Captive formations continued to surge last year as new and existing owners turned to alternative risk transfer vehicles to navigate rising commercial insurance market rates.

Property insurance pricing was one of the principal drivers behind captive growth, as average property rates increased by double digits throughout 2023, and rising health care costs and claims led to more interest in medical stop-loss captives.

Commercial auto risks, a long-time staple for captives, were also increasingly covered in the alternative sector as the years-long trend of higher premiums continued, captive managers say.

Captive ownership also diversified, with more managing general agents forming captives, often through protected cell structures, to participate in the risk portfolios they manage.

In addition, there were shifts among captive domiciles, with Bermuda, the leading domicile for decades and the cradle of the modern captive industry, being overtaken by two of its rivals (see story here).

Property 

Concerns over rising property insurance rates continued to spur many captive formations in 2023, said Nancy Gray, regional managing director-Americas at Aon PLC in Burlington, Vermont.

“We’re seeing some stability in terms of the property market rates, but they’re still high, they haven’t come down,” she said.

In many cases, policyholders formed protected cell companies to adapt their programs to the changing market, said Ellen Charnley, president of Marsh Captive Solutions in Las Vegas.

Property policyholders often choose cells to fix problems they encounter in the commercial market, she said.

“Companies are sometimes looking to set up a vehicle quickly to retain risk in a structured way and slot it into their property structure to fill a gap or plug a hole,” Ms. Charnley said.

Using a captive also helps alleviate capacity problems because policyholders can use captives to directly access reinsurers, although there is little difference in price between insurers and reinsurers, said Barry White, Annapolis, Maryland-based executive vice president, sales advisory and analytics, at Artex Risk Solutions Inc., the captive management unit of Arthur J. Gallagher & Co. 

“It’s more to do with accessing newer capacity and to broaden the world where they can go to get some coverage,” he said.

Property risks also can be covered on a quota share basis in a captive to build more capacity, said Michael O’Malley, managing director at Concord, Massachusetts-based Strategic Risk Solutions Inc.

“Mature captives that have built their balance sheet over time are now looking at property because it’s the problem coverage line,” he said.

Owners usually must have a well-capitalized captive to cover property risks because regulators generally require higher capital ratios for property compared with general liability or workers comp, Mr. White said. 

To make a significant change from commercial market pricing, though, captives need to offer a substantial limit, said Jason Palmer, Burlington-based head of U.S. captive management at Willis Towers Watson PLC.

“If you’re not talking $5 million and above, you’re probably not making any sort of dent in your commercial market placement,” Mr. Palmer said.

Established captives may have already accumulated sufficient levels of capital to write the limits, but for new captives “that’s the hard part,” he said.

Other considerations for policyholders include whether a property policy needs to be fronted, which can involve significant fees and collateral, and whether the captive can issue a policy directly, said Mr. White. Banks often include insurance rating conditions in loan covenants that necessitate fronted coverage.

Medical

There is also increased interest in covering medical stop-loss risk through captives to address higher pressures in the health care sector “and really using that to diversify the captive’s portfolio and risk,” said Mr. Palmer of WTW.

Again, captive owners can use the vehicles to directly access reinsurance markets for medical stop-loss coverage, Mr. White said.

“That’s where there can be, and historically has been, some pricing differential,” he said.

International employee benefits risks are increasingly being placed in captives as owners seek flexibility in structuring the programs and to diversify their risk base, said Ms. Gray of Aon.

While benefits have been placed in existing captives for several years, some companies are establishing benefits captives, Mr. White said.

“What I have seen in the last year for the first time is companies actually considering establishing a captive purely for benefits as a first line,” he said.

Auto

While auto liability risks have long been covered through captive insurers, there is heightened interest in covering trucking risk through captives because of the difficult commercial market, Mr. O’Malley said.

“Clients are getting frustrated when their positive loss experience and investments in telematics are not reflected in their ability to get what they consider a reasonable proposal on a fully insured basis,” he said.

In addition, increased deductibles imposed by insurers have led to a requirement for more collateral to be posted by policyholders, Mr. O’Malley said.

“What we’ve been doing on a few structures is they pay a premium to the captive, they contribute capital to the captive, and then the funds in the captive are used to offset the collateral,” he said. 

Cyber

Some captives are also increasing coverage for cyber liability risks, even though commercial cyber rates have stabilized over the past year, said Ms. Charnley of Marsh.

Marsh, the world’s largest captive manager (see chart), saw a 30% increase in cyber premiums in captives it manages, Ms. Charnley said.

“Cyber continues to be one of those risks that can be quite volatile in the commercial market, so while it perhaps is softening a little bit right now, risk managers tend to be a little bit wary about what’s around the corner,” she said.

Having a captive can help companies build reserves to prepare for potential market changes, Ms. Charnley said.

Some owners remain interested in using their captives to directly access reinsurance for their cyber risks, but demand has eased with the stabilization of rates, said Ms. Gray of Aon.

Cyber MGAs and insurtechs have also formed captives over the past couple of years, said Mr. O’Malley of SRS. 

They use the captives to create capacity and participate as a risk taker in the coverages they offer, he said.

“They’re really surprised in terms of how quick you can get to market with a captive,” he said.

Property MGAs are forming captives, to participate in the risks and to show their partner insurers that they have confidence in their portfolios, Mr. White said.

The outlook for 2024 remains strong for captive formations, captive managers say.

“We are still seeing a lot of opportunities in the marketplace; there are still a lot of captive feasibility studies going on; there are still formations going on, so the industry appears to be very robust,” Mr. Palmer said. 

The pipeline for cell captives remains particularly strong as companies of various sizes seek ways to quickly establish captives, Ms. Charnley said.