As we enter a new decade, industry participants share their predictions for this year
Dan Towle, president, CICA
This will be the year that elevates the value proposition of owning a captive insurance company. With the hardening insurance market, risk managers, CFO’s and boards of directors will fully understand the value a captive insurance company brings to their organisation’s bottom line.
As companies feel the economic effects of the hardening market, they will quickly look to form captives. Companies with existing captive structures will be expanding the use of their captives.
Dominic Wheatley, CEO, Guernsey Finance
Moving into my sixth year at Guernsey Finance, I find myself for the first time focused on traditional captive insurance – my old stamping ground.
Over the last 10 years or so, captives have remained attractive in US markets for a range of reasons, but in our UK and international markets, the persistent soft market has made the up-front financial case for risk retention on the major corporate property and casualty risks marginal.
But things are changing. Over the last few years, a number of emerging cyber risks have been reaching main board agendas, while market cover available in areas such as professional indemnity and supply chain risks has been hardening in terms of limits, terms and price.
The big change in the last few months has been in the hardening of rates led by the reinsurance markets. Many commentators, including myself, are seeing this as a market adjustment rather than part of the traditional rating cycle.
As terms, limits and rates become more restricted, companies are being encouraged, or even compelled, to retain more risk and, to look for the most effective and efficient ways to manage and finance these risks. Inevitably, interest in captives has increased and continues to do so.
The value of using the working capital in your business to capitalise and provide reserves against claims on retained risks, backed by the high-quality insurance programme management provided by a properly administered and directed, and well-regulated, captive insurance company, delivers a level of security and risk governance not available through other self-insurance models.
Sandy Bigglestone, director of captive insurance, Vermont Department of Financial Regulation
I predict growth in the captive insurance market. Even with a certain level of saturation, the tightening commercial marketplace will generate renewed interest for existing captives, to increase coverage retentions and expand into new lines of coverage. Growth will happen with new formations of single-parent captives, group-type captives, and especially cell captive activity.
The benefit of sponsored cell captives is that they provide an efficient solution for typically small- to mid-size businesses, but not restricted to those. Once a sponsored cell captive is set up, the turnaround time for adding cell business is relatively quick. In 2019, Vermont experienced growth in the number of captives licensed as well as the number of cells, so I expect that activity to continue well into 2020. We have already licensed four new companies in 2020.
Debbie Walker, senior deputy commissioner, North Carolina Department of Insurance
The expectation for 2020 is the continued formation of new captive insurers and redomestications of captive insurers from offshore to the US.
Growth in captive insurers providing medical stop-loss coverage and tenant liability coverage is anticipated.
Also, growth is expected in the number of captive insurers providing coverage for traditional risks such as workers’ compensation, general liability, and professional liability as business owners address rising commercial insurance prices or seek to fill gaps in their coverage. It is likely the use of cell structures, group captive insurers and agency captive insurers will be appealing to those desiring to enter the captive industry during 2020.
As with 2019, likely there will be small captive insurers that make the decision to terminate and wind-down their operations, but at the same time new formations of small captive insurers will continue, but at a slower pace than the growth that was occurring three to five years ago.
Laurent Nihoul, board member, Federation of European Risk Management Associations
For the coming year, FERMA will be focusing on specific elements which will be crucial for the captive industry. FERMA’s European risk manager survey will keep asking members about their intentions on using captives for traditional and non-traditional lines.
By comparing the previous results, where there was a fear that risk managers will stop using captives because of Solvency II and BEPS, we saw the use of captives stayed rather stable: from 34 percent (2016) to 37 percent (2018). With our 2020 survey coming soon, we will aim at trying to find out if risk managers are planning to create or use more intensively their existing captives.
The hardening insurance market might bring a renewed interest in the use of captive insurance vehicle and the primary rule of using a captive to buffer market conditions should then be back on the risk manager’s desk.
Moving towards risk financing schemes based on technical risk premium will be a way to achieve less dependency on the insurance market’s restrictions This is where we will clearly see captives helping risk managers to achieve more efficient and less costly solutions than traditional insurance covers with more retentions and higher premiums.
Therefore, with the overall industrial and commercial insurance market turning to more restrictive underwriting conditions, we can expect to see an increase in both the number of new captives being set up and the use of existing captives’ capacity to support traditional insurance programmes.
Kelvin Wu, group assistant general manager - risk management and insurance, International SOS, treasurer and member of EXCO, Pan-Asia Risk & Insurance Management Association
My predictions for the captive insurance market in 2020, I think there will be strong renewed interest of captives as a concept as the insurance market hardens, with more companies taking the leap to set up a captive proper.
Existing captives will play a bigger strategic role in the 2020 renewals, affording clients more flexibility and options to manage this hardening market cycle.
