The changing captive landscape

At Marsh we have over 1,400 captives and licensed entities under management, across 51 domiciles. Looking back over Marsh’s Captive Landscape data reveals some interesting trends in the captive insurance industry in recent years, although it is important to note the observations below are based on Marsh-managed captives only.

Which industries now use captives?

More than 25 different industry segments use captives, a substantial increase over the last five years. The top industry using captives is our financial institutions segment, accounting for nearly 23 percent of Marsh-managed captives, with over $21 billion of gross written premium.

This has historically been the largest segment and although the actual owner numbers have slightly decreased—by 1 percent—over recent years, the gross premium written has increased from $19 billion in 2015 to over $21 billion in 2019.

The second largest industry in terms of numbers is healthcare, followed by manufacturing in third place and retail/wholesale at fourth. These industries have remained large users of captives and have held their positions over the last five years.

Gross premium written has increased in nearly 70 percent of our industries over the past three years.

Other significant highlights include a major increase in the amount of gross written premium by communications, media and technology company captives, up from $3.2 billion in 2015 to $4.9 billion in 2017 and to $6.5 billion in 2019. This demonstrates the increased usage of captives across a multiline base. Other substantial increases in gross written premium were evidenced in the life sciences, transportation and power and utility industries.

Are the key players smaller or larger companies?

Five years ago large companies with net retained premium in their captives ranging from $5 million to $20 million accounted for only 11 percent of Marsh-managed captives. Since then they have increased greatly, accounting for over 24 percent. While we have companies of all sizes using captives, the key area that has seen increased usage is among the medium and large-sized entities which now account for a combined 43 percent of the whole portfolio.

It will be fascinating to see how this statistic evolves over the coming years, in line with transitioning market conditions and more companies looking to establish captives and potentially to retain more in their current captives.

What does the captive portfolio look like?

In 2015 the most common line of business written across all industries was general liability, written by more than 30 percent of companies. The top spot has now been taken over, however, by companies writing property, with over 32 percent in 2019. General liability is still a close second.

The popularity of these two lines is unsurprising, given the number of companies that buy this type of insurance, and the fact that these lines are most likely to be among the largest proportions of premium spend.

Other very popular traditional lines of business written over the last five years include workers’ compensation, which is written by approximately 21 percent, and motor liability (17 percent). More than 100 companies write lines such as medical malpractice and marine.

Other lines which have seen a material rise in their inclusion in recent years include professional liability, medical stop-loss and many forms of employee benefits. In the last year there has been a large increase in the number of companies assessing whether to write many financial lines such as crime (4 percent) and directors and officers (4 percent) liability in their captives.

It is likely that this will lead to these lines being added to portfolios in the coming years. Environmental was one of the few lines that experienced a decrease in captive usage.

Overall we are seeing an increase in the amount of lines written by captives, as well as the emergence of non-traditional lines being added to captive portfolios to diversify the risk spread and fully utilise the captive for all potential qualitative and quantitative benefits. Over the past five years, companies writing cyber liability coverage has increased by more than 95 percent, equating to over 40 captives now writing this risk.

Trade Credit has also experienced a large increase—up an average of 35 percent in the last two years—while political risk is up an average of 17 percent in the last two years. There has been a year-on-year increase in companies writing third party coverages, with 22 percent of all captives writing some form of these.

Where are the captives and their owners?

Marsh has captives owned by parent companies from over 50 countries. US owners are still the largest group by some way; the other countries in the top 10 are the UK, Australia, France, Germany, Switzerland, Sweden, Canada, Japan and the Netherlands.

With more than 70 jurisdictions having captive insurance legislation, there is now so much choice for companies. In recent years we have seen an increase in onshore domiciles and a decrease in companies choosing offshore domiciles. In 2015 53 percent of captives were domiciled onshore, compared to 47 percent offshore. By 2019 that had changed to 59 percent onshore, versus 41 percent offshore. It would be fair to say that this is due in part to the emergence of many US states entering the captive insurance market.

Time for change?

It is essential to reassess whether your current domicile and captive arrangements are still optimal, especially if your captive has been in place for some time. Regulatory change or a change in the focus of the captive owner’s business could mean it is time to make changes to the captive.

Many domiciles offer the option of redomiciling into or out of the domicile. However, when assessing whether many have moved in recent years the simple answer is no—captives are redomiciling less frequently and it has not been a significant trend in any of the last five years. Thirteen redomiciled in 2015, dropping to only three in 2018.

Captives using fronting insurers and getting a rating

There was a small decrease in the amount of companies using a fronting insurer, with 35.7 percent in 2014, dropping to 34.7 percent in 2016, and 32.7 percent in 2014. This small decrease may be due to more companies looking to issue direct policies in the marketplace from permitted domiciles.

The rating figures have stayed relatively constant over the last five years. Between 3 and 4 percent of captives attain a rating.

Summary

Captives are used by all industries and are owned by companies from a huge pool of countries. There has been an increased usage of captives by large companies, who are retaining more within their captives. Companies are also writing more extensive programmes in their captives, with non-traditional risks being added to the longstanding use of the large P&C lines.

Coupled with the transitioning market, current activity and the points highlighted above, there is likely to be strong growth among captives in the future. More premium is likely to be retained in captives, and we are likely to see more owner locations and more multiline programmes being written, as companies look to gain the full benefits of ownership of a captive.

Rob Geraghty is international sales leader at Marsh Captive Solutions. He can be contacted at: robert.geraghty@marsh.com