Captives could help soften impact of hardening market

Captives that generate profits during the oncoming hard market might tempt commercial insurance carriers back into the market, suggested Sandra Bigglestone, director of captive insurance at the State of Vermont department for financial regulation.

Speaking on the final day of the VCIA conference, she said this might prevent the market remaining as hard and as long as it has in the past, causing it to instead fluctuate to some extent between hard and soft.

Joshua Reding, director of risk management at Life Time Captive Insurance Company, was also optimistic that the hard market might prove relatively short lived. “The pendulum is certainly swinging [back to a hard market], but we don't expect it to swing too hard,” he said.

James Swanke, director of risk consulting at Willis Towers Watson, said captives seemed to be responding to the changed market conditions in much the same way they had in previous cycles, taking as much risk as they could into the captive and then looking to take it out in the reinsurance market.

But David Provost, deputy commissioner for captive insurance at the State of Vermont department for financial regulation, highlighted a potential problem with this strategy. Captives he spoke to had reported a dramatic decline in the number of reinsurers willing to do business with them, he said, in some cases halving to 10 from 20. Some insurers are also pulling whole lines of business, he added.

Some companies with particularly impressive risk management processes had read the emerging situation early and had formed captives in anticipation of this market deterioration, he said. But he dismissed suggestions that captive formations in the current market might constituted a red flag, noting that many established Vermont captives had been formed in previous hard markets, going back as far as the 1980s.