27 April 2021Actuarial & underwriting

Willis Towers Watson braced for surging interest in captives for D&O, cyber and excess liability cover

Willis Towers Watson is preparing for an uptick in the use of captives in coming months, as businesses look to plug holes in their coverage, particularly for risks that have seen the highest rate increases as the market hardens in key lines.

Willis cited directors’ and officers’ (D&O), excess liability, trade credit, cyber, pandemic and business interruption as lines that have seen particularly steep rate increases, where the motivation to use a captive will be particularly strong.

There is already evidence of increased deployment of captives in response to the hardening market, Willis noted, with new activity largely focused on business from the US and Europe, supplemented by some activity from Asia and Australasia.

While the pandemic initially dampened new captive incorporations in 2020, activity has increased into 2021, Willis explained. While US captive domiciles reported increases in new licensee numbers in 2020 compared to previous years, this growth has been offset by the continued decline in 831(b) captives, due to the IRS crackdown on abuse in this sector of the market, it added.

Meanwhile, Bermuda and Cayman saw captive numbers continue to fall by a net 17 in 2020, with new licenses in these domiciles also offset by declines in the 831(b) sector, and by mergers and acquisitions activity.

Willis also said it has “seen instances where the careful preservation of cash in 2020 has positioned buyers to take more aggressive risk retention positions in 2021.”

Willis also highlighted increased use of analytics among captives in 2021, to support decision making and to optimise costs. “We see this at all stages of captive development, from new captive feasibility to strategic planning for existing captives,” it said.

“We have seen much greater focus on risks that are driven more by severity than frequency, such as professional liability, cyber and complex products liability risks,” Willis said. “This has created additional demand for analytical services that can better model such risks and that can assist an owner in capital and portfolio management for the captive.”