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Captive numbers increase as rates rise

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The captive insurance sector saw increased formations and expansion of existing captives last year as companies continued to seek alternatives to the hardening commercial insurance market.

Several domiciles reported record growth in 2021, and captive managers say interest in the alternative risk transfer market is unlikely to diminish soon.

Hard-to-place lines of coverage, such as some property risks and cyber liability, are increasingly being placed in captives, experts say. 

And more policyholders are considering whether directors and officers liability coverage can be funded through a captive as commercial rates continue to increase. Recent legislation in Delaware will likely accelerate that trend, they say (see related story).

“From a captive point of view, it’s been a phenomenal year. There’s been record growth even among smaller domiciles,” said Anne Marie Towle, Carmel, Indiana-based global captive solutions leader at Hylant Group Inc.

Total captive numbers worldwide increased by more than 100 last year, though  growth and contraction varied significanly by domicile (see chart).

Rising prices in the commercial insurance market have been the main driver behind the growth, Ms. Towle said.

“We are seeing a record number of formations for Aon across the various domiciles,” said Nancy Gray, regional managing director-Americas at Aon PLC in Burlington, Vermont.

For each of the past two years, Aon doubled the number of captive feasibility studies it has conducted, she said.

Marsh LLC has also seen strong captive growth across all industries, said Ellen Charnley, president of Marsh Captive Solutions in Las Vegas.

“We’ve seen particular growth in our cell business,” she said. “With the hardening market, sometimes clients have needed a quicker solution or a specific need.” 

For example, companies have formed cells to handle property or cyber risks.

In addition, there has been significant growth in managing general agents forming cells to take on part of the business they are handling, Ms. Charnley said.

Different sized companies have differing experiences with the commercial insurance market, which has affected the types of captives formed, said Peter A. Kranz, Burlington, Vermont-based executive managing director and captive practice leader at Brown & Brown Inc.

Large companies were hit first with price increases, which led to increases in retaining risks in existing single-parent captives, and as rate increases spread more cell and group captives were formed by middle-market companies, he said.

Aon has also seen an increase in cell formations as more companies seek to react quickly to tough renewals, Ms. Gray said.

The process for forming a single-parent captive usually takes about six months, but a cell can be formed without a feasibility study — for example, if it’s covering a single line or filling a gap in a tower of coverage — shortening the formation time to less than 30 days, she said. 


The increased interest in using captives to fund cyber liability risks is partly price driven but is also a reaction to exclusions being inserted in commercial policies, Mr. Kranz said.

“When all these things happen, you have an unfunded risk, so you have to look at how to finance it and say, ‘Are we going to use our balance sheet or are we going to use a captive,’” he said. 

Placing cyber risks in a captive can also help a company formalize its risk management process for the exposure, Ms. Charnley said.

Concerns over the much larger deductibles some policyholders in areas such as cyber and D&O are having to take are also leading to more formations, said Martin Eveleigh, chairman of Atlas Insurance Management, a Charlotte, North Carolina-based unit of Risk Strategies Co.

“I’m at the beginning of a feasibility study where deductibles are $2.5 million on one line and $5 million on another. When you are faced with that, it makes sense to look at how you finance that risk,” he said.

Risks that have traditionally been placed in captives are also generating new formations, Mr. Eveleigh said.

“We have seen a lot of inquiries for medical malpractice captives as well as transportation,” he said.

Both lines have seen increases, in many cases where loss experience has been good, Mr. Eveleigh said.


One area of the market that has seen less activity is the microcaptive or 831(b) captive sector, managers say.

The IRS has four court victories against owners of 831(b) captives that it says do not qualify as insurance for tax purposes and has announced that it is increasing resources to pursue alleged tax abuses related to 831(b)s.

Atlas has formed few 831(b) captives over the past two years and some owners have stopped using existing 831(b)s, Mr. Eveleigh said. “They seem to have a certain life span anyway as people retire or sell their businesses.”

Abusive 831(b) transactions are still an issue, though, Mr. Kranz said. “There are still folks out there that are not setting them up quite the right way,” he said. “We as an industry need to focus on ensuring that we do things the right way, which I think the majority of us do.”

Another negative development for captives over the past year was the passage of legislation in Washington that added a 2% premium tax on captives insuring risks located in the state.

Captive managers say the industry is concerned that other states may follow Washington’s lead, but the move has not yet significantly affected the market. 

The law increased costs for some captives, but it has not deterred companies from forming captives, Ms. Gray of Aon said. 

Looking ahead, captives are expected to make increased use of data.

Data analytics are being used increasingly to support decisions to move risks into captives, said Ms. Towle of Hylant.

“CFOs understand managing the cost of risk and are really looking at alternatives, so you need data to drive the discussion,” she said.

For example, risk managers can use data to justify using captives to obtain wider coverage for cyber or pandemic-related risks than is available in the commercial market, Ms. Towle said.

Captives can also enhance companies’ so-called ESG strategies.

Using captives to cover environmental, social and governance risks is attracting interest and will likely grow, said Ms. Charnley of Marsh.

“Simply the existence of a captive provides good governance for funding risks retained,” she said. 

Having an entity to retain risks that has its own board of directors and regulatory oversight arguably provides better governance than if risks are retained on a balance sheet, Ms. Charnley said. 

The trend of more captive formations is expected to continue as commercial rates keep rising in many lines and the higher pricing levels are maintained even in lines in which rate hikes are easing.

“From a trending perspective, we are expecting to have even more captives licensed in 2022 than we did in 2021,” Ms. Gray said.

“The pipeline continues to be filled with new opportunities, and I think the interest is going to continue for quite some time,” Mr. Eveleigh said.







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