ORLANDO, Florida – Despite a slowdown in the pace of rate increases in property insurance, buyers continue to use captives to finance their property risks, experts say.

After years of rate increases and reduced capacity in the commercial market, risk managers are more comfortable retaining more of their organizations’ own risks, they say.

And while obtaining property reinsurance coverage for captives also remains challenging, multiyear solutions can help them structure more affordable programs, they say.

The comments came last week during the World Captive Forum, sponsored by Business Insurance.

Rate fatigue and capacity issues are driving policyholders into captives, said Walnut Creek, California-based Seth Madnick, managing director, captive group, at Alliant Insurance Services Inc.

“When you’re starting to see north of 10% to 20% rate-on-line, it’s really driving clients to consider captives for risk financing,” he said.

Policyholders are using captives to address capacity issues and fill gaps in either primary or excess layers in their property towers, Mr. Madnick said. Captives also allow direct access to reinsurance markets to buy down aggregates or build the tower higher, he said.

Rate fatigue and capacity constraints are not the only reasons why clients are using alternative risk transfer options like captives, said Roberto Rivera-Rodriguez, Los Angeles-based director, alternative risk transfer, at Alliant.

“Clients are getting more sophisticated in how they’re financing their future losses,” Mr. Rivera-Rodriguez said.

“You have more levers to pull when you’re actually doing risk transfer yourself through your own facility,” he said.

Heather Graziani, Denver-based assistant vice president, captive fronting at Starr Insurance Cos., said property has been the biggest growth segment for the insurer because of the hard market.

“On the property side, we are seeing some stabilization, but in the energy and real estate sectors, we are seeing a tough hard market for those risks,” she said.

Real estate companies are forming captives in the U.S., and in Canada and Asia many energy companies are using captives, Ms. Graziani said.

“A lot of big energy companies are Chinese, so we’re seeing growth in Asian domiciles, specifically Hong Kong and Singapore,” she said. Europe is also seeing growth, in Guernsey and Malta, she said.

Reinsurance

While one of the advantages of captives is that they allow policyholders to access reinsurance markets directly, they sometimes face difficulties accessing sufficient capacity in the current market.

The Jan. 1, 2024, reinsurance renewal season was easier for cedents than the previous year, but it was still a difficult market, said Michael Woodroffe, president of Kirkway International Ltd., a Bermuda-based reinsurance brokerage.

“It wasn’t pretty, but it was easier. There were lots of reinsurers around, they’re just expensive,” he said.

Property catastrophe treaty renewal rates were up 3% to 5% and direct and facultative property rates were flat, but that followed several years of significant rate hikes.

Dedicated reinsurance capital increased about 10% last year, but the sector did not see any startups despite the significant hardening, said Rick Hartmann, a Philadelphia-based senior vice president at Guy Carpenter & Co. LLC.

And reinsurers attached at high levels, which meant insurers and captives retained more losses, Mr. Hartmann said. Last year saw 21 loss events of more than $1 billion, and the majority of those losses were retained by insurers, he said.

“That’s why we’re seeing more and more U.S. and European buyers turn to structured reinsurance solutions to try to reduce some pressure on some of those earnings and retentions within their nets,” he said.

As they face higher retentions, some captives are buying second and third event covers to limit their exposures in the event they face multiple losses, Mr. Hartmann said.

Other structures can also protect captives against the accumulation of property losses through multiyear programs in which annual premiums are calculated to cover at least one severe loss year, he said.

Multiyear deals can also help captives secure capacity from reinsurers that are unwilling to deal with small cedents on an individual year basis but will consider a larger premium spread over several years, Mr. Woodroffe said.