Captives are no longer ‘alternative risk transfer’: EY
Insurers should eye the growth of captive insurance as an opportunity instead of competition, a new report by EY has suggested, arguing that they should no longer be classed as a form of alternative risk transfer.
In its 2024 Global Insurance Outlook report, EY noted that as wider hard market conditions in the commercial insurance market have continued, captives have become a growing part of the wider insurance landscape.
"Up until a few years ago, captives were rightly considered to be part of an alternative risk transfer market," the EY report said. "That is no longer the case. Nearly every Fortune 500 firm owns and operates its own captive insurer."
The report stated that captives now represent almost 25 percent of the overall commercial insurance market, accounting for hundreds of billions of dollars in premiums. From 2017 to 2022, the volume of premiums managed by the top five global captive managers doubled, the report said.
"Captives have grown because companies weren't finding what they wanted on the open market," the EY report said. "They came to believe they could devise more effective risk solutions in more direct alignment with their needs than could traditional carriers."
The report also noted that the size of captives has increased while captives are also using reinsurance in a more sophisticated way to reduce portfolio risks and volatility.
The EY report suggested a number of ways commercial insurers can collaborate with captives by engaging and innovating with solutions that address strategic, functional, or geographic gaps in the captives' operations. It suggested that potential areas of collaboration between commercial insurers and captives include: Fronting, the supply of reinsurance, management support and claims support.
"With captive insurers typically focused on their parents' main risks, traditional insurers can offer complementary services," the EY report said. "For instance, solutions and expertise that address mortality and health-related risks for employees can improve captives' approach to risk mitigation."
