Even though the rate of increase in pricing in the commercial insurance market has begun to flatten out in 2021, organisations are still continuing to explore alternative risk financing options as loss-hit lines remain challenging to place, says Aon in its new captive benchmarking survey.
Captive owners are retaining more risk on a sustained basis while maintaining an appropriate level of cover to address medium-term economic viability and price increases in primary markets over the past two years.
Aon reports a 50 per cent increase for the number of captive feasibility studies (an indicator of interest in captives) performed in 2020, and says 2021 is likely to top this increase again.
But even since 2018, Aon reports there has been a 73 per cent increase in premium retention among the captives managed by Aon, including a massive 361 per cent increase in property damage and business interruption retentions and a further 26 per cent increase in general liability retentions.
John English, CEO of captive and insurance management at Aon, comments: “There has been a marked increase in clients looking for access to reinsurance market capacity and achieving this through the use of protected cell facilities.”
The Aon Captive Benchmarking Survey also notes that organisations are increasingly implementing their captives as part of their risk management strategy for emerging or hard-to-place risks, such as cyber and environmental.
Aon reports it has seen a 650 per cent increase in captive premium for cyber risk, and a 400 per cent increase in environmental risk since 2018 — and Aon expects these trends to continue.
In addition, captives are being utilised more widely to support flexible employee benefits schemes as a result of market capacity and pricing, as well as an increasing demand for coverage for active diversity and inclusion programmes.
Environmental, social and governance (ESG) funds persist as an area of interest for captive owners to invest their assets, as it allows organisations to align their captives with the values and principles of the parent company.
In terms of the Americas, Aon records a 13 per cent increase in insurance entities under management since 2018, attributable to the hardening market, several high-loss natural catastrophe events, and underpricing in the primary insurance market.
The Americas has also seen significant increases in the non-aviation transportation and healthcare sectors in particular, as well as a 300 per cent increase in gross written premiums for cyber liabilities.
Although Aon notes that the same scale of growth has not been witnessed in Europe, the Middle East and Africa (EMEA), there has still been an increase in captive and protected cell formation in the region, particularly in the number of insurance businesses writing general and public liability, as well as property damage and business interruption.
EMEA has also experienced notable growth in protected cell formation and utilisation for supply chain-reliant sectors, such as construction and waste management.
Aon describes the current insurance market environment in Asia Pacific (APAC) as “challenging” as a result of significant premium increases and reduced capacity.
However, the survey still notes a 23 per cent increase in the total gross written premium in captives under Aon’s management in the region in the last five years.
Looking ahead in a global context, Aon states it does not expect an immediate return to soft market conditions, which along with increased rates in loss-hit lines will cause “continued steady growth” in both the utilisation of existing captives and demand for new captives and protected cells.
