9 January 2023Analysis

Crawford: captive growth in 2021-22 phenomenal

The past two years have seen a phenomenal increase in the rate of growth for captive formations, peaking in the fourth quarter of 2020, but with growth remaining strong throughout 2021 and 2022 also, according to a new report by Crawford.

Citing figures from a presentation by Marsh Captive Solutions, Crawford said that recent growth in new captive formations is comparable to that seen during the hard insurance market of the 1980s. Around 200 new captives were formed in 2020 and 2021 – equivalent to around $3.4bn in captive insurance premiums.

Over the last two years, the worldwide COVID-19 pandemic, combined with a challenging insurance market for conventional risk transfer, has presented some of the most complex challenges to risk managers for a generation.

As risk managers look to utilise every solution available to address these unprecedented challenges, captives have become an increasingly valuable risk financing tool to more organisations than ever before, the report said.

This rate of growth is expected to continue for the remainder of 2022, and into 2023, with captive managers in receipt of a continual flow of captive enquiries and feasibility studies.

Captive formations are typically a trailing indicator of a hard market, but the current increase in activity is also indicative of continuing economic volatility combined with a growing awareness among corporate insureds of what captive insurance companies are and how they can be used.

A notable feature of this growth trend is the rise in non-traditional coverages that are now being written by captive insurers, with risks such as third-party business (e.g. contractor / vendor programs, extended warranties etc), terrorism, cyber liability, business interruption and directors’ and officers’ (D&O) liability being covered by captive programs.

Captives are also being set up to not just place such risks but are also being used to deliver additional capacity to boost excess programme limits when the conventional markets cannot deliver.

The maturing managing general agent (MGA) and insurtech sectors are also turning to captives as a means of both boosting capacity and improving profit margins. Given that MGAs / insurtechs typically work with fronting carriers and that captives are one of the few vehicles that can be used to reinsure fronting arrangements, captive ownership has proved beneficial to MGAs wanting to secure a competitive edge over rivals.

Whereas the captive market in the past was dominated by single parent structures, the relative ease and lower cost of forming a cell captive has seen this sector grow significantly, with property, professional liability and general liability some of the leading coverages written by recently formed cell companies.

Speed to market appears to be a major driver, as the continuing hard market in commercial insurance is driving cell formations ahead of insureds’ next renewal period, in a time frame that would be more difficult to achieve with a full captive.

New captive formations are being seen across most captive domiciles globally, driven predominantly by North American parent companies but also with significant growth among parents from Australia and the Asia Pacific region, Crawford said.