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Hardening property market shifts interest toward captives

Flooding after Hurricane Harvey

Risk managers are shifting more of their property exposures to captive insurers amid rising costs and tightening terms and conditions in the U.S. commercial property insurance market, particularly after the higher catastrophe activity of the past two years.

With the proliferation of captives, companies are looking to use them more, but “a hardening market definitely incentivizes them especially in certain industries, for example, if one is not in place already,” said Mikhail Raybshteyn, a partner with Ernst & Young LLP and Americas captives services deputy leader, based in New York.

“We have been doing quite a bit of work and getting inquiries about rising costs,” said Adam Perea, vice president in business development with captive manager Atlas Insurance Management in Phoenix. “I’ve had people tell me they’re seeing 20% to 30% (rate) increases. They want to know how to control or lower those costs.”

While some policyholders want to lower their premiums, for others it’s more about keeping them consistent, he said.

“They want to have more control over their premiums and not just have to grin and bear it and write a check every time their renewal comes in,” Mr. Perea said.

As several business lines are experiencing hardening rates, management teams and boards are “undoubtedly looking at captives” as part of their risk management strategy, U.S.-based ratings agency A.M. Best Co. Inc. said in a report released Monday.

Risk managers are also seeing higher all-other-peril deductibles, which is a starting point when considering how much risk to retain and place in a captive versus the premium saving, he said.

Industry sectors getting hit harder by rate increases, such as retail, are increasingly looking to place their all-risk property deductibles into their captives, said Michael Serricchio, a managing director with Marsh Captive Solutions, a unit of Marsh LLC in Norwalk, Connecticut.

“They don’t want a $5 million or a $10 million deductible sitting out there on their balance sheet … They want to bring it into the captive so they can achieve a bit of self-funding for that risk and business unit smoothing,” he said.

Manufacturing, food and beverage, and real estate sectors are also exploring these options, he said. “Hospitality, for example hotels that have big properties in Florida on the coast and are getting rate increases or being forced to higher retentions, are thinking more about captives,” Mr. Serricchio said.

The surge in interest in captives for property risks is less tied to industry sector and more to how a policyholder’s specific portfolio is affecting their impending renewal, said Martin Hughes, Norwalk, Connecticut-based executive vice president-underwriting, North America at Bermuda-based captive manager Artex Risk Solutions Inc.

“Interest is typically from very large insureds with vast property schedules,” he said.

For example, following two years of higher catastrophe activity, property catastrophe rates are being pushed up and deductibles are increasing, leading policyholders with catastrophe exposures to look at whether they can package the risk differently, said Mr. Hughes.

“Somebody may have $1 billion worth of property values and they may have an expected catastrophe loss of $100 million for that one-in-100-year event. What we’re looking at here is the insured taking the first $2.5 million or $5 million of that total event loss,” Mr. Hughes said.

“You wouldn’t take the whole cat schedule and put it through a captive, you would have to limit it so the maximum loss is within the value that can be financially sustained by that company over the course of business,” he said.

For commercial property owners, wind/hail deductibles typically might start at 5%, said Mr. Perea. “Depending on the values of the properties and what their exposure is, we will look at different layering techniques or increasing that wind/hail exposure,” he said.

Property owners “on the hook” for $4 million retention might decide, “OK, why not take a 10% deductible and go to $8 million, and we’ll find a way to fund that through the captive,” he said.

The growth in property risks being placed into captives, and the overall growth in the captive insurance sector, is also due to greater coordination between the captive market and commercial insurers that exists today, said Mr. Raybshteyn.

“We also see a lot of commercial insurers realize that captives can be a friend rather than a foe and working with captives to better stabilize insurance (placements) and better manage risk,” he said.

“Commercial carriers are becoming more in tune with how they can work with captives rather than compete for business and it has driven positive results,” he said.



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