical stop-loss (which saw a massive 81 per cent increase), followed by cyber, D&O and excess liability.
Marsh notes that adding new lines of coverage to diversify the risks within a captive is beneficial because it provides stability to pre-loss funding and allows the captive to garner profits by writing third-party business.
Specifically, premiums written for third-party unrelated risk grew by 13 per cent in 2020 compared to 2019 — in particular, captives with owners based in North America wrote more third-party risk in extended warranty and voluntary benefits.
Regarding the types of newly-formed captives, cell captives saw a 53 per cent increase in new formations, which Marsh attributes to simplicity, cost and ease of set-up. However, cells still only make up less than 10 per cent of total captives managed, while single-parent captives remain the most popular structure at almost three-quarters of all captives managed (despite seeing a slower 6 per cent increase).
In addition, the automotive industry led with a 28 per cent year-on-year increase in captive count in 2020, followed by a 20 per cent growth in sports, entertainment and events, and 15 per cent in financial institutions.
Charnley says: “The benchmarking data showed organisations in every industry turning to captive vehicles to help them meet their challenges. Captives have proven to be effective tools in responding to risks and changing market conditions, which is why they keep growing.”
“Growth came in existing captives as well as new formations, as organisations sought ways to relieve pressure on their balance sheets. With advantages including cost efficiencies, financial flexibility, the ability to design customised coverages, access alternative capital, and generate profits through third-party business, captives will continue to be an important option in managing and financing risk.”
The report concludes by considering the role of captives in enhancing a company’s ESG initiatives, as the structures can reduce risks, protect a brand, and provide commercial and competitive advantages.
In terms of environmental, the severity and frequency of climate issues are increasingly viewed in the context of sustainability, portfolio impact and resilience — captives offer a solution to coverage gaps, as well as exclusions and the mitigation of catastrophe perils.
For social, (the “S” in ESG) captives have historically been utilised to reduce the cost of providing employee benefits and engagement programmes. Marsh identifies that there is now a trend to implement captives to fund board diversity and vendor diversity initiatives, while in terms of governance, the existence of a captive in itself demonstrates good governance as a formal loss-funding vehicle.
