Captive owners add specialty coverages

SOUTHAMPTON, Bermuda — In the face of the low investment yields suffered by the rest of the insurance industry, captive insurers are expanding the coverages they provide.

“There's a number of other lines of business that are actually starting to come into captive programs,” said Niall Farrell, director and co-owner of Phinsys (Bermuda) Ltd. in Hamilton, Bermuda.

Cyber risk and credit insurance are among new lines of business that are being put into captives, Mr. Farrell said.

“Companies are looking at alternatives to what they've traditionally done,” said Lawrence Bird, managing director of Marsh Captives Solutions in Hamilton, Bermuda.

Captives may be looking to take advantage of soft market conditions, he added.

“I think there are opportunities there with the markets,” said Mr. Bird, speaking at the Bermuda Captives Conference held June 8-10 in Southampton, Bermuda. “We're seeing captive owners, because of that market, expanding their vision into other areas.

“In terms of nontraditional risks we've seen from captives, we are seeing more companies putting trade credit coverage through (captives), and we've even seen political risk,” said Mr. Bird, adding that employee benefits is a large area being scrutinized by captive owners.

“We're seeing captive owners, because of that (soft) market, expanding their vision into other areas,” Mr. Farrell said.

“We've seen some captives take on surety bonds and supply chain-type risks,” Mr. Bird said.

“Supply chain risks (are) something we're increasingly having conversations with clients about,” he said.

There are also indications that cyber coverage is growing in captive usage, he said.

“We had 17 captives locally writing cyber risks in 2013, and that's increased to 20 in 2014, and that figure is only going to go north,” said Mr. Bird.

Captives' interest in cyber coverage mirrors that of the overall insurance market.

“Cyber is definitely the largest growing risk for us at the moment,” said Catherine Duffy, senior vice president and underwriting manager of specialty insurance for XL Catlin in Hamilton, Bermuda.

The insurance industry wrote some $1 billion in cyber coverage in 2014, and that could quadruple to roughly $4 billion over the next several years, Ms. Duffy said.

The low yield environment gripping the insurance industry presents investment challenges for insurers and captives alike, according to Henk Potts, director of global investment strategy for Barclays Wealth and Investment Management in London.

In some cases, insurers are looking to take on more risk in their investments in search of greater returns, said Robert Goodman, managing director, global insurance asset management, for The Goldman Sachs Group Inc. in New York.

The two major responses taken by the industry to the low yield environment are “to increase the level of risk they are prepared to take in their investment portfolio, and to have greater diversification in asset classes,” Mr. Goodman said.

William Dalziel, a partner at London & Capital in London, agreed with that assessment.

“They are interested in where could they take risk and how much risk should they take,” Mr. Dalziel said.

Some economists, however, see interest rates rising this year into next.

“We're expecting the first rate increase to take place in December of this year, and that we will have only three rate increases through the end of next year, taking us to a target range of 75 basis points to 100 basis points,” said Ryan Wang, U.S. economist for global banking and markets with HSBC Securities (U.S.A.) Inc. in New York.

“We actually think the first rate increase from the Federal Reserve will come through in September, and we think we'll see two rate hikes from the Federal Reserve during the course of the year with fed funds finishing the year between 50 and 75 basis points,” Mr. Potts said.