20 August 2020Asia-Pacific analysis

Sustained growth for the world’s third largest captive parent country

In a rapidly changing world, the risk landscape faced by organisations is constantly evolving. The full economic impacts of COVID-19 are yet to be known but prior to the pandemic, emerging risks, changing climate patterns, increased cyber attacks, and changing regulatory conditions were all affecting the risk landscape.

Catastrophe losses have been increasing in frequency—over the past 18 months alone, Australia has experienced bushfires, severe hailstorm damage, and flooding, all causing significant losses for insurers.

These disasters have led to loss ratios exceeding 100 percent for many carriers on policy lines over multiple years, causing sharp adjustments in pricing, capacity, and coverage. To add to this, reinsurers are reducing capacity or withdrawing capacity altogether on some risks, thereby increasing pricing, and further restricting flexibility with underwriting.

“In 2019, the average underwriting profit made by each of these Australian-parented captives was more than A$3.5 million.”

According to Marsh’s latest “ Global Insurance Market Index”, the second quarter of 2020 was the 14th quarter in a row that recorded increases in composite insurance pricing in the Pacific. In the search for solutions, a captive insurance company is often at the top of the list for Australian clients. Even companies with traditionally conservative risk management philosophies have looked to innovate and keep costs down through captive insurance.

Companies are looking very closely at the optimal risk retention amount and in what vehicle (captive, protected cell, or trust) they should retain risk. All of these factors combined have led to a large increase in captive formations for Australian companies, particularly in the domicile of Singapore.

Captives are not a new phenomenon for Australian companies, but the recent large-scale increase and growth in utilisation and formations certainly is. Australian-parented entities represent the third largest parent country group of Marsh-managed captives, behind the US and the UK. Australian companies that have owned captives for some time are now utilising them further for higher risk retention amounts and new lines of business.

In the “2019 Marsh Captive Landscape Report” we highlighted growth of 24 percent of captives with parent companies from the Asia-Pacific region, and an increase of 116 percent in gross written premiums from the period 2014 to 2018. This sustained growth has increased further from 2018 to 2019, with a further 13 percent increase in Australian-parented established companies from the previous year.

The surge has continued this year and Marsh Captive Solutions expects an increase of more than 20 percent in Australian-parented captives by year end, predominantly establishing with our office in Singapore.

Preferred domicile

Singapore has historically been the preferred domicile choice for many Australian entities, and remains so. Our large Singapore office supports nearly 65 percent of all Marsh-managed Australian captives globally and is the key centre for the new formations.

This is due to a number of factors, including proximity to Australia; experience with captives; low capitalisation; fair solvency levels; ability to arrange full intercompany loans; inward re-domiciliation; an efficient tax system; a highly reputable regulator—the Monetary Authority of Singapore; and familiarity with Australian-parented companies.

Among all our Australian captives under management, the parent companies are split across a number of industries. The two most numerous industry users are financial institutions (the largest industry user of Marsh-managed captives globally) and mining, metals and minerals, with over 20 percent of the market each.

These two segments are closely followed by construction and retail. Other industries in Australia using captives include agriculture, aviation, chemical, energy, healthcare, manufacturing, marine, real estate, and transportation. The large number emphasises the point that captives can benefit companies from a wide range of industries.

Most companies find positive savings and strong results by setting up a captive. In 2019, the average underwriting profit made by each of these Australian-parented captives was more than A$3.5 million. All indications thus far are that this will increase going forward this year.


When looking at the insurance lines included in the captives of Australian-parented companies, we see a close correlation with market conditions, reflecting how captives are being used in the client’s corner as a key risk management tool. The most popular line of business is property, with over 55 percent of captives writing this coverage.

Linked to this, terrorism cover is, in effect, a compulsory cover within Australia for direct writers of property lines, following the Terrorism Insurance Act 2003. Not all captives use the Australian terrorism pool, however, with approximately 80 percent seeking this support and the rest using the captive to retain the risk.

As noted in Marsh’s “2020 Q2 Global Insurance Market Index”, property insurance in the Pacific region showed a pricing increase of 28 percent, the 11th consecutive quarter of year-over-year double-digit increases. Double-digit increases were reported for catastrophe and non-catastrophe risks in Australia and New Zealand. Wildfires and other catastrophe events drove the pricing increase, with concerns surrounding COVID-19 also having an impact.

Policy wordings and coverage edits occurred frequently as a means to offset or mitigate pricing increases, adjustments to deductibles, and/or self-insured retentions (SIR) increases. There was little competition among insurers, and a general move toward reducing line sizes (deployed capacity) on major placements, in particular those with catastrophe exposures.

In consideration of all these factors, many of our recent new formations and current clients are beginning to write, or increasing their participation in, the risk of the captive on property.

Commercial Pacific casualty pricing, although increasing for the past three years, has not been rising at the same rate, with an increase of 9 percent in Q2 2020. Competition and capacity in the casualty marketplace increased, but pricing continued to increase at a consistent rate.

While we have always seen this risk in Australian captives, the utilisation rate is approximately 20 percent, so less prevalent than property.

Other popular lines in Australian captives include product, environmental and employer’s liability, professional indemnity (market increases ranged from 20 percent to 25 percent in Q2 2020), crime, and marine. In recent times, we have seen an increase in new lines including surety, trade credit, and cyber, showing the heightened complexity and sophistication in risk management and captive usage by Australian entities.

Financial and professional liability pricing rose more than 48 percent in Q2 2020, marking 12 straight quarters of double-digit increases. Currently, the most popular or trending risk for captives is directors and officers (D&O) liability. Side C-exposed listed companies, (companies that are publicly listed on stock exchanges) in the Pacific experienced the largest increases in Q2 2020, most greater than 100 percent.

This market pricing increase and difficulty in filling capacity has had a direct effect on companies looking to retain this risk in their captive. Historically, D&O has been written by Australian-parented captives but not on a large scale, with only approximately 10 percent writing the risk. We are, however, seeing a change in companies’ thinking around this risk and more companies looking towards their captives to retain some or all of this risk within it.

In the first half of 2020 Marsh has already been engaged in more formations and feasibility studies of Australian-parented captives than ever before. With this challenging commercial market, now is the time for companies to review the optimal usage of their captive, or if companies do not currently have a risk retention solution such as a captive, protected cell, or trust, then we suggest they start discussions as to whether one could work for them.

Companies should aim to do this well in advance of renewal to make sure they are in the best position possible when negotiating with the market.

Australian companies seeking to garner the potential cost-savings and qualitative benefits the establishment of a captive provides, coupled with the continuing transitioning market, should drive one outcome: a large increase in formations year on year going forward.

Rob Geraghty is international sales leader at Marsh Captive Solutions. He can be contacted at: