6 February 2023ArticleAnalysis

The evolving captive insurance landscape: are you keeping up with the latest captive strategies?

2023 promises to be a particularly challenging year for the insurance industry and it is expected to impact the captive insurance industry. In this short article, we will explore some of the industry’s current and future trends.

In response to the increase in premium rate and reduction of capacity available, we have seen clear initiatives to scale up existing captives.
One of the most common ways to scale up a captive insurer is to diversify the types of insurance coverage offered. As companies grow, they may have new and different risks that need to be covered. Diversifying the types of coverage offered by a captive can help companies to better manage these risks.

Medium and large captives would often find it inexpensive to add new risks to an existing portfolio because they typically experience better-than-average combined ratios over a sustained period of time which results in surplus capital.

A good example to look at is AM Best’s recent analysis of the 25 rated captives domiciled in Bermuda, Cayman Islands, and Barbados that have experienced a combined ratio 13 percentage points lower than their US commercial peers. In dollar amount, that translates to $2.3 billion of surplus and $1.7 billion in dividends over the 2017–2021 period.

The most popular “new lines” remain cyber and D&O risks with some companies exploring reputational and intellectual property risks depending on their industry and exposure. Cell captives have also been extensively used to explore underwriting new risks as they segregate the risk from the existing single-parent captive, but it requires a different investment.

“An additional way to scale up is by leveraging existing quality data that companies collect.” Pierrick Livet, KPMG BermudaAn additional way to scale up is by leveraging existing quality data that companies collect. Working closely with actuaries allowed captive owners to readjust premiums and capital allocation which often results in allowing them to retain more risks with little impact on the business.
Finally, we are seeing an increase in technology investment to improve processes and day-to-day management. Mainly driven by self-managed captives there is also an interest from captive owners to move away from legacy systems used by third-party captive managers.

Another key trend for captive owners is the developments in the regulatory environment. Across the globe, captive domiciles are pushing for attracting new formations or re-domiciliation. Outside of the traditional captive domiciles, France has recently introduced incentives for the establishment of captives. Italy’s regulator has been working toward a framework to motivate and simplify the transfer of Italian-parent-owned overseas captives back into the country. The UK is conducting a Solvency II reform with important voices in the London Market asking for a framework dedicated to captives.

Those regulatory changes are also related to the development of global tax rules. While captives are first and foremost risk management and risk financing tools, they have to be considered within the company’s global tax strategy.

Captives also have a role to play in their parent’s environmental, social and corporate governance (ESG) strategy. A captive can help its parent company manage and mitigate its ESG risks by, for example, providing coverage that goes beyond standard wordings for reconstruction costs or reputational risks as mentioned previously.

Overall, the captive insurance industry is evolving and growing, with new and diverse types of coverage, and the implementation of better technology. Companies should keep an eye on these trends and adapt their captive’s strategy accordingly to remain competitive and protect their operations and assets.

Pierrick Livet is senior manager, advisory, at KPMG in Bermuda. He can be contacted at: pierricklivet@kpmg.bm

More on this story

21 November 2022   Firm recognises growth potential of insurance in Crown Dependencies.

More on this story

21 November 2022   Firm recognises growth potential of insurance in Crown Dependencies.