Reznicek warns of race to the bottom as market softens
The commercial property market has softened considerably heading into 2026. Some are questioning whether captives still make sense in this environment. What’s your take?
The softening market doesn’t weaken the case for captives. It clarifies it. What it really does is separate the organisations that built captives as long-term risk financing infrastructure from the ones that formed them reactively because their broker couldn’t find capacity in 2022. If the only reason you started a captive was because the commercial market was expensive, then yeah, you’re going to question that decision when rates come back down. But if you built a captive because you understood your own risk better than the market did, because you had the loss history and the safety culture and the operational discipline to outperform the pool, the softening market doesn’t change that calculus. It actually gives you more options. You can selectively access commercial capacity where pricing is favourable and retain in the captive where you hold a structural advantage. That’s optionality. That’s the whole point.
You’ve argued before that a soft market may actually be the optimal time to form or strengthen a captive. Can you walk through why?
The economics compound in your favour on both sides of the program at the same time. Your retention layer is written at actuarially sound rates calibrated to your actual loss experience, and that doesn’t change with the market cycle. But the excess and reinsurance layers? Those are purchased at cyclical lows. Collateral requirements may get more flexible. Attachment points can also be more favourable. So if you’re forming a new captive or restructuring an existing one, you’re assembling all the operational infrastructure in the most favourable environment you’re going to get. And that window is temporary. When the market hardens, every one of those components gets more expensive and harder to negotiate. The captive that locked in favourable reinsurance pricing and strong carrier partnerships during the soft market is the one that actually performs through the next hard turn. You’re not just saving money today. You’re positioning the program for the next decade.
Property and excess property specifically. We’re seeing significant rate moderation and abundant capacity. What should captive owners be thinking about on those lines?
Property is the line where this conversation gets really interesting, because the courting happening in the property and excess property market right now is aggressive. Carriers are competing hard for premium. Capacity is back and for a lot of buyers, the instinct is to move everything back into the commercial market and call it a win. I get the impulse, but captive owners need to think carefully about what they’re retaining and why. Property is a severity-driven exposure. You’re not managing frequency. You’re managing the potential for a single catastrophic event to blow through your program. When commercial carriers are competing on price in a severity line, that’s the market getting aggressive on risk it may not be adequately pricing. A well-capitalised AM Best-rated carrier can absorb adverse development on a mispriced property book. They have the surplus, the reinsurance towers, and the diversification. A captive, particularly a newer or thinly capitalised one, does not typically have those same luxuries.
Are there risks of a “race to the bottom” in captive property programs as the market softens?
Absolutely, and honestly it’s the thing that concerns me most right now. When the commercial market softens and carriers start competing aggressively on property and excess property, there’s pressure on captive programs to match those economics. Captive managers feel it from their clients. Brokers feel it from their insureds. And the temptation is to relax underwriting controls, lower attachment points, reduce collateral requirements, expand coverage terms, all to keep the captive “competitive” with the commercial alternative. That is a dangerous game for any captive, but it’s an existential risk for a new or thinly capitalised one. Underwriting stringency isn’t something you negotiate away in property. It is your solvency protection. Every dollar you give up on the front end is a dollar of potential adverse development on the back end that you may not have the capital to cover. The race to the bottom in commercial property pricing will eventually produce losses. It always does. The carriers that survive it will be the ones with discipline and surplus. Captives need to hold themselves to at least that same standard, and given the capital disparity, probably a higher one.
Can you expand on the capitalisation point? Why does it matter more in property than in a frequency-driven line like workers’ comp?
It’s the nature of the exposure. For frequency based exposures (like Workers’ Comp), you’re typically retaining a working layer,$250,000, $500,000 per occurrence. Your loss experience is credible because you have volume. Actuarial projections are grounded in your own data, and the variance around the expected loss is manageable. Property is a completely different animal. You could have ten clean years and then a single hurricane, a single fire, a single collapse event that exceeds your entire annual premium multiple times over. That severity profile demands a capital base that can absorb the shock. And the financial size/strength disparity between an AM Best A-rated fronting carrier and a typical captive really can’t be understated. We’re talking about carriers with hundreds of millions, sometimes billions, in surplus, backed by reinsurance programs designed specifically for catastrophic variance. A captive sitting on $5 or $10 million in surplus is not in the same position. The maths don’t care about your intentions.
What should a captive owner do if they’re being told their captive can’t compete with softening commercial rates on property?
Reframe the question. The captive was never supposed to compete with the commercial market on price in a severity line. It’s supposed to give you control, transparency, and long-term economic benefit on risks where your performance is better than the pool. If commercial property rates are genuinely favourable right now, take advantage of that. Use the commercial market for what it’s good at. But here’s what’s actually strategic: use this soft market to strengthen the captive on the lines where it does hold an advantage, and use the favourable environment to negotiate better terms on the components that support the captive’s structure. Lock in reinsurance pricing. Negotiate favourable fronting arrangements. Build carrier relationships now, while those partners are hungry for premium volume. When the market turns, and it will, the captives that used this window to build stronger infrastructure and better partnerships will have a real advantage over the ones that just enjoyed the temporary rate relief.
Any final thoughts for the CICA audience on navigating this cycle?
The soft market is a test of conviction. Every captive formation pitch during the hard market said “this is a long-term strategy, not a market-timing play.” Well, here’s the long term. The organisations that meant it will use this environment to optimise. They’ll access commercial capacity selectively, lock in favourable reinsurance terms, strengthen carrier relationships, and build the track record that makes the program more valuable with every passing year. The ones that didn’t mean it will quietly dissolve and go back to the commercial market until the next hard turn, and then they’ll form new captives again. It’s also important to keep in mind that even though a few lines may now be back into a softened cycle, that suddenly captive’s don’t work. There are many other lines and emerging risks (residential construction/general liability, commercial auto, AI proliferation, etc.) where captives are still as up to the task as ever, likely more so as the industry continues to grow and mature. We see it every cycle and it’s one of the biggest reasons we suggest spending a lot of time on the front end with underwriting scrutiny, actuarial rigor, and program design, precisely because we’re building for the full cycle, not just the market conditions at formation. That’s what separates a captive that performs from one that was always just a temporary workaround.
Nate Reznicek is president of Captives.Insure. He can be reached at: nate@captives.insure
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