AXA XL
Marine Charbonnier of AXA XL discusses the current state of the captive sector, the hardening market, and what the next 12 months will bring
How would you describe the current state of the captive insurance industry?
At AXA XL, we work with many clients who use a captive as part of their risk financing strategy, particularly for global programmes. Despite some of the challenges that captives have faced recently, the captive market is very healthy. In recent years we have seen many companies that already had a captive choose to use them more widely by adding new lines of business. With the current change in market conditions, we are now also seeing companies that did not previously have a captive explore setting one up.
What trends are you seeing in the captive insurance market?
The main one is the use of captives to cover new programmes. This is to help create greater diversification for the captive and because of the changing market conditions. Recently, I was speaking with a client who had previously been reluctant to involve their captive in their casualty programme, but from next year they will be doing so because taking greater retention in the captive was key to the casualty renewal negotiation.
We also expect to see increasing captive participation in cyber programmes. We’ve previously seen some cover for cyber exclusions put into captives as part of a risk incubation strategy, and now we are seeing captives also take the first layer of exposure on their cyber policy. Interest is also growing in using captives to cover some construction and environmental risks. Where there is a gap in coverage, clients are looking to involve their captives to provide that cover rather than leave it uninsured.
In addition, a key new area for captives is emerging risks, which could cover a range of things, including penalties due to contractual commitments and intellectual property, for example.
Are you seeing a shift from the prolonged soft market to a hard market?
The market is hardening, and we expect to see hardening market conditions – such as rate increases across lines and a reduction in capacity – continue into 2020.
This is obviously challenging for some clients, so we have been engaging with them early and discussing possible alternative retentions and structures to help them manage the changes taking place.
Why do you think the market is seeing this change? What have been the contributing factors?
Catastrophe losses made 2017 and 2018 the most expensive two-year period for insurers ever recorded. The past year has not been a quiet one in terms of industry losses – with severe weather events in Italy and Germany, for example. In addition, the persistently low interest-rate environment has impacted the financial results of many (re)insurers.
The environment we live in is changing significantly and there can be little doubt that the nature of risk has shifted as well. For example, the increased frequency and severity of climate-related incidents; the increased interdependence of the modern, global supply chain, or the shift towards intangible and sometimes systemic risk in areas like cyber, are changing the nature of the risks faced by clients.
If the hard market continues, how do you expect the market to change over the next few years?
We expect the current hard market to continue into 2020, which we anticipate will make captives even more relevant. If the hard market trend continues, we would expect captives to look at increasing their retentions and adding new lines of business to achieve greater diversification.
This current market offers risk managers a great opportunity to show internal stakeholders the value that a captive can bring and provide them with a greater understanding of how the captive works.
What are your predictions for 2020 in the captive insurance market?
I expect there to be a lot more interest in the use of captives going forward, including for emerging risks that are not typically insured. Europe is already a very mature market with a lot of captives, but I expect that there will be new formations.
Risk managers themselves will need to be prepared to explain, justify and anticipate scenarios with larger claims because of increased risk-taking in the captive risk.
I also expect that risk managers will look to work with more innovative and open-minded insurers, who listen to the needs of their client and can offer a wide range of solutions.
