29 June 2020Feasibility studies analysis

Soaring premiums could trigger swathe of new captives being formed: Willis

The insurance market increasingly resembles that of the 1980s, one of the most challenging insurance markets in history for those buying insurance, according to Jim Swanke, senior director of captive consulting at Willis Towers Watson. And this could trigger a swathe of new captives being formed.

Speaking on a Willis Towers Watson webinar titled The Role of Captives in Difficult Times, Swanke warned the market is set to keep hardening over the next 24-36 months, with premiums rising and capacity falling. That makes it a very difficult environment for buyers of insurance.

“This market increasingly resembles the hard market of the 1980s, which was one of the worst insurance markets in history [for buyers],” said Swanke.

He said this will encourage new companies to consider launching captives.

Swanke said companies should think about launching single parent captives when they were able to collect premiums of around $1 million, given they tend to have running costs of between $75,000 and $150,000 per year.

Erin Boulware, senior associate of client development at Willis Towers Watson, said these running costs represent good value for companies, which will still benefit from their captives when markets start softening again.

“Captives are still valuable in soft markets,” she said. “They are relatively inexpensive to run and they produce a lot of value. They are a tool that it is always useful to have available for when you need it.”

Peter Carter, head of Willis Towers Watson’s global captive practice, noted that captives allow their owners to bring more quantitative data to discussions about risk. “It is better when discussions about risk are not too theoretical,” he said.

“Captives help companies better analyse what is going on,” agreed John Merkovsky, global head of risk and analytics at Willis Towers Watson. “It allows them to analyse smaller losses, to create an environment where they can see all the leakages, which is particularly important in large and complex organisations.”

Boulware added: “Captives help companies manage their retained risk. They also provide value by encouraging executives to think and talk more about risk, which benefits the company’s risk control.”

Companies should be thinking about their exposures and retained risk as they adapt to challenging market conditions, added Boulware. “The captive can take down reserves and reduce premiums, or delay premium payments, allowing the parent to hold onto cash longer,” she said.

Meanwhile, Swanke pointed to alternative options for smaller companies, such as group captives or a segregated cell structure, which can give them access to the benefits of captives with smaller running costs.

Swanke said: “If the market gets as bad as it was in the 1980s we will see more group captives, which have been very successful over the years.”

However, Swanke noted that group captives are more difficult and time consuming to set up than single parent captives, taking up to a year in some cases, compared to around three or four months for a single parent captive.

Securing the agreement needed from all members to make decisions can be “a herding cats exercise,” he warned.

“I have worked with groups in the past that had 80-100 members, which was maddening,” Swanke added. He said the optimal membership for group captives is around eight-12 members, which makes it much easier to build consensus.

Smaller companies looking at the group captive option needn’t launch a new one, added Boulware. She noted there are many existing group captives that accept new members.

Willis Towers Watson launched a captive in the 1980s when the professional liability market was effectively closed. It also has another captive that it uses to access the reinsurance markets.

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