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Captives seen as refuge as rates keep rising

market trends

Interest in captive insurance has soared during the hardening commercial insurance market of the past two years and new formations are growing, although economic uncertainty related to the COVID-19 pandemic is likely holding back some potential captive owners, captive experts say.

Existing owners are also expanding the use of their captives as they face higher insurance rates and tightening capacity in traditional markets.

Most of the largest captive domiciles reported a surge in formations last year (see chart page 22), though others, particularly those with significant numbers of small captives, saw decreases. Regulatory pressure on microcaptives has intensified over the past 18 months (see story page 22). All of the largest captive managers reported increases in captive numbers (see chart page 25).

Captive managers and other experts expect the growing interest in alternative risk transfer vehicles to continue through 2021 as the hardening insurance market shows little sign of abating. 

“Companies that had captives in the past or explored them are certainly revisiting and forming captives now, and people who hadn’t explored them are really looking pretty hard at it and pursuing forming a captive because of the hard market,” said Anne Marie Towle, Indianapolis-based global captive solutions leader for Hylant Inc.

There has been unprecedented interest in captives over the past year, said Ellen Charnley, president of Marsh Captive Solutions, a unit of Marsh LLC.

Existing captive owners are making more use of their captives, for example by increasing their retention levels to control their total cost of risk, and more companies without captives are looking to form them, she said.

“It’s all about flexibility. Ultimately a captive allows a captive owner and an organization to have flexibility in arranging and taking control of their overall total cost of risk, so when markets are hard they can leverage their captive to be flexible with their program structure and to manage that volatility,” Ms. Charnley said.

“There’s been a significant increase in captive formations because of the hardening market,” said Sandy Bigglestone, director of captive insurance in the captive division of Vermont’s department of financial regulation in Montpelier.

Vermont, which is the largest and one of the longest established U.S. captive domiciles, licensed 38 new captives in 2020, compared with 22 new licenses in 2019, and by mid-February had already licensed eight new captives this year, she said.

Interest in forming captive cells within segregated cell companies has increased sharply during the hard market as companies look to quickly expand risk financing tools, several experts said.

Vermont approved about 60 new captive cells in 2020, taking the state’s total cells to about 300, Ms. Bigglestone said.

“The amount of interest is through the roof and the amount of formation is high as well,” said Patrick Theriault, managing director at Strategic Risk Solutions Inc. in Burlington, Vermont.

Industries such as long-term care and trucking have seen significant reductions in capacity and are looking at captives as their other coverage options recede, he said.

“It’s a mix of capacity or lack thereof in some places and reduced capacity and increased prices in other places,” he said.

Pandemic pressure

But financial pressures related to the pandemic have held back formations by some companies, Mr. Theriault said.

“For certain companies cash has become more important than ever,” he said. “They may hesitate to commit capital and significant funding in a captive at this time. … But many others have gone forward.”

Some businesses facing pressure during the pandemic are confronting opposing forces, several captive experts said.

“On the one hand, in the pandemic all businesses are keeping a close eye on cash flow; on the other hand, you have a hardening insurance market, or a hard insurance market in certain lines of coverage, that’s forcing businesses to take a good hard look at captives,” said Matt Atkinson, senior vice president at Artex Risk Solutions, the captive management unit of Arthur J. Gallagher & Co.

Vermont has added more due diligence questions related to captive funding during the pandemic, Ms. Bigglestone said.

“If a company is hurting, it may not be the best time to fund a captive and pay the expense of operating it,” she said.

The pandemic slowed formations for a few months in the first half of 2020, but the pace picked up again in June, said Nancy Gray, regional managing director-Americas at Aon PLC in Burlington, Vermont.

“Ultimately companies need insurance in place, so it’s not like you could delay, and the captive became a useful tool in terms of managing any new renewals,” she said.


Captives are increasingly being used as a negotiation tool by their owners during renewals, Ms. Bigglestone said. 

Companies prepare feasibility analyses for a variety of limits that their captives may cover and may take higher retentions to lower prices for coverage in the commercial market, she said. Once the negotiations are complete, they present a final business plan to the regulators, she said.

International Paper Co. has used its captive for many years to cover various risks, including general liability, auto liability, property, contractor risks and employee benefits risks, said David Arick, assistant treasurer, global risk management at the Memphis, Tennessee-based company. 

“We are already taking substantial deductibles across most of our programs so we avoided some of the hurdles that a lot of people are seeing for the first time because the soft market allowed people to have much lower deductibles than probably would be sustainable in the long run,” he said.

International Paper had captives in Vermont and Tennessee and last year decided to redomesticate its Vermont captive to its home domicile, said Mr. Arick, who is also a director of the Risk & Insurance Management Society Inc.

While Vermont is the most well-established U.S. domicile, Tennessee also has a supportive regulatory structure in place, and ease of travel and administration were the main considerations behind the move, he said.

Increasing insurance prices are also prompting commercial insurance companies to establish captives.

More managing general agents and managing general underwriters are looking to form “companion captives” to take a quota share of the business they are handling, said Ms. Towle of Hylant. 

U.S. companies remain more interested in establishing captives in domestic domiciles, in part due to costs, and particularly those in states with well-established captive laws, but captives are also establishing offshore, she said.

About 50% of the U.S. captives formed by Davies Captive Management are in domestic domiciles with the remainder formed offshore, said Nick Frost, Bermuda-based president of the captive manager, which is owned by Davies Group Ltd. “We are domicile neutral,” he said.


One of the often-cited benefits of forming a captive is that the vehicles allow policyholders direct access to capacity in the reinsurance market, but rates have been tightening in that sector, too, captive managers say.

“Businesses need to go through proper risk engineering, they need to have buy-in from the highest levels in their leadership, and they need to interact with the reinsurance market and tell their stories,” Mr. Atkinson said.

While reinsurance markets are hardening, captives still allow captive owners to access additional capacity in a tight market, said Ms. Gray of Aon.

“What the captive provides is additional capacity through the reinsurance market, so if you are not getting capacity directly it provides another source,” she said. “It’s mostly about accessing additional capacity, but in some cases the reinsurance pricing is cheaper than going directly.”


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