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Captive formation surging: Panelists

Posted On: Jan. 25, 2024 1:04 PM CST


ORLANDO, Florida — Captive market growth continues to surge as businesses of various sizes turn to these risk-financing vehicles to manage their insurance costs and cover gaps, experts say.

Captive markets are still “hot,” said Dan Petterson, director of captive examinations for the Vermont Department of Financial Regulation’s captive division in Montpelier.

“We don’t see them slowing down. We’ve not seen a downtick yet or markets changing,” he said Thursday during a panel session at the World Captive Forum, sponsored by Business Insurance.

Vermont saw a record number of captive formations during the last three years, with between 35 and 45 added each year, Mr. Petterson said.

“We had nine new formations in the first month of 2024, so we’re already off to a great start,” he said.

Captive growth last year was largely driven by external events and pressures, said Barry White, Annapolis, Maryland-based commercial lead at Artex Risk Solutions Inc.

“Property is a good example. Property markets have been pretty awful for everybody — for brokers, insurers and buyers,” he said.

Existing owners that have built up equity in their captives can strategically manage the overall cost of risk by writing some of their property within them, increasing retentions and addressing capacity issues, Mr. White said.

“We have seen numerous new captives specifically formed for property risks alone in 2023 and have a full pipeline in 2024,” he said.

Captive owners are also diversifying by adding different lines to their captives, Mr. White said. “Cyber and medical stop loss are lines of business that we're seeing mature captive owners now starting to investigate and put into their captives,” he said.

If a business has good risks and has a good handle on risk management, “putting them into a captive makes sense whether or not it’s a soft or hard market,” said Michael Domanski, Rochester, Michigan-based partner at Honigman LLP.

“Insurance coverage in a captive in a lot of ways is like a financing situation. If you’ve got the risk, rather than going out to the market and running an overhead that you pay for but don’t get the benefit of, if you put it into a captive and you’ve got good faith in your processes, it makes sense, especially for a long-term play,” Mr. Domanski said.

Growing interest in captives is coming from small and medium-sized companies, in addition to Fortune 500 companies, panelists said.

With smaller captives, “it’s not like you need to have $3 million in premium or really high limits. There’s a way to handle it with taking on deductibles for your coverage. I like the idea of you have to walk before you can run,” Mr. Domanski said.

A large percentage of captives domiciled in Vermont are Fortune 500 companies and larger captives with sophisticated business plans, Mr. Petterson said.

“We’ve also got some very small captives with not-so-sophisticated business plans,” he said.

“It does take resources, so you’ve got to be able to make sure it’s sustainable, but at the end of the day, we’ve seen a lot of success across the board and all different company sizes,” he said.

Increased pricing, higher deductibles and higher premiums disproportionately affect smaller companies, Mr. White said.

“They may not have the balance sheet or the cash flow to support what the commercial market is offering,” he said.

Smaller companies may think they’re too small for a captive but there are many different captive structures and vehicles they can use, he said.

Technology including online applications and electronic documentation is helping to make the captive formation process more efficient and accessible to more companies, the panelists said.