Firming commercial insurance prices and impacts from the ongoing COVID-19 pandemic could present opportunities for the US captive insurance segment to increase its footprint in several lines of business, according to a new A.M. Best report.
The report suggested that the difficulty and expense of placing insurance in a hard market may encourage enterprises to expand the use of their existing captives, form new captives, or a combination of both, as part of their risk management strategies.
As a result, captives are balancing risk appetites with self-insurance savings in determining whether, or how much, to increase net retention or to participate in the reinsurance tower to manage costs, according to A.M. Best.
The rating firm said: “Firming commercial insurance prices and reinsurance capacity shortages are examples of recent market developments that are contributing to market dislocation and could continue for years to come.”
Elsewhere, the report also highlighted captives may also provide an opportunity to write traditional lines of business where rates have climbed following catastrophe losses as well as for ongoing uncertainty related to COVID-19.
A.M. Best noted that rate increases for lines such as directors and officers and errors and omissions, and commercial auto could also encourage captive interest and help reduce claims costs.
COVID-19 brings forth not only a new set of challenges but also new opportunities, particularly for insureds seeking to include coverages for communicable diseases as part of their commercial property policies, including business interruption and contingent business interruption, the report noted.
The report stated: “Few if any commercial carriers are currently offering this coverage –this, in and of itself, presents a huge opportunity for captives and their insureds.”
Additionally, the report addressed the Pandemic Risk Insurance Act of 2020 (PRIA), which was introduced in May 2020. Itexplained that “should PRIA be signed into law, it may provide captives with an opportunity to write pandemic risk if the federal backstop is available to them, similar to the public/private partnership protections currently available for terrorism risk and flood insurance”.
A.M Best outlined that the number of captives continues to grow suggesting that the “insurance market challenges aren’t new to the captive segment”.
The rating firm explained: “These challenges create opportunities for enterprises and focused management teams that allow them to restructure their exposures, limits, and retention, and to make their operations more efficient and economical.”
The report also highlighted key regulatory issues suggesting that disruption is often described as an opportunity for commercial insurers, but it also presents an opportunity for captives. , the report said“as disruption is often
It explained: “Captive domiciles, in turn, aim to establish legislative frameworks that not only provide for efficient and effective regulation but also encourage captives to do business in their jurisdiction.”
A.M. Best also noted that the Internal Revenue Service (IRS) “continues to scrutinise micro-captives, despite removing them from its “Dirty Dozen” list in July 2020”.
It stated: “IRS activities have reportedly had the effect of slowing the number of new micro-captives being licensed; however, many of these captives will continue to exist and operate as insurance companies.”
“Given the knowledge of IRS activity, ensuring that elements such as risk transfer, risk distribution and arm’s length pricing are in place is highly prudent for not only micro- captives, but for captives of all sizes”, it added.