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Historic Captive Growth Continues

Driven by the challenging insurance market, captives ‒ including the use of cells ‒ have seen significant growth.

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. Even the most mature domiciles, such as Bermuda, Vermont, and Guernsey are seeing a sharp increase in activity. 

And 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, auto, 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. Organizations 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 optimization is finding the right balance between retention and risk transfer. Increasingly, our clients are turning to analytics to help pinpoint this value inflection point.  

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 A D&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.  

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 organizations 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.  

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