Growth is the indicator by which most judge success. If it’s getting bigger, generally it’s becoming more profitable and reliable, even healthier.
Growth is the indicator by which most judge success. If it’s getting bigger, generally it’s becoming more profitable and reliable, even healthier. Marsh’s 2017 Captive Landscape Report, an annual analysis of the captive insurance market that is now in its tenth year, has reported year-on-year growth, with more than 7,000 captives currently in operation globally. Of course, growth also means bigger.
But, as Marsh’s review of data from more than 1,100 captives indicates, growth also means change. Previously, captives were a luxury enjoyed only by larger corporations capable of bringing their risk management and financing in-house. Now, smaller and middle-market companies are benefiting from their own captives, while the larger entities are creating more than one, often to cover non-traditional risks ignored by the commercial insurance market.
This is a story that has been told often in captive insurance, but Marsh’s data does one better and tracks it in action, suggesting that alternative risk financing is truly becoming mainstream.
Even in the face of catastrophic events such as the 9/11 attacks, Hurricane Katrina, the global recession, Hurricane Sandy and Brexit, captives have grown year over year, despite fluctuations in the average property insurance market rate, suggesting, to Marsh at least, that “captives are not only formed in hard insurance markets, as some might assume”.
“In particular, we have seen growing interest in captive formations that solve business unit needs or create a new revenue stream,” according to Marsh’s report.
This has led to a market traditionally dominated by extra-large captives opening up to new entrants, many of them on the middle and small end of the corporate spectrum.
Marsh found in 2016 that the market changed significantly, with extra-large captives—generating more than $20 million in premiums annually and mostly established by FTSE 100 or Fortune 500 companies—making up only 20 percent of the total.
Small captives now account for almost 44 percent of the market, up from 24 percent in 2012, according to Marsh, which has also seen an increase in midsized captives that have grown into larger captives.
Ellen Charnley, global sales leader for Marsh’s global risk and specialties division, says these results are “a sign that the Fortune 500 segment isn’t growing as fast as the small and midsized segments, particularly in the US”.
“Many Fortune 500 companies already have captives, so there is less room for growth in what is arguably a more mature segment of the market,” Charnley explains. “The growth we’re seeing in that space is also different. It’s not necessarily in new formations, but extending and expanding the use of captives beyond what’s traditional.”
“Midsized captives, meanwhile, are becoming more sophisticated in their risk management,” she says. “The rising cost of employee benefits is also affecting all companies.”
How should midsized captives approach expansion and growth? Charnley says: “Those captives that launch without a phased approach may struggle because they may not have total stakeholder alignment.”
“A small or midsized captive tends to attract the attention of different business units within the parent organisation, which then wish to purchase insurance from it because they are unsatisfied with the volatility in the commercial market, for example.”
“If the captive is ‘promoted’ within the organisation in a thoughtful way, it naturally grows into other areas, such as employee benefits.”
The size of the surplus warchest is also another telling indicator of how captive insurance has changed. Marsh-managed captives, for example, currently have more than $110 billion in shareholder funds, which include net retained earnings and capital contributions.
Leading the way are financial institutions, with a staggering $40.05 billion in the bank, well ahead of the life sciences, communications, media and technology, and manufacturing sectors, whose $9.49 billion, $8.37 billion and $8.06 billion nesteggs can’t even combine to overtake those on the front line of the global financial crisis of less than a decade ago.
Charnley says: “Financial institutions have led the way in captive insurance for as long as Marsh has produced the Captive Landscape Report. They have huge customer bases which provide third-party risk opportunities for captives, and they are knowledgeable of and experienced in risk financing, so captive insurance is a natural fit for them.”
In reference to communications, media and technology companies lagging behind financial institutions, Charnley adds: “The increasingly large technology industry has similar kinds of customer risk, so it is likely to catch up with financial institutions to some extent, although I don’t see that happening for a number of years.”
Of the warchest, Marsh explained in its analysis: “Specifically, we are seeing an increase in parent companies using captive shareholder funds to underwrite an influx of new and non-traditional risks, including cyber, supply chain, employee benefits, and terrorism, as well as to develop analytics associated with these risks and fund other risk management initiatives.”
“Risk management projects funded by captive shareholder funds in 2016 included initiatives to determine capital efficiency and optimal risk retention levels in the form of risk-finance optimisation; quantify cyber business-interruption exposures; accelerate the closure of legacy claims; and improve workforce and fleet safety/loss control policies.”
As the world becomes more complex, so do the risks that corporations must protect themselves against. Marsh’s case studies of employee benefits and cyber illustrate this best, because of the kind of ‘risk’ each line represents.
Corporations are under pressure to create efficiencies as they face “the triple threat” of medical insurance cost inflation, an aging workforce and a shift in responsibility for providing benefits, Marsh explained.
“The cumulative costs to insure employee benefit risks often exceed those of global property and casualty insurance, yet benefit financing and governance is far less sophisticated,” Marsh explained.
“We expect continued growth in captives writing multinational employee benefits over the next three to five years as service support eventually follows a similar structure to global property and casualty programs, which are centrally controlled with consistent and transparent governance.”
The rise of the cyber threat, meanwhile, is reflected in Marsh-managed captives, whose use cyber liability programmes increased nearly 20 percent in 2016. Since 2012, that use has exploded 210 percent.
“We expect to see a continued increase, driven in part by companies that are already strong captive users and by those that may have difficulty insuring their professional liability risks.
“The potential advantages to using a captive for cyber liability include accessing reinsurance for cat limits, filling gaps in standard cyber policy language, securing coverage for emerging and unique cyber risks, and consolidating cyber programs across operating companies.”
Charnley says: “Cyber is arguably the number one concern for organisations today and we are assisting captive owners to explore how their captives can work with commercial insurance and reinsurance solutions to provide the optimal coverage to alleviate some of those concerns. I think we need to watch this space. It’s still such a new area that companies are still investigating—their focus being on how to quantify and understand the risks. Those that achieve that will be able to be first out of the gate in offering effective cyber solutions through their captives.”
Marsh’s report goes into greater detail, explaining why captive formation is moving away from tax benefits, and breaking down which domiciles are taking advantage of growth. Visit www.marsh.com for a full copy of the report.
