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MIAMI – Captives can be used to combat challenging conditions in the commercial property insurance market, experts say.
Deductible buydown or deductible reimbursement policies, fronted policies and structured solutions are ways in which captives can participate in property programs, they said.
Captives can be used to combat rate increases, capacity reductions and the desire for insureds to take more risk, said Nate Reznicek, president and principal consultant at at Empowered Risk Solutions LLC, which does business as Captives.Insure. He was speaking Thursday during a panel session at the World Captive Forum, sponsored by Business Insurance.
“We’ve had a hard market cycle that’s been happening for quite some time, not only in the primary markets but also in the reinsurance markets,” Mr. Reznicek said, noting reinsurance renewals went very late last year.
“We were at a point in late November where maybe 80% of capacity providers in the U.S. had not completed their property cat renewals for the 2023 year,” which caused a lot of uncertainty in the market, he said.
At some point the pain of higher prices and lower limits becomes too much for business owners, who are educating themselves about alternative strategies to handle property risks, Mr. Reznicek said.
One good thing about property captives or property risks in captives is that the property tail risk is very short, he said. “We don’t have to worry about major claims coming in at the close of the policy year. You know if something happened to the property or not,” he said.
When property owners such as habitational building owners are subject to lender-placed insurance contractual requirements that specify a maximum deductible, using a captive insurer to issue a deductible reimbursement policy can help lower their retention, Mr. Reznicek said.
Deductible reimbursement policies can play an important role in filling coverage gaps, said Prabal Lakhanpal, vice president of Spring Consulting Group.
“They’re a powerful tool for folks to navigate the landscape where premiums are going back up, and coverage limits are becoming tighter and tighter,” Mr. Lakhanpal said.
Another advantage of using captives for property programs is that they can give policyholders more control over their policy wording and claims processing benefits, he said.
Fronting and structured solutions are “just hitting the page as I look at the landscape of what we’ve been doing in the alternative market in the captive space,” said Raymond Roccio, executive vice president of Keystone Risk Partners, a unit of Ryan Specialty Group Holdings Inc.
While captives were traditionally associated with workers compensation, general liability and auto programs, property was never part of the discussion, Mr. Roccio said. “The mindset was more predictable losses. Property, you’re clearly not that, right?” he said.
If a business has had some bad loss years, with the property marketplace contracting and pricing rising sharply, structured solutions give it an ability over a multiple-year period to get that back, Mr. Roccio said.