Continued hardening in commercial property could drive captive use, says Artex

The commercial property insurance market is facing a “perfect storm” that could drive interest in captives, according to a new report from Artex Risk Solutions.

“Under Pressure – Capitalizing on alternative risk solutions in the face of a hardening Commercial Property market” notes that hardening in the US insurance market looks set to continue in the first half of 2023.

While market hardening may not be at similar levels to those experienced to date, inflation impacting material and labour costs and insurers “resetting reserves to buffer against a more challenging economic environment” could see continued hardening and capacity constraints in some lines.

“There appears to be a general consensus among re/insurance company shareholders that both carriers and re/insurers need to drive higher returns and deliver improved underwriting profits,” the report notes.

Underwriters are becoming more selective over the mix of commercial property business they accept and are pricing capacity accordingly, the report notes. Meanwhile, inflation, interest rate hikes, geopolitical instability and a rising cost of living are converging, leading to a "resetting of commercial property re/insurance rates”.

“Given the currently expected market trajectory, it is increasingly unlikely that a return to softer markets, which we had seen prior to 2020, will reappear any time soon,” it states.

Captives may increasingly be a solution for businesses and industries with complex risk profiles, as well as other sectors and occupancies carriers have moved away from.

Steve McElhiney, SVP and director of re/insurance at Artex, said: “Insurers are more frequently drilling into the drivers of potential loss, particularly in industry niches where claims losses are generally expected to be higher.

“As one example, you may have a company that is operating in a tougher risk class such as steel productions, but within that class you might have an outlier in the mix with extremely low losses and a well-controlled risk management framework. Those types of companies have generally been good candidates for moving out of the traditional insurance market and using a captive to access re/insurance directly.”