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08/17/2021 · 3 minute read

Historic captive growth continues

At a glance

  • Captive utilisation continued to grow globally, including Australia.
  • Property, directors and officers (D&O), excess liability and cyber lines of insurance have seen the biggest captive premium growth.
  • Clients are increasingly turning to analytics to help pinpoint the right balance between retention and risk transfer.  
  • The Australian D&O space has seen particular growth in clients utilising analytics modelling tools (e.g. IDEAL) due to an increasing need for data-based decisions to help organisations validate premium spend and/or modify coverage/retention levels.

 

The surge in captive formations, which began in 2019, has continued to gather momentum. In 2020, we helped our clients form over 100 new captives around the world. And indications are that we will see a similar number of formations by the end of 2021, meaning two consecutive years at almost double the rate of historic annual formations.    

Although the US is experiencing the most significant increase in captive numbers for the first time in decades, we are seeing growth in almost all captive domiciles around the world, including Australia. Even the most mature domiciles, such as Bermuda, Vermont, and Guernsey are seeing a sharp increase in activity. 

It’s not only new formations that are experiencing growth; there has also been a significant increase in premiums written by the over 1,500 existing captives we manage globally. In particular, we have seen tremendous growth in property, directors and officers (D&O), excess liability and cyber lines of insurance.  

What is driving captive growth?

The biggest driver of captive growth is the current insurance market, which continues to present challenges globally. According to Marsh’s Global Insurance Market Index – 2021 Q2 , global commercial insurance pricing increased by 15% in the second quarter of 2021, marking 15 consecutive quarters of price increases. This is the longest stretch of consecutive price increases since Marsh began publishing the index in 2012. 

While average global price increases may have moderated slightly, they remain significant, especially after 15 consecutive quarters of upward momentum. Many lines of insurance — such as property, D&O and excess liability — continue to be challenging. The difficult market is driving many companies to consider alternative risk transfer solutions in order to reduce costs and mitigate volatility.

While the strong correlation between a challenging insurance market and increasing captive formations is not new, it is not a case of captives flourishing while commercial insurers are facing challenges. Captives and commercial insurers are highly inter-dependent and connected parts of the same risk-financing ecosystem. Organisations that own captives still buy insurance, but can balance risk retention with risk transfer in a strategic and cost-efficient way through their captive. This benefits all players in the ecosystem since commercial insurance capacity can be deployed where it is really needed. 

The key to optimisation is finding the right balance between retention and risk transfer. Increasingly, our clients are turning to analytics to help pinpoint this value inflection point.  

In the Australian D&O space, we have seen particular growth in the utilisation of IDEAL by clients over the last 12-18 months due to an increasing need for data-based decision making to help organisations validate premium spend and/or modify coverage/retention levels.

IDEAL is Marsh’s proprietary D&O analytics modelling tool that helps clients evaluate the structure of their D&O programs by utilising one of the largest data repositories of both insured and uninsured loss data. This database spans 20 years and consists of over 12,500 D&O related data points with incurred losses over $420 billion, enabling IDEAL to run up to 1 million simulated class actions. Analytics is playing an increasingly critical role as organisations rely more on data-based decisions to navigate a persistently challenging D&O market.

Can captives be used for D&O insurance?

A great example of the connectivity between captives and the commercial insurance market is the recent growth in activity around D&O insurance. Historically, D&O insurance capacity was widely available, and pricing was competitive, creating little incentive to retain risk. Only a relatively small number of captives wrote this coverage. 

But the recent heavy pricing increases and capacity shortages are dramatically changing the landscape, forcing insureds to retain significant risk. In 2020, D&O premiums written by the captives we manage increased by 50%, on top of a 25% increase in 2019.

Sides B and C D&O coverage can be written in a single parent captive. But Side AD&O coverage is not suitable for this type of structure due to the conflict which arises if the captive — a group subsidiary — is required to make a claim payment that is non-indemnifiable by the parent group. An increasingly popular alternative for Side A is a protected or segregated cell captive — a stand-alone entity with ownership, management, and control largely independent of the company seeking to insure its directors and officers. While the use of a cell captive facility might be a better fit to fund Side A D&O, this remains relatively untested.  

Locally in Australia, D&O renewal strategy discussions with clients often include the topic of alternative risk transfer solutions or captive utilisation. Typically, these mechanisms suit companies with very strong balance sheets or the ability to dedicate significant amounts of capital. Additionally, protected cell captives may not be an ideal solution for Australian companies given the Corporations Act and insolvency laws typically prevent the use of company funds to exclusively benefit directors.

Has the use of protected/segregated cell companies increased?

Cell companies are increasing in popularity across the board. In 2020 there was a 53% increase in cell captives across our seven Mangrove cell facility locations around the world. The bulk of this growth was in our Washington DC and Bermuda facilities, but we are also seeing interesting activity in Guernsey, Isle of Man, and Malta. Cells are increasingly being formed for MGA risk, and for more traditional property and casualty risk, along with single line D&O and professional indemnity cells.  

Captives continue to be a hugely popular risk financing mechanism, enabling organisations to better manage their costs and take greater control of their insurance programs. Next month we will be launching our much-anticipated 2021 Captive Landscape Report, which will provide even more granular detail on captive trends and growth across industries, domiciles, and product lines.  

 

LCPA: 21/307

This document and any recommendations, analysis, or advice provided by Marsh (collectively, the ‘Marsh Analysis’) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. This document contains proprietary, confidential information of Marsh and may not be shared with any third party, including other insurance producers, without Marsh’s prior written consent. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modelling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. 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.

 

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