12 May 2015USA analysis

Political risk and cyber drive formations of captives

Captive insurance vehicles are increasingly being used by businesses to provide cover for non-traditional risks with political risk driving this growth, a new benchmarking report published by Marsh has shown.

Marsh’s report, The World of Captives: Growth and Opportunities Without Borders, states that the number of captives writing non-traditional coverage lines rose overall by 11 percent in 2014. The biggest increase came from political risk, where the number of captives that include political risk rose 83 percent in 2014. Additionally, the number of captives writing cyber liability grew 18 percent.

“As more companies use data and analytics to better quantify their emerging risks and optimize their retained risk, the utilisation of a captive to finance retained traditional and emerging risk is a logical next step,” said Christopher Lay, president of Marsh Captive Solutions.

In the US, 83 or 22 political risk of the 374 US captives under Marsh management currently access Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA), by writing either conventional terrorism coverage for property damage or the excluded nuclear, biological, chemical and radiological perils.

Across international markets, the European Union is continuing to see an uplift in formations driven by increasing certainty around Solvency II. Other regions including Latin America, Asia and the Middle East are all experiencing significant activity in exploring the use of captives as risk financing becomes more sophisticated.

The report also found that financial institutions represent the largest users of captives worldwide, with 269 captives writing $20 billion of annual premium and holding a combined surplus in excess of $35 billion.

While the number of captives owned by communication, media, and technology (CMT) companies ranks seventh among industries benchmarked, they generate the second-largest amount of premium totalling $3.2 billion.

There were eight captive re-domestications in 2014, down from 11 in 2013 and 16 in 2012, once again showing no large scale trend in captives moving domiciles.

Hong Kong now has three captives and has goals of attracting many more, including companies from China.

Marsh’s 8th annual captive benchmarking report is based on the activities of more than 1,100 captives under Marsh’s management, ranging from the world’s largest insurance vehicles to small captives.