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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 utilizing 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 organization’s bottom line and their employees as they will often see reduced costs, improved investment strategies that can be customized 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 four structures available:
  1. Single-parent captive: Created by an organization 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 organization 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.
  3. Risk retention group (RRG): In this structure, businesses with similar insurance needs will create and own a liability insurer to pool risk. This can be useful for liabilities including automotive risks related to trucking and transportation or medical malpractice. However, it’s not applicable for first-party risks, such as property or workers’ compensation. It’s important to note that RRGs are only available within the US.
  4. Group captives: Ownership of this captive program type is limited to the insureds. The captive exists primarily to provide greater long-term cost stability than the traditional market allows.

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 organization.
  • Strategy: A captive insurance program offers organizations 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 organization.

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 organization have uninsured catastrophic type risks?
  • Is the organization 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 organization’s strategic risk management program.

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