AXA XL’s Owen Williams discusses the current captive market and the most significant challenges facing the industry
What are the biggest trends in the captive industry right now?
By far and away the biggest trend in the captive industry is the effect of the hardening of the insurance and reinsurance market. This is having three main impacts on clients. The first is an increase in pricing for most lines of insurance and reinsurance. The second is a retraction of capacity – clients cannot currently always secure the capacity they require from the insurance market. And thirdly, the breadth of coverage to which clients have become accustomed is not always available.
Clients are using captives to counteract all three of these effects. Many are taking larger primary layers within their captive to reduce the cost of their insurance spend. Clients are also using captives to fill gaps in their tower where they cannot find capacity in the insurance market. And risk managers are using captives to obtain coverage for their corporate entity that isn’t readily available in the insurance market or where terms and conditions have severely tightened.
Clients are using existing captives more and we are also seeing great interest in setting up new captives. We are certainly seeing increased numbers of captive feasibility studies being undertaken at the moment.
How has COVID-19 impacted the captive industry? Do you think it has had a positive or negative effect?
First and foremost, COVID-19 has been a human tragedy on a huge scale. And it continues to affect societies and industries across the world. For the captive industry, it is probably too early to say what the medium and long-term impacts will be.
The pandemic has probably contributed to what was an already hardening insurance market, particularly with respect to the availability of coverage for risks such as non-physical-damage business interruption. Many clients are looking to use captives to respond and I would expect to see greater use of captives for non-insurable risks.
What do you believe are the most significant challenges firms are currently facing?
Beyond the very immediate impacts of the pandemic, such as uncertainty about companies’ ability to trade and the effect of restrictions on the movement of people, the number one concern for risk managers is the hardening of the insurance and reinsurance market.
For the past several years, risk managers and insurance buyers have been able to go to their boards showing year-on-year price savings on insurance and expanded coverage. This year, however, for the first time for a very long time that will not be the case. Risk managers and insurance buyers are not necessarily used to this situation or communicating the fact to their boards. A captive can help to lessen the impact of the hardening insurance market. It reduces a company’s reliance on insurance and its exposure to the vagaries of the insurance cycle.
It’s important to remember, however, that putting risk into a captive is not the same as buying insurance from an insurer; as a captive owner, you are taking on risk rather than transferring it. Taking the time to discuss forming a captive, or putting more risk into an existing captive, in a strategic way, is vital. I would urge clients not to rush forming a captive and its relevant insurance/reinsurance structures as a response to the conditions in the insurance market, but instead to take the time to talk about it with their brokers, advisors, captive managers and others in order to fully understand what can be achieved and what the longer-term plan might be. Early engagement from all partners and providers in those discussions is important.
Do you think 2020 has been a positive year for the captive industry? Are you expecting to see overall captive formations increase for this year?
This year has certainly provided an opportunity for captives to demonstrate their relevance and value to their corporate owners.
Following the prolonged soft market period, current insurance market conditions mean that risk managers increasingly now are able to show their boards the cost and coverage benefits of having a captive, as well as the longer-term strategic benefits that a captive can bring to an enterprise risk management programme.
We are certainly seeing an uptick in interest in captive formations and I would expect captive numbers to increase, globally, this year.
Moving forward, what you do expect to see over the next few years within the industry? What will be the biggest talking points?
It will be interesting to see if those companies that currently are exploring setting up a captive, or expanding current captives, continue with that strategy when conditions in the insurance market change. Many will likely continue to use their captive as an important part of their risk management and transfer strategy even when capacity and coverage become more available in the traditional market.
I think the ability of captives to take on uninsurable or intangible risks will be one of the biggest talking points in the months and years to come. Most risk managers’ risk registers contain several risks that cannot be insured in the traditional sense. If this year has shown us anything, it is that unexpected, uninsurable risks can and do happen.
In the past, captives were typically used to provide capacity for more run-of-the-mill, well-understood property and casualty-type risks. But the current pandemic and its effects, both on the insurance market and society and industry more widely, have prompted interest in using captives to underwrite risks that are not currently insurable in the traditional market.
I believe that the ability of captives to play a part in managing and transferring emerging and previously uninsurable risks will be a major talking point.
