13 June 2019Accounting & tax analysis

Captives used to dodge primary rate hikes by accessing reinsurers direct

Many large companies are looking to better leverage their captives to avoid “unbudgeted” rate hikes on their traditional insurance programmes, John English, CEO, captive and insurance management, Aon, told Captive International.

Some are using captives to work with reinsurers directly to get better deals, he added.

English was speaking to this publication at the annual Bermuda Captive Conference taking place this week. He said that many of the clients he is speaking to are looking to navigate the hardening market but using their captive in very specific ways.

Many companies, even with loss free portfolios, are being hit with rate increases of 10 percent or more on property business, he said. Companies that have suffered losses are seeing increases of more than 30 percent in some cases. In addition, nat cat business is proving problematic for many clients with retentions increasing and the risk appetite of carriers changing.

“But this is an unbudgeted cost for many clients and they are looking to their captive to help navigate what is going on,” he said.

Some firms are looking to mitigate increased retentions being imposed by their insurers by using their captive to place a cross-class aggerate cover directly into the reinsurance market. “The net effect is a lower retention by accessing reinsurers directly,” he said.

Others are stripping the natural catastrophe element out of their property programme, placing it separately into the reinsurance market via their captive. One client in North America did this using a parametric trigger. “Seeing a corporate go directly to the reinsurance sector and use a trigger like that is pretty interesting,” he said.

Some financial institutions that are grappling with a spike in rates and restrictions on coverage for professional indemnity and crime are looking to use facultative reinsurance on an opportunistic basis, he said. “They are using it tactically,” he said. “But all these are examples of using a captive more efficiently.”