SCOTTSDALE, Arizona – Captive insurers are a good solution for property risks, but property-focused captives can also face challenges, experts say.

Pricing the risks, fronting and reinsurance costs, and capitalization are some of those challenges, they said Monday during a panel session at the Captive Insurance Companies Association 2024 International Conference.

Historically, insurance requirements in lender contracts have limited the tools available to companies to take on more risk or purchase less coverage, said Nate Reznicek, president and principal consultant at Captives.Insure LLC, based in Knoxville, Tennessee.

Lenders may require real estate owners to use insurers with a certain financial strength rating or set maximum deductibles or minimum limits, Mr. Reznicek said.

“Until the past couple of years there have not been very many capacity providers or carriers that have the ratings on paper that were willing to allow full property covers to be written or reinsured back into a captive,” he said.

Property captives can be challenging because the limits needed for the coverage are so high, said Rob Walling, Biltmore Lake, North Carolina-based principal at Pinnacle Actuarial Resources Inc.

“With a property captive you’re talking about $50 million or $100 million buildings… Trying to fit that into a captive with limited capitalization is difficult,” Mr. Walling said.

Collateralization on property captives can also be problematic when Florida windstorm-exposed or California wildfire-exposed properties are being insured, he said.

“The cat claims potential is simply different because of the limit that is often needed for the coverage,” he said.

Limited claims data is another challenge, Mr. Walling said. “If I’m looking at a medium to large business and I’m looking at a workers comp captive or commercial auto captive, I’ve got credible claims experience to do experience-based rating,” he said.

With property insurance, just because they haven’t had a claim in the last five years doesn’t mean they haven’t had any exposure, he said.

The lack of data makes it hard to price the risk, Mr. Reznicek said. “Risk collection becomes critically important,” he said.

Risk appetite is another consideration, he said.

“You may have a strong desire to take on all of the risk, but it’s 100% concentrated in a very dangerous wildfire area. Maybe you’re not going to be able to find the carriers that are willing to share any of that risk with you at all,” he said.

Reinsurance is also costly as the industry may not have much appetite for certain risks, especially habitational properties, he said.

Lee Zieben, president and founder of Zieben Group, a Houston-based real estate developer, said he turned to captive insurance to better manage the company’s insurance costs.

Despite being a responsible property owner and filing few claims, the company’s insurance premiums kept going up and up, Mr. Zieben said.

Obtaining third-party probable maximum loss studies on the company’s properties helped inform its insurance negotiations, he said. Lenders agreed to change their insurance requirements and the company saw a substantial reduction in its insurance costs, he said.