Buyers review options as property rates soar

As businesses continue to see sharp rate hikes and shrinking capacity for commercial property insurance, many are rethinking their risk financing approach and exploring alternative ways to retain risk.

Interest in insuring property risks in captives has grown significantly in recent years, and the trend is accelerating, experts say.

Some 60 additional companies wrote property risks in their captives in 2022 and 2021 across the 1,500 captives managed by Marsh LLC, said Michael Serricchio, Norwalk, Connecticut-based managing director, Marsh Captive Solutions, a unit of Marsh. 

Forty of the 60 wrote all-risk property, he said, noting that the growth was heavily weighted toward cell captives.

The breadth of coverages going into captives has expanded, said Steven Bauman, New York-based global programs and captives director, Americas, at Axa XL, a unit of Axa SA.

“With property risks and, in particular, natural catastrophe risks, risk transfer is more expensive and that just lends itself to more captive utilization, especially in the lower layers of that risk,” Mr. Bauman said.

For companies with an overexposure to earthquake or flood, captive insurers are stepping up and filling in and extending the limit in a layer, he said. 

Many companies are taking problematic layers in a property tower, a “ventilated layer” where “they save $200,000 to $1 million for taking on not a lot of risk and not a lot of loss ratio in that high excess layer,” Mr. Serricchio said.

Owners are also using captives to provide a quota share cover. “We’re seeing a lot of integrated multi-year, multi-line alternative risk transfer mechanisms, both with and without fronting carriers,” Mr. Serricchio said. Terrorism and cargo covers in captives are increasing, he said.

Property is the driving factor in many captive feasibility studies, said Nancy Gray, regional managing director-Americas at Aon PLC in Burlington, Vermont.

Captives are being used to fund rising deductibles, fill gaps in coverage and layers in property towers, and as a negotiation tool at renewals, Ms. Gray said.

A large Fortune 500 company with a March 1 renewal expected the retention on its property program would almost double because of the quoted rate increase, she said. 

“We looked at the captive in terms of the capital required to be able to maintain those retention levels, and they were able to leverage the captive,” she said.

The commercial markets reduced the quoted rates, and the company was able to renew its program at a lower retention, she said.

Kristen Peed, corporate director of risk management at Cleveland-based business services company CBIZ Inc. and a board member of the Risk & Insurance Management Society Inc., said CBIZ is in the process of setting up a captive in Vermont as part of its long-term risk financing strategy.

The captive will mainly fund liability risks such as cyber and a small property deductible, Ms. Peed said.

“Right now, we’re looking at just doing the retentions and deductible buydowns,” she said. Depending on its risk tolerance, CBIZ may explore different deductible options ahead of its Sept. 30 renewal, she said. CBIZ leases its properties and so is not a property-heavy business, but it has some natural catastrophe exposure in California and Florida, she said.

A commercial egg farm in Ohio last year set up a captive for property risk when its commercial insurer declined to renew its property program, said Nate Reznicek, Miami-based president and principal consultant at Empowered Risk Solutions LLC, which does business as Captives.Insure. 

The farm’s total insured values had become too large, and the insurer said it would have to go into a shared and layered program, Mr. Reznicek said. Unwilling to live with the associated increase in premium, the policyholder decided to form a captive, he said.

“That’s the theme I see running through the transactions that I have eyes on,” he said.

Unlike liability risks, which have aggregate limits, property insurance limits reset after each occurrence, said Karen Sullivan, San Francisco-based head of property at USQRisk Insurance Services LLC. 

Stop loss mechanisms are used to limit captives’ exposure to multiple losses in a policy period, Ms. Sullivan said. 

“Captives may be comfortable taking the first, second, maybe even a third loss, but after that the capital isn’t quite prepared to take the fourth loss and beyond,” she said. The structured solutions act as a backstop behind the captive on an annual or multiyear basis, she said.

Captives are being used to address terrorism risks by offering broader terms for coverages such as nuclear, biological, chemical and radiological exposures, said Courtney Claflin, Denver-based head of insurance at Fluid Truck Inc., an on-demand truck rental company.

“I once did an arrangement where I used the captive to purchase a wrap around TRIPRA,” the federal terrorism insurance backstop program, Mr. Claflin said.

The tower created included nuclear, biological, chemical and radiological risks as well as coverage for non-certified acts of terrorism, he said. It also provided coverage for the deductible that had to be met before the federal backstop coverage could be accessed.

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Parametric coverage within captives can tackle tougher climate risks

Organizations are considering using parametric coverage within their captives to cover property risks, especially natural catastrophe and climate exposures, experts say.

Where climate risks can be identified and pared out, there’s increased interest in parametric covers, said Steven Bauman, New York-based global programs and captives director, Americas, at Axa XL, a unit of Axa SA.

If an organization is vulnerable to a particular climate-related risk, such as excessive rainfall or hail in certain locations, and the risk is driving up the cost of its property program, it could pay to remove it from the traditional program and use a climate parametric structure to cover the exposure, Mr. Bauman said.

Parametric insurance structures are usually based on an agreed trigger, such as wind speed or rainfall in a defined area, and payments are made regardless of physical losses. 

The advent of parametric insurance, particularly for property risks, is helpful for captive applications, said Courtney Claflin, Denver, Colorado-based head of insurance at Fluid Truck Inc., an on-demand truck rental platform.

Mr. Claflin said he looked at developing a parametric earthquake coverage for employees via a captive in his previous role as executive director of captive insurance programs at the University of California. 

Research shows 90% of homeowners don’t buy earthquake coverage because it’s too costly and 90% of earthquake losses don’t reach the deductible level when coverage is purchased, he said. 

The idea was the captive would sponsor a program where employees paid $25 a month to purchase $30,000 of parametric earthquake coverage, he said. The trigger would be based on a “shake table” rather than the Richter scale and pay out if the ground-shaking meets a certain intensity in a ZIP code, he said.