Consulting in captive insurance: the intersection of education and independent evaluation
Captive insurance is a dynamic industry that offers unique benefits to both brokers and insureds. It empowers insureds to take control of their insurance programmes while providing brokers with a way to retain key accounts through tailored captive solutions.
Captive consultants often work directly with broker partners and insureds throughout the underwriting and formation cycle. These professionals typically guide prospective clients through the entire captive process In covering everything from explaining the initial concept to providing actionable evaluations, consultants are typically relied on to assist with the necessary decision-making components of a transaction, ultimately allowing the insured to make an informed decision at the outset of the relationship.
Independence is crucial in aligning interests and determining what’s best for the client as a qualified consultant’s primary goal is to maximise the financial benefit for the insured, not the promise of revenue from feasibility studies, formation costs or ongoing management fees.
By using an objective and independent approach, these professionals can foster trust among all parties and provide significant peace of mind to the insureds, the captive shareholders and regulatory authorities. With a continued expectation of volatility in the commercial market, and the associated growth of the captive industry, the use of independent captive consultants is expected to rise and is seen as paramount for success. As industry continues to grow and utilise the services of independent captive consultants, we’ll discuss a few of the common topics addressed by these professionals.
Captive insurance opportunities
Although it may seem self-evident, captives continue to offer unique opportunities to address new and hard-to-insure risks. With the growing and perpetual threat of emerging risks, captives often provide tailored coverage for nearly all such exposures. This can include offering solutions for environmental risks, such as climate-related exposures and environmental liabilities that may be challenging to insure in traditional markets, as well as to augment worldwide catastrophic coverage capacity for potential future pandemics.
Rising premiums and capacity constraints
The commercial insurance market continues to face significant challenges, creating opportunities for captive insurance solutions to fill critical gaps with several key insurance lines experiencing notable rate increases. While recent Property rates have been softening (particularly in the excess layers in the South-east US), this trend is unlikely to continue due to potential catastrophic weather events, supply chain vulnerabilities and inflationary pressures. Nuclear/thermonuclear verdicts and inflation continue to drive challenging loss experiences and rates for Auto Liability, a trend that shows little to no sign of slowing down. Casualty lines are also facing upward pressure from increasing litigation and claims costs.
Insurers are becoming increasingly more selective, limiting capacity, particularly in high-risk industries such as transportation and construction. The excess and umbrella liability markets are also tightening, forcing companies to explore alternative risk financing strategies.
Persistent market volatility
The insurance industry remains under pressure from catastrophic events, with annual losses consistently exceeding $100 billion. This volatility is predicted to persist, forcing insurers to increase premiums, reduce coverage limits and/or exit certain markets entirely.
As a result, many businesses are left with limited options and may face unfair terms regardless of their individual loss experience.
Emerging risks
New and evolving risks are creating challenges for traditional insurers to respond quickly. Cybersecurity remains a large concern for businesses, with ransomware payments growing both in frequency and severity. Ultimate loss costs are often significantly increased by related business interruption caused by these cyber incidents, resulting in potentially catastrophic financial losses. Environmental risks and climate change impacts are increasing, causing additional changes in terms from insurers, particularly in areas related to “forever chemicals”.
Captive benefits and control
Captives continue to offer significant financial advantages. In a volatile insurance market, captives provide long-term pricing consistency and control through premium stability. Being able individually to underwrite your business without being affected by poor performers is a key benefit of a captive and increasingly important to captive owners. Underwriting profit is also a significant potential advantage as these funds can accumulate and be utilised in a number of ways, benefiting both the captive and the related businesses it insures/reinsures. Additionally, captives offer direct access to reinsurance markets, leading to more favourable terms.
Captives are increasingly being used as strategic tools for overall risk management. Surplus funds from captives can be used to invest in loss prevention programmes, safety initiatives and risk management technologies. Captives typically provide the owners with greater influence over claims information and costs, enabling better analysis to mitigate risk, creating a symbiotic relationship with risk management strategies and investments.
Looking forward
As market volatility persists and emerging risks continue to challenge traditional insurance paradigms, captive insurance has evolved from an alternative risk financing mechanism into an essential strategic tool for sophisticated organisations. These structures offer significant advantages through financial optimisation (underwriting profit retention, premium stability and direct reinsurance access), protection against market fluctuations unrelated to individual risk profiles, and unparalleled flexibility in addressing emerging risks that conventional insurers struggle to cover adequately.
The integration of captives with broader risk management initiatives creates a virtuous cycle where accumulated surplus funds can be support loss prevention programmes, enhancing both risk control and captive profitability. Organisations that leverage independent captive consultants to guide implementation and captive operations position themselves to maximise these benefits while maintaining appropriate governance – ultimately transforming insurance from a pure expense into a comprehensive risk management approach that creates sustainable enterprise value in an increasingly complex global risk landscape.
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