8 November 2023news

AM Best: European captive insurance market navigates challenges and seizes opportunities

The hard market is providing challenges and opportunities for captives, according to the latest AM Best sector report on the European captive insurance market.

Commercial insurers have continued to adjust insurance premiums upwards in 2023 to ensure that inflation is reflected in the price of cove, the rating agency said. These adjustments have been accompanied by increases in deductibles and other programme restructuring to adjust for increased asset values.

The inflation-related price adjustments in commercial insurance in 2023 follow significant premium rate adjustments put through since 2018, when the commercial insurance market started to harden.

According to the report: “Commercial insurers reported rate increase on top of rate increase, alongside a tightening of terms and conditions in the period since 2018. Casualty lines, in particular, experienced significant price increases, as insurers responded to the impact on loss experience of social inflation stemming from increased litigation and so-called ‘nuclear’ verdicts.”

AM Best has observed an increase in the use of existing captives in response to the hardening market conditions, as owners seek optimal risk transfer solutions. Several captives have increased their participation on existing covers, as well as expanded into new lines of business as their parents have looked at increasing captive utilisation.

As an example, the significant hardening of the cyber market has led to more captives writing cyber covers. Commercial covers are often restrictive, with numerous contract exclusions, as well as coverage limits, which may not fully meet companies’ needs. AM Best has noted that companies with better data have access to better cyber insurance coverage.

As a group risk management tool, captives have a strong understanding of their parents, with privileged access to risk information and data, and are able to design more specific and tailored covers.

Despite this, typically captives chose to take a share of a commercial cyber programme rather than providing specific coverage, AM Best said.

According to the report insuring cyber risks requires specialist knowledge and best practices in terms of underwriting, which can take some time for captives to develop. Established cyber writers also increasingly provide organisations with valuable additional risk management tools, such as recovery services, which captives might not be able to match.

“While the hardening market provides opportunities for captives to demonstrate their value, it also presents challenges,” the report stated. “Many captives are highly dependent on reinsurance capacity to be able to offer the large limits required by their parent groups. The reinsurance market has trailed the commercial and specialty insurance markets in terms of price increases over recent years, but with significant catastrophe losses and inflation concerns affecting 2022, reinsurance is now clearly in a hard market.

“Captives, even those with good claims records, therefore faced price increases for their reinsurance programmes in the 2023 renewals and many increased their retentions. Capacity, though reduced, remained available for captives.”

AM Best noted that most captives have long-standing and strong relationships with their reinsurance partners, which helps mitigate the risk of significant capacity withdrawal from their panels.

While reinsurers results have improved in the first half of 2023, AM Best expects the 2024 reinsurance renewal to remain challenging, with reinsurers allocating their capacity cautiously and seeking further positive price increases, and adjustments to programmes.


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6 April 2022   The rating agency will present and exhibit at this year’s RIMS conference.
Analysis
15 February 2023   Executives from the rating agency will take part in sessions at the conference.
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31 July 2019   AM Best’s rated captive composite reported a pretax profit of approximately $1.1 billion in 2018, down 16 percent from the $1.3 billion reported in 2017, but still profitable.

More on this story

article
6 April 2022   The rating agency will present and exhibit at this year’s RIMS conference.
Analysis
15 February 2023   Executives from the rating agency will take part in sessions at the conference.
article
31 July 2019   AM Best’s rated captive composite reported a pretax profit of approximately $1.1 billion in 2018, down 16 percent from the $1.3 billion reported in 2017, but still profitable.