Captive insurers help cover risks that become ever more complicated

The number of captive insurers has skyrocketed over the past five decades, with growth certain to continue.

“The need for captives as a risk management tool will continue to expand over time. The world is getting more complicated, and risk management continues to become more sophisticated,” said Charles Lavelle, a senior partner with Bingham Greenebaum Doll L.L.P. in Louisville, Kentucky.

Experts concur that increasingly in the years ahead, employers will tap their captives to cover cyber risks.

“Corporations would love to buy broader coverage and higher limits than are commercially available. It is hard to believe that cyber risks will not be covered in some way through their captives,” said David McManus, president and CEO of captive manager Artex Risk Solutions Inc. in Hamilton, Bermuda.

At the same time, more employers will likely tap their captives to fund stop-loss coverage for their health care plans.

“Employers are saying, ‘Why can’t we manage this risk, like other risks, through our captives?’” said Kathleen Waslov, a senior vice president with Willis Towers Watson P.L.C. in Boston.

Growth also will come from smaller firms.

“Even the big insurance brokerages are encouraging midmarket-size employers to set up captives,” said Len Crouse, a partner with JLT Insurance Management (USA) L.L.C. in Burlington, Vermont, and the state’s former deputy commissioner of captive insurance.

Still, others note, while captive owners will continue to find new risks to cover, the lines of coverage insured or reinsured through captives “will continue to be 75% to 80% traditional property and casualty, with the bulk of the latter in workers comp,” said Hugh Rosenbaum, a retired principal with Willis Towers Watson and now an independent consultant in London.

Captive changes also could occur on the legislative front. For example, for years federal lawmakers have been considering proposals to expand coverages that risk retention groups — a special type of captive that Congress first authorized in 1981 — can offer to their policyholder-owners.

Currently, RRGs can provide coverage for all commercial casualty risks except workers compensation.

RRGs have waged a long-running but so far unsuccessful drive to convince lawmakers to allow RRGs to write property coverage for their members. The latest proposals would limit that expansion to RRGs whose policyholders are small and midsize tax-exempt nonprofit organizations.

While lawmakers have not displayed much interest in such an expansion, some say that could change. “I believe that ultimately good people will decide to move past political disagreements and enact the right policy for small and midsize nonprofits,” said Pamela Davis, founder, president and CEO of Alliance of Nonprofits for Insurance, Risk Retention Group, which is headquartered in Santa Cruz, California, and was licensed in Vermont in 2000.