Industry experts discuss 2023’s captive market performance, trends and developments and share predictions for the coming year
Captive Insurance Companies Association (CICA) president Dan Towle hailed this time period to be the “golden age” of captive insurance. Towle made this bold statement in Luxembourg during his speech at the 2023 European Captive Forum (ECF), addressing keen listeners looking to seize their opportunity in this gilded market.
Hard market conditions over the past few years have encouraged a number of companies to turn to captive insurance to provide coverage that is too expensive or difficult to obtain in the traditional market.
These conditions are characterised by diminished capacity, high premiums and stricter underwriting standards, as well as widespread volatility and uncertainty.
(Re)insurer Swiss Re has identified a new higher interest rate era emerging from the economic stresses of the inflation shock and war in Ukraine, which is conducive to hard market conditions, according to 2023 research by the (re)insurance provider.
It touted these findings as positive catalysts for the wider insurance industry.
Although the market is starting to ease in some areas, such as cyber and financial and professional lines, this year has been no exception to market participants turning to captives driven by the hard market.
In 2023, ratings company AM Best reported that with the continued growth in captive surplus and dividends, captives have saved their organisations an estimated US$9.4 billion over the past five years in comparison to the traditional market.
Taking a wider view, 2023 has witnessed unprecedented changes in technology and the climate crisis, with the rapid proliferation of AI and the world heating up at an alarming rate.
Against these imminent external threats, several industries, including the captive one, have recognised opportunities among the ashes.
”Captive market use included expansion into new areas with the use of AI technology, designing alternative programmes for property risks and arming today’s risk managers with the control they need and require with access to their own data,” according to Anne Marie Towle, CEO of Hylant Global Risk Management and Captive Solutions.
Born in the USA
Diana Hardy, director of audit operations and chief operating officer at RH CPAs, says: “The market has been explosive. More and more middle market companies [in the US] are using captives as a risk financing tool.”
CICA president Towle affirmed this sentiment in his ECF speech, saying: “We are seeing market growth from unparalleled rates of new formations and expansions, and this is not exclusive to large organisations. Middle-market and non-profit organisations are turning to captive insurance in record numbers.”
However, the global market has seen fluctuations of interest in certain areas. The US, already booming, has seen an increase in captives, but some have observed a plateau compared to previous years.
Joe McDonald, director of captives for the South Carolina Department of Insurance (SCDOI), says: “Based on the number of formations, we saw early signs of a slowing down of new licences, while existing programmes continued to evolve and expand.”
On the other hand, Michelle Bradley, consulting actuary at SIGMA Actuarial Consulting Group, says: “We observed strong growth in interest in 2022 but we are seeing more interest in 2023, and even more so in the second half of 2023. It’s especially exciting to notice this growth spread across a wide range of industry segments as well as both traditional and emerging risks.”
Looking ahead, SIGMA’s Bradley suggests: “The sustainability of new entrants remains to be seen. One of the biggest challenges is making sure new captives are based on analytically supported strategies. Exiting the traditional market because of the pain of a hard market should be based on long-term strategies and not short-term reactions.”
She encourages anyone contemplating the use of captives to spend adequate time reviewing and discussing the guidance offered by their service providers.
Reflecting on the year, Kirk Watkins, president and founder of Promethean Risk Solutions, says: “It was very busy with many companies looking for unique ways to leverage their captive to create programmes to benefit their key stakeholders.”
Promethean’s programmes cover risks including pet insurance, identity theft, electronic devices and legal insurance to tenants and association members.
“When considering programmes for customers, association members and employees, the market is huge. It provides the stakeholder with better coverage for less premium and the captive with low-risk profitable business. It’s a genuine win-win opportunity,” Watkins summarises.
U-turn to traditional lines
Industry experts have noticed a trend of captives returning to placing more traditional lines including property and casualty coverages, a move catalysed by the challenging property market.
Enoch Starnes, a captive and complex risk consultant at SIGMA Actuarial Consulting Group, says: “We are seeing a slight shift back to placing more traditional property and casualty coverages in a captive, but interest remains strong for complex and emerging risks. As expected, cyber risk continues to dominate many alternative risk strategy conversations. The somewhat more surprising development, however, is activity happening in the second half of 2023 relating to property.”
Global commercial insurance prices increased three per cent in Q2 of 2023, down from a four per cent increase in Q1, according to Marsh’s Global Insurance Market Index.
The report found that pricing was relatively consistent across all regions in Q2, although it noted that pricing was offset by property insurance increases. Marsh found global property insurance pricing was up 10 per cent on average in Q2, the same as in the previous quarter.
Marsh’s most recent index observed that pricing continues to stabilise” and “property lines remain challenging” through Q3 of this year. It also found that global commercial insurance pricing rose by the same amount as the prior quarter. “Property insurance experienced increases in every region, while cyber and financial and professional lines pricing generally decreased or showed moderating increases,” according to Marsh.
Elizabeth Steinman, managing director for risk finance and captive consulting for the Americas at Aon, weighs in: “This reflects the continued difficult insurance market, particularly the property market. In this market, our clients are having to take much higher retentions and premium pricing is increasing all the way up the tower. Which makes putting a high layer in the captive more economical.”
RH CPA’s Hardy concludes: “Companies are realising they have the balance sheet capacity to take on more of their own risks, even in the traditional space, which can add to their bottom line. We are fortunate to work with some of the largest companies in the world that are creating captive structures and succeeding in doing so.”
Reverse captive colonisation
The seeds of a captive revolution have been sown this year in Europe. Leading this charge, a new captive regime was launched in France in June.
Daphné Naudy, director of development for continental Europe at London-based insurer Charles Taylor Adjusting, elaborates: “The French government allowed captive insurers and reinsurers to accumulate tax-free reserves of up to 90 per cent of underwriting profits, in the form of a ‘resilience’ provision that can be drawn on in the event of a disaster.”
The year-end saw the UK chancellor announcing the UK government’s plans to consult on a UK captive regime, set to launch in spring 2024. According to Jeremy Hunt’s Autumn statement, released on 22 November, the UK captive regime aims to “encourage the establishment and growth of captives in the UK”. This year’s AM Best market segment report on European captives says: “Captive insurer numbers are set to grow in Europe as more jurisdictions seek to lure companies.” Key takeaways of the report include growth within existing European jurisdictions and new domiciles coming online.
Naudy says: “From a European perspective, we’ve seen an increase in captive creation in Germany, Italy, Spain and the UK too, following the French lead as governments consult on new captive regimes.”
The rating agency expects both these factors will continue to drive the increase in European captive markets as well as the commercial hard market.
Hylant’s Towle says: “It seems as if Europe closely watched the US states adopting captive legislation and is following suit. It will be interesting to watch domicile options expand, and assess the impact it has on existing long-standing domiciles.”
Traditionally, the main European domiciles for captive insurance are Luxembourg, Ireland and Malta, as well as Guernsey, which sits outside the jurisdiction of the EU.
“It will nevertheless take time for those markets to mature, especially in terms of regulation, structuration and skill set. Therefore, Luxembourg and Malta remain safer options for now,” Naudy advises.
Considering the impact of the macroeconomic environment on the industry, Naudy says: “The geopolitical situation in Ukraine, and more recently Israel, increases in natural catastrophes and the recent evolution of the seismic’s models’ earthquake risk in Europe have combined to stretch the markets, and will continue to do so for years to come.”
Recent natural catastrophes in Europe include major floods in north Italy and storms on the coasts of France and the UK.
“As some risk managers at the recent captive forum in Luxembourg said: ‘this year again, the renewals are a real bloodbath’,” she adds.
Key events
Elsewhere, in the US, Captive Insurance Times (CIT) tracked the ongoing ‘battle’ between the IRS and captive insurance. SDCOI’s McDonald, says: “Several big topics were the increase in property coverage, caused by challenging market conditions, the uncertainty with respect to pricing cyber coverage, and the discussion surrounding the IRS and the 831(b) election.”
In June the IRS targeted micro captives with proposed regulation changes to the 831(b), which could severely limit access to captive insurance programmes for small- and medium-sized businesses in the US. The proposed regulation changes have not been passed.
This prompted the submission of formal comments in refute to the IRS’ proposal by the Self-Insurance Institute of America (SIIA), Oxford Risk Management Group and the Oklahoma Insurance Department to name a few.
Legal proceedings related to risk retention groups (RRGs) in the industry were also tracked by CIT from April to May.
The Florida Senate Bill 516 looked to change the definition of “motor vehicle liability policy”, and redefine the term “RRG”.
The bill was expected to have a “devastating impact” on every RRG writing commercial liability, including auto, according to the National Risk Retention Association (NRRA).”
“On 5 May, the bill failed to be passed into law and the NRRA accelerated its campaign to challenge “illegal discrimination against RRGs in Florida”.
Another noteworthy event was the Vesttoo incident, which sent shockwaves through the insurance industry and highlighted the necessity of regulatory oversight and due diligence. CIT explored the implications of this event on this industry in its October issue.
Looking into the captive ball
Going forward, Aon’s Steinman predicts that some will de-domesticate their captive insurance companies: “We have many clients reviewing their domicile choices due to the potential effect on the global minimum tax from the OECD BEPs Two Pillar solution.”
More than 135 jurisdictions joined the Two-Pillar Solution to address tax challenges arising from the digitalisation of the economy, the OECD says, to update key elements of the international tax system which are no longer “fit for purpose” in a globalised and digitalised economy.
Against the backdrop of the climate crisis, there has been a shift in the way insurance careers operate in heavy-emitting industries. Steinman notes: “With a strong focus on ESG-related risk factors, most industries are now facing increased scrutiny, leading to capacity reductions and restricted terms and conditions.”
She adds: “We expect these companies to have a difficult property renewal in 2024 and will want to explore alternatives such as captives, structured arrangements and parametric trigger arrangements.”
Alternatively, CIT’ article in September analysed how the functions of a captive can be used as tools for a company’s transition to net zero.
The current tumultuous macroeconomic backdrop has led industry experts to observe a keen interest in being able to ‘control your own risk management’. They expect captive financing strategies will be driven by this factor, in addition to increasing data availability and AI.
Hylant’s Towle says: “We are continually watching the global property market and the impact it may have on significant retentions for organisations. Hurricanes and prone-to-wind areas are struggling across all industry sectors to secure cost-effective insurance — we need to assist with developing solutions.”
“A captive can play a large part in addition to reinsurance capacity,” she notes. “We are also watching cybersecurity as this will continue to evolve as cyber criminals seek new avenues to hack systems and entry points.”
The experts agree that cyber will continue to dominate traditional and alternative risk strategy considerations going into 2024. Participants also predict a greater focus on parametric insurance, which usually covers risks deemed ‘impossible to cover’.
Parametric insurance covers the probability of a predefined event happening, instead of indemnifying actual loss incurred. “This is something that will be particularly relevant in the case of natural catastrophes,” according to Charles Taylor Adjusting’s Naudy.
She predicts: “The captive market will grow in 2024 and the key parameters will be fronting fees, quota shares of risks and claim control. The development of AI will also have an impact on captives’ management and transform day-to-day activities, improving efficiency and productivity while reducing costs.”
CIT will look to assess how captive insurers can utilise the latest iteration of AI, Generative AI, to their advantage in 2024. It has previously analysed how captive insurers can use AI to their benefit in its July issue.
“This will only increase as it has now been proven that AI can provide superior forecasting accuracy, an optimised variable selection process and richer data segmentation,” says Naudy.
Steve Bauman, global programmes and captives director at AXA XL, says: “I predict the captive insurance market will continue its path of growth, innovation and entrepreneurial spirit as it has now for several years. Compared to 2022, captives are taking on more difficult and emerging risks in a measured way and working with trusted partners.”
He concludes: “Global risk management will continue to be challenging in 2024. This affords captives greater opportunities to be more involved in so many areas of risk assumption.”
