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Captive owners, like commercial insurers, face an increasingly difficult reinsurance market as rates rise sharply and capacity shrinks.
To dampen the effect of the hard market, captives are having to use a larger panel of reinsurers and adopt other strategies, experts say.
Commercial reinsurers have suffered significant losses over the past year, which led to a hardening market for cedents, including captives, said Michael Woodroffe, president of Kirkway International Ltd., a Bermuda-based reinsurance brokerage.
Catastrophe reinsurance rates rose 30% at year-end renewals and retrocessional reinsurance rates rose 50%, he said last month during a session of the World Captive Forum, which is sponsored by Business Insurance.
In the difficult market, captive owners are having to use more reinsurers on their programs, said Anne Marie Towle, Carmel, Indiana-based CEO global captive solutions at Hylant Group Inc.
“If you had two or three partners in the past, you might have five, six or seven on your slip or even more. So, there are some of those pain points still coming through on reinsurance capacity, and I think that will continue this year,” she said.
The tightening reinsurance market for captives is also resulting in less available capacity for more complex structures, such as integrated aggregate reinsurance that covers multiple lines of business, said Peter Kranz, senior vice president at Alliant Services Inc. in Burlington, Vermont.
“We can still do some of these integrated programs, but if it needs a $30 million limit, you might have to find three reinsurers at $10 million or two at $15 million in order to put that together,” Mr. Kranz said.
Captive owners can use various strategies to manage the difficult reinsurance market, Mr. Woodroffe said. For example, start-up captives can stagger premium payments over the year or look for a mid-year adjustment, based on the amount of business written.
Captives should also adopt realistic limits, he said. “If you are a small captive, don’t be the Travelers; you don’t need $1 million for cyber, $100,000 might be just fine,” he said.