Uncertainty in commercial lines drives interest in captives: Swiss Re Institute


Disruption and uncertainty in global commercial insurance markets is prompting companies to explore captive insurance, according to a new report by Swiss Re Institute.

The report notes that the commercial insurance markets are experiencing rate increases, capacity reductions and tighter underwriter scrutiny as the market reacts to COVID-19-related losses, social inflation, above-average catastrophe losses and secular downward pressure on investment returns.

Exacerbated by uncertainty created by the pandemic, the current rate hardening is the strongest in 20 years and this is expected to continue into 2022. It notes that, as a response, many commercial insurance programmes are increasing deductibles, retentions and coinsurance as ways to curb insurance spending.

The pressure is leading companies to increase their utilisation of existing captive insurers and form new captives, the report notes. It cites a Marsh survey in September 2020 found 59% of respondents expected to expand their captive use by adding more lines of coverage, increasing retentions in the captive.

The report notes that captives also benefit from better access to data and closer proximity to the risks of their sponsors, so can more flexibly develop customised products that cover the changing needs of their corporate parent. This becomes increasingly important with the emergence of new risks and uncertainties regarding how to determine the frequency and severity of those risks. Advanced data analytics and actuarial developments support captives to underwrite hard-to-insure risks such as cyber, the report notes.

It also highlights the fact that there are now more captive insurance companies than traditional insurers globally, estimated at more than 7000 captives domiciled in more than 70 jurisdictions.

The US remains the world’s leading market for captive insurance, used by up to 70% of Fortune 500 companies. But with high saturation among large corporations in North America and Europe, the use of captives is spreading geographically to Asia and Latin America.

The report stress that it also expects more smaller companies to explore the use of captives. “Captive use is also expanding from the traditional large global corporations to midsized companies. This is in line with the growth of alternative structures and business models for captive insurers, which fit the needs of a wider spectrum of organisations,” it said.

“Structures such as Protected cell companies (PCC) and virtual captives enable smaller corporates to access the benefits of captive insurance without needing to set up the infrastructure themselves. We expect to see continuing momentum in the global market for captive insurance as companies seek a more flexible and efficient insurance solution amidst uncertainty and a hard market.”

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