Pandemic sees record growth in captives
Captive formation almost doubled in 2020, as companies worked to meet the challenges of the pandemic, according to Marsh. The consultant’s 2021 Captive Landscape Report finds that “captives thrived” in the midst of a challenging market.
“[T]he benchmarking data showed organizations in every industry turning to captive vehicles to help them meet their challenges,” the report finds. “Captives have proven to be effective tools in responding to risks and changing market conditions, which is why they keep growing.”
The survey of more than 1,300 captives found that gross written premiums increased to $60.8 billion in 2020, from $54.0bn a year before.
Several factors contributed to captives’ success, including insurance market challenges, disruptions from the global pandemic, record natural catastrophe frequency, and liability claims inflation, said Marsh.
These “have increased risk transfer costs for every industry, making captives a more attractive option”.
The report continues: “When facing difficult operating conditions and higher rates for commercial insurance, organizations take a hard look at their options. Many conclude that one solution is to retain more risk by increasing their deductibles or self-insured retentions and buying insurance above those levels. In 2020, Marsh captive clients opted to do exactly that – by increasing the premium volume in existing captives. In addition, many organizations decided to form a new captive entity.”
According to Marsh, it helped record numbers of clients form captives in 2020, with more than 100 created – nearly double the historical rate. It is on track to create 100 more this year. Protected or segregated cell companies in particular saw “historic growth”, with new formations up 53% in 2019. Growth has continued this year, with directors & officers’ and cyber the top two coverages written in cell facilities formed in the first half of 2021.
Risk retention groups and special purpose vehicles also saw significant growth (up 11% and 13%, respectively). While single-parent captives saw slower growth (up just six per cent) they still account for three-quarters of the total.
According to Marsh, an increasing number of captives are also writing third party business, with captives offering cover for customers of the parent company, suppliers, pooling facilities, and employees. In 2020, premiums written for third party unrelated risk grew 13%. Over the past five years, third-party premiums are up 85%.
“Risk diversification, a higher potential for building up surplus, and the opportunity for the captive to generate profits for its parent are among the advantages of taking on third-party risks,” the report states. “Some captive owners see additional value in third-party business as a way to strengthen relationships with customers, key business partners, and employees.”
Most industries saw growth in 2020. While the numbers in financial services remain highest, up 15% to 287 captives and $28.1bn in premiums in the latest survey, from 249 and $21.3bn in 2019, growth was strongest in the automotive sector. The number of captives there grew 28% to 46, while gross written premiums climbed to over $2bn.
As for domiciles, Guernsey continues to dominate and saw the fastest growth in premium volume in 2020, up 79%, followed by Singapore (30%) and Bermuda and Cayman (20%), with 6% in the US.
Despite some easing of price increases in insurance, Marsh urged captive users to take a long-term view.
“Captives demonstrate their value over time, not just as a temporary solution to commercial insurance market volatility,” the report states. “The market firming is showing some signs of slowing, but rates in many lines are unlikely to drop back to pre-2018 levels before the market began firming. New risks are emerging, and captives remain an effective way to address those – as well as the ongoing, known risks that organizations already face.”
