Companies of all shapes, sizes and industries are evaluating their alternative risk financing strategies in response to the continued hard market conditions, according to a session at the Barbados Risk and Insurance Management (BRIM) conference.
Michael Serricchio, managing director at Marsh Captive Solutions, noted the heightened interest around captives, whether companies are returning to feasibility studies from a few years ago, revisiting dormant captives, or expanding their current active captives.
This was affirmed by Patrick Ferguson, senior vice president at Marsh Captive Solutions, who added that commercial insurance premiums have increased year-on-year while capacity declines.
“The reality is that, at this point in time, a captive provides a higher value proposition to a company than it would have two or three years ago,” Ferguson said.
With this increased utilisation of captives, it was noted that property insurance was the most popular coverage written by Marsh-managed captives in the first half of 2021, followed by directors’ and officers’ (D&O), trade credit, surety, third-party and cyber.
Cyber in particular was highlighted as a key emerging risk, with Ferguson noting US$63.5 million in total cyber premium in captives under management. This marks a 13 per cent growth in the number of captives writing cyber year-on-year, and a massive 127 per cent increase over five years.
Serricchio added that, as a low frequency, high severity risk, there are several different possibilities of how captives can provide innovative policies for cyber, including a policy to reimburse retention, quota share or limit for layer within a risk transfer programme, a policy for excluded coverage (such as ransomware), or a policy for excess limits.
He noted that a key indicator of a captive’s value in providing flexible, customised insurance solutions is the growth in coverages that were not written by captives a decade ago. These emerging non-traditional risks are demonstrating steady increases in net premiums written, particularly medical stop-loss (81 per cent), cyber (54 per cent) and D&O (50 per cent).
The latter has become particularly prominent over the last six months, Serricchio added, especially following the recent amendment of the Delaware Insurance Code allowing corporations to use captives for D&O liability insurance.
D&O and cyber are the top two coverages written in cell facilities formed in recent years, Ferguson noted, although protected cell formations still see traditional risks such as property and liability.
Serricchio added that third-party business continues to increase, with 19 per cent of Marsh-managed captives writing third-party coverage and premium growing by 85 per cent over the past five years. He noted that third-party risk is advantageous as it allows for risk diversification, and provides an opportunity for the captive to generate profits for its parent with a higher potential for building up surplus.
The session concluded that, among the current market conditions (rising interest rates, inflation, war, pandemic), captive owners should constantly evaluate their risks and captive portfolio to consider how ESG and the interest rate environment affects their captive.
Noting that captives have traditionally excelled at governance (‘G’), they should now focus on environmental (‘E’) and social (‘S’) by viewing climate issues in the context of sustainability, portfolio impact and resilience, and by allowing organisations flexibility and control in addressing the people risks that impact their business, such as employee benefit and engagement programmes, and board diversity.
