Captive insurance companies are being utilised more effectively and more strategically to serve their parent companies’ needs, according to a report from Aon.
The 2019 edition of the ‘Global Risk Management Survey’, which surveys thousands of risk managers from 60 countries and 33 industries every two years, reveals that 17 percent of respondents currently have a captive or active in a cell protected cell company (PCC), a 3 percent increase from 2017.
However, the number of respondents planning to create a new or additional one in the next three years fell, down to 4 percent from 6 percent in 2017.
Additionally, the survey notes that overall captive numbers are decreasing worldwide but the companies with active captives write more premiums and cover an increasingly broader range of risks as part of their risk management.
Aon described this as a positive indicator because captives are being utilised “more effectively and more strategically to serve the needs of their parent organisations”.
The survey also shows a significant growth in the usage of captives and PCCs by companies with less than $1 billion in revenues (9 percent up from 5 percent in 2017) and with revenues in the $1 billion to $4.9 billion range (26 percent up from 20 percent).
According to Aon, this is a result of mid-sized companies adopting a more sophisticated approach to risk financing and suggests that the “proliferation of PCC structures and formalised risk financing vehicle alternatives scale is becoming less of a barrier to access”.
Additionally, the report notes a significant shift in captive utilisation within industry sectors, with the top five industries with a captive being energy, banking, chemicals, healthcare, and pharmaceuticals and biotechnology.
However, this may be due to the 2019 report’s respondent profile, which differs slightly from the previous survey.
For the 2019 survey, respondents were also given the option to simultaneously select multiple reasons for owning captives, which led to a marked change in responses.
Cost efficiencies, reduction of insurance premiums, and control of insurance programmes were the top three reasons.
Aon suggests this focus on the cost of risk management programmes is not surprising given the fact that economic slowdown/slow recovery was identified as the number one risk by respondents.
Property and casualty remained the dominant lines currently underwritten by captives or cells, however, the report reveals an array of other lines, which suggests captives are increasingly being used to cover industry-specific risks.
Aon commented that the increased focus on industry-specific solutions is influencing the business written by captives, making them more relevant to the organisations they support.
The report adds: “At the same time, the maturity of the risk management community
continues to develop in a trading environment that includes more data than ever, and easier access to the tools and expertise to support decision making.”
The number of companies utilising captives to retain cyber risk has risen to 16 percent, up from 12 percent in 2017, and it was identified as a risk to be written in the future by 34 percent of respondents who are captive owners, the most of any line.
Respondents, across all regions and revenue sizes, also indicated they’re planning to underwrite new risks in captives or cells, which Aon notes is “encouraging”, and the spread of future risks written in captives continues to broaden.
Asia Pacific and Latin America, markets where captive usage has traditionally been very low, showed a big appetite for new captive risks to be underwritten, and Aon is keen to see if this will be reflected in the 2021 survey.
Aon stated that captives “remain an integral part of the insurance industry landscape and an important component in the risk financing toolkit, not only for large multinational companies but also for an increasing number of smaller entities”.
