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Managing new risks in uncertain times

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Captive owners are making greater use of their captives to cover risks that are tough to place in the commercial insurance market.

“We are seeing an increased number of captives expanding lines of business,” said Nancy Gray, regional managing director-Americas at Aon PLC in Burlington, Vermont.

While they remain a minority, some captive owners are covering risks such as cyber liability, which is often placed in a captive to access reinsurance, and medical stop loss, which is usually retained within a captive, she said.

“Once a captive is established, that’s when they become a useful tool to explore how they can be used to reduce total cost of risk,” Ms. Gray said.

In the hard market, captives are being used to cover risks that previously were infrequently covered by captives, such as high severity/low frequency risks, said Ellen Charnley, president of Marsh Captive Solutions, a unit of Marsh LLC.

“Mature captives with perhaps an abundance of surplus have played a very important role in this hardening market,” she said.

Captives are also being used more frequently to support insurtech initiatives, said Dennis Silvia, Cleveland-based executive vice president of Davies Captive Management, a unit of Davies Group Ltd.

“They have such confidence in the performance of the product that they want to take risk as well,” he said. “Some are parametric weather coverages, some are microinsurance deals, some are accident and health coverages — it runs the gamut.”

Using a captive allows the companies to access a fronting insurer and reinsurance, Mr. Silvia said.

Interest in using captives to cover some directors and officers risks has increased as the cost of buying D&O insurance in the commercial market has soared, several captive managers said.

Few captives are being formed specifically to cover D&O, but some companies with well-established captives are looking at the possibility of covering D&O risks through their captives due to the significant hardening of that sector of the market, said Patrick Theriault, managing director at Strategic Risk Solutions Inc. in Burlington, Vermont.

Some policyholders can’t buy sufficient D&O limits “and a captive in certain situations can be a good alternative,” Ms. Charnley said.

While captive owners have been wary of including Side A D&O coverage in captives — due to potential problems in indemnifying directors for exposures that corporations are prohibited from funding, among other things — Side B and Side C coverages, which provide cover for companies, have more frequently been covered by captives, captive managers say. 

“Businesses are looking at Side B and C for better ways to manage that risk because we are seeing increases in that line that just aren’t feasible,” said Matt Atkinson, senior vice president at Artex Risk Solutions, the captive management unit of Arthur J. Gallagher & Co. 

In the wake of the pandemic, companies with trade credit risks are increasingly looking to captives to cover them, said Anne Marie Towle, Indianapolis-based global captive solutions leader for Hylant Inc.

International Paper Co. has recently added trade credit risk to its captive, said David Arick, assistant treasurer, global risk management, at the Memphis, Tennessee-based company.

“We have a large trade credit program and a lot of industries have been stressed by the pandemic, so credit insurance has firmed a bit and our businesses don’t really want that deductible. …We are able to use the captive to give them basically a guaranteed cost program and give the insurers the buffer they wanted,” he said.

The company is also looking at the possibility of taking a larger property insurance retention, given the constricted property insurance market for paper and forestry products companies, Mr. Arick said.

Captives are being used to cover a variety of risks that had not been significant concerns for their owners prior to the pandemic, said Nick Frost, Bermuda-based president of Davies Captive Management.

Coverage for business interruption exposures related to the loss of a key supplier, loss of a key employee, civil unrest or breach of data related to people working at home are more frequently being included in captives, he said. 

“There’s lots of risks that have become more problematic and you can put them in a captive for a save-for-a-rainy-day type of coverage,” Mr. Frost said.

Some owners are using captives to cover a portion of their business interruption risks on a difference in conditions or difference in limits basis to support their commercial insurance programs, Ms. Towle of Hylant said.

“People are taking on a $5 million or $10 million or $20 million policy, they are not taking unlimited risk,” she said.

Cyber risks are also being written through captives, sometimes to fill out higher layers of coverage towers, Ms. Towle said.

“Cyber is one of the fastest growing areas of interest,” said Mr. Atkinson of Artex.

Businesses are growing more comfortable placing cyber risks in captives as more data on the exposure becomes available and cyber risk mitigation services expand, he said.

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