19 September 2017Analysis

Harvey, Irma and other recent cat events shine spotlight on captives, says Towle

Recent natural disasters have shone a spotlight on captive insurance, which can play an important role in helping organisations defray some of the related financial losses, according to Anne Marie Towle, executive vice president and captive consulting practice leader at JLT Insurance Management.

"Companies using their captives to insure a portion of quake and wind losses in California and wind and flood losses in coastal regions are becoming more common,” said Towle.

"I’ve seen some companies with high-wind deductibles of up to 10 percent and others that have to pay $1-5 million out of pocket before commercial insurance kicks in. Captive insurance is often an appropriate way for large organisations to fund these first-dollar losses."

Towle gave an example of a company with a $10 million cat-loss deductible.

The company may use a captive, commercial solution or a combination of the two for initial losses. Another utilisation strategy is having the company buy $100 million of catastrophic reinsurance for excess losses. In exchange for participation in a cat-loss layer, Towle explained that the company might take a small quota share percentage of the $100 million of reinsurance coverage when pricing is ideal for the captive.

"Cat losses give companies an opportunity to use a captive to its fullest potential, providing them balance sheet stability," Towle continued. "A captive-centric strategy for cat losses eases the immediate impact to operations and provides the ability to smooth potential losses over time."