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Construction companies turning to captives to overcome challenging conditions

Construction industry companies are increasingly utilizing a non-traditional method to manage their risks in the face of challenging insurance market conditions, Marsh data has revealed.
Confident bearded head Civil Engineer-Architect in sunglasses is Sstanding outside with his back to camera in a construction site on a bright day. Man is wearing a hard hat, shirt and a safety vest.

Construction industry companies are increasingly utilising a non-traditional method to manage their risks in the face of challenging insurance market conditions, Marsh data has revealed.

Marsh Captives Solutions’ 2023 benchmarking report shows a third consecutive year of impressive global growth of captive insurance.

Property-related captive premiums – which combined with casualty premiums represent 83 per cent of all construction captive premiums placed by Marsh – have grown by 13 per cent in the past two years.

Within this growth, Marsh has seen increased usage of captives for wrap up – including Owner and Contractor Controlled Insurance Programs (OCIPs and CCIPs, respectively) – as well as subcontractor default and environmental policies.

The rise of captives could be driven by consistent increases in the cost of insurance, with Marsh’s Q2 2023 Global Insurance Market Index showing composite pricing rising for the 23rd consecutive quarter, continuing the longest run of increases since the inception of the Index in 2012, combined with reductions in capacity and tighter restrictions in coverage.

What is captive insurance?

Captive insurance is a risk-financing mechanism in which a company insures itself against future losses.

When facing higher premiums, a lack of capacity, increased deductibles, and more stringent terms and conditions, captives offer an opportunity for businesses to more efficiently manage risk. And, with better risk management comes an array of potential benefits for an organisation’s bottom line and their employees as they will often see reduced costs, improved investment strategies that can be customised to the company’s short and long-term needs, and an ability to invest surplus capital into better employee benefits, product innovations, and more.

There are two structures available:
  1. Single-parent captive: Created by an organisation to insure only its own business and its employees or those of controlled but unaffiliated business, such as a management contract. Single-parent structures account for approximately 85% of all captives.
  2. Cell captives: These programs are sponsored by a third party, usually a captive management company, so that business owners don’t have to create their own. This allows an organisation to obtain the benefits of a captive insurer without the higher upfront start-up costs and slightly higher annual operating costs. Cell captives are seeing steady growth because they can be faster, less expensive, and simpler to enter. They typically provide one or two lines of coverage in a structure that allows a company to create a legal separation of assets and liabilities between individual cells and their owners.

What types of businesses are captives suitable for?

Captive insurance can add value to a wide variety of companies, from large multi-national contractors with revenues greater than US$1 billion and smaller contractors to project owners and developers.

What are the benefits?

Captives can help in the following ways:
  • Improved risk management: Captives are created to improve a business’ ability to manage the retentions and deductibles associated with traditional risk transfer programs. By forming its own subsidiary insurer to handle some of its risk, a company is freed from the control and restrictions of the commercial insurance market. Businesses that create a captive insurance program also have the flexibility to fund traditional coverages — such as general liability, workers’ compensation, auto liability, property insurance, and employee benefits — as well as difficult-to-insure exposures, including environmental and cyber risks.
  • Financial flexibility: By retaining the premium for unexpected losses, a captive can help reduce the overall cost of an insurance program. Captives can also hold and invest premiums for unpaid claims, which are otherwise kept by a commercial insurer. This allows the captive owner to take advantage of the time value of money and can put cash back into the organisation.
  • Strategy: A captive insurance program offers organisations several strategic benefits, including enhanced group purchasing power and an improved negotiating position. Employers are increasingly using captives to finance healthcare and employee benefits risks, gaining greater control over costs and access to data.
  • Operational insight: Through data analysis, companies will be able to make more accurate predictions of future claims trends, helping to reduce costs and improve risk management.

Captives check list

Assessing whether a captive insurance program makes sense for your business’ unique risk vulnerabilities and strategic goals will require a wider conversation across your organisation.

Although captive insurance programs come with many potential benefits, there are some important considerations that may factor into your decision when it comes to creating one, including: capital and time commitments as well as operating cost.

The following questions can help support your company’s decision-making process and the eventual development of your captive program:  

  • Are deductibles and/or rates likely to increase at the next renewal?
  • Are business units unable to absorb increased retention levels?
  • Is capacity and/or coverage becoming limited in the traditional market?
  • Are there any contractual requirements to provide evidence of insurance to facilitate business?
  • Does the organisation have uninsured catastrophic type risks?
  • Is the organisation incurring sizeable excess and surplus lines taxes in the US that could be mitigated with the use of a captive?
  • Is there frustration with the insurance market? Is there an interest in capturing third-party customer risk?
  • Is there an appetite to get more visibility and control over claims management?

If the answer to all or most of the above questions is “yes,” then a captive insurance program may be a viable option for your organisation’s strategic risk management program.

For more information, download Marsh’s Definitive Guide to Captive Insurance.

Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. LCPA 23/363

Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) (“Marsh”) arrange this insurance and is not the insurer. The Discretionary Trust Arrangement is issued by the Trustee, JLT Group Services Pty Ltd (ABN 26 004 485 214, AFSL 417964) (“JGS”). JGS is part of the Marsh group of companies. Any advice in relation to the Discretionary Trust Arrangement is provided by JLT Risk Solutions Pty Ltd (ABN 69 009 098 864, AFSL 226827) which is a related entity of Marsh. The cover provided by the Discretionary Trust Arrangement is subject to the Trustee’s discretion and/or the relevant policy terms, conditions and exclusions. This website contains general information, does not take into account your individual objectives, financial situation or needs and may not suit your personal circumstances. For full details of the terms, conditions and limitations of the covers and before making any decision about whether to acquire a product, refer to the specific policy wordings and/or Product Disclosure Statements available from JLT Risk Solutions on request. Full information can be found in the JLT Risk Solutions Financial Services Guide.”