The captive industry saw a 2.5 per cent compound annual decline between 2015 and 2020 in the number of total captives worldwide (from 6,851 to 6,027) owing to increased scrutiny and reporting requirements, according to a new whitepaper by Strategic Risk Solutions (SRS). The whitepaper, ‘Captive insurance: the state of the market’, notes that, despite the decline, this period also saw an expansion in the availability of different cell captive facilities. Looking at major industry trends and developments in 2021, the whitepaper identifies a 2.9 per cent increase in the number of total captives in SRS domiciles, as well as a 5.5 per cent growth in the number of total risk-bearing entities. In addition, SRS notes a 31.2 per cent decrease in the number of captive closures in 2021. This net growth in the number of total captives is attributed to the hard commercial market, which has seen heightened use of pure captives for property and casualty (P&C) risk with high premiums rates — particularly cyber, directors’ and officers’ liability, umbrella liability and medical malpractice. Group captive activity is also closely correlated with premium rates in the commercial market, with SRS noting an increase in both use of and interest in group captives in the current environment. The whitepaper highlights 26 risk retention group (RRG) formations and four closures in 2021, marking the highest level of formation and net increase in RRG numbers since 2007. The total number of active RRGs at the end of 2021 was 236. Discussing trends among cell captives, the whitepaper says: “Cells and series have been growing as a percentage of the overall risk-bearing entities in the captive industry. Across SRS domiciles, excluding Bermuda and Cayman, cells increased by 265 (10.9 per cent). Like standalone captives, formations of cells were higher than 2020 and closures were down. “With the popularity of the cell structure and increased interest in captive programmes, we are seeing insurance companies and brokers setting up their own cell facilities as a service to their clients.” SRS also indicates a growth in existing programmes and new formations for medical stop-loss (MSL) captives, noting the main advantage — greater control over healthcare costs — to be particularly relevant as health insurance costs continue to be a significant challenge for employers. SRS-managed MSL captives saw a premium increase of US$180 million between 2017-2021 (marking an annual growth rate of 23.8 per cent), while the number of employers participating in these programmes increased at an annual rate of 17.9 per cent. Turning to domicile analysis, the whitepaper shows that US domiciles saw captive numbers increase by 3.2 per cent in 2021, partly owing to the growing use of captives for MSL, affinity programmes and agency captives, but ultimately driven by traditional P&C risk in response to the hard commercial market. Having experienced declining captive numbers over the past four years, international domiciles (Barbados, Bermuda and Cayman) saw a 3.1 per cent increase in 2021. SRS adds that these three domiciles have seen more rigorous compliance requirements, such as economic substance, anti-money laundering and data privacy regulations. Despite these challenges, international domiciles continue to “hold their own” in new captive formations, with growth in existing captives and cells, the whitepaper notes. Conversely, European domiciles saw a comparatively modest increase of 0.9 per cent — although this did reverse a trend of consistent decline over the past four years. Reflecting on the outlook for the captive industry, SRS says: “We expect the current positive trends for captive utilisation and formation to continue through 2022. This should lead to an increase in captive and cell numbers in the coming year and greater utilisation of captives. We do expect that there will be some flattening of premium rates by the end of the year, but this should not slow captive use. “As conditions in the P&C market stabilise, we expect a renewed focus on some of the other uses of captives (MSL, affinity programmes, strategic uses) which may have taken a back seat during the hard market. We also expect the trend in managing general agents using captives to retain risk in the programmes to continue, and potentially expand to other service providers, such as third-party administrators, looking to take risk on their programmes. “Challenges facing captives in 2022 will include an expanding tax environment and increased regulation. As we come out of the COVID-19 pandemic, government entities at all levels are looking at sources of tax revenue. With greater scrutiny around the world on tax havens, the call for a global minimum tax and the imposition of black and grey lists, there will be a continued expansion in regulation and compliance to avoid domiciles facing restrictions.”
