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December 2005/January 2006 Pulse Survey Analysis:
The Impact of the 2005 Hurricanes on Captives

 In partnership with captive.com, Towers Watson conducted this pulse survey to take a look at the impact of the devastating hurricane season on the captive industry..

This analysis was written by analysts at Towers Watson.

The pulse survey on the impact of the 2005 hurricanes on captives elicited 30 responses. As expected, a majority of the responses (60%) indicated no impact; 13.3 percent of the responses had losses over $1 million; another 16.7% between $100,000 and $1 million; and the last 10% had less than $100,000 in losses.

Most of the losses were for property claims. Only three responses were for liability and two had workers compensation losses.

When asked as to the possible impact the hurricanes would have on their captive program, a third expect no changes. However, 50% expect reinsurance pricing to increase, 36.7% expect reinsurance capacity to shrink, 23.3% expect underwriters will want more underwriting data, and 16.7% expect increasing credit demands will be made. One respondent will now consider using his captive to write property (note: multiple responses were allowed).

In the December issue of the Captive Insurance Company Reports, in the lead article on the impact of the hurricanes, Towers Watson outlined the key impacts on the captive market. Some of the pulse survey results verified the conclusions drawn in the article. Specifically, actual losses to captives would be slight, mainly concentrated in property, and reinsurance would become more expensive and more difficult to secure. However, CICR predicted that credit demands on captives would increase as the heavily hurt reinsurance industry sought stronger credit quality. Only 16.7% of the respondents concurred. Towers Watson believes credit quality could be a concern because the reinsurance industry could end up absorbing half of the estimated $55 billion in U.S. catastrophe losses in 2005. However, reinsurers have a much smaller capital base than the commercial market. The reinsurance market has policyholders’ surplus of around $73 billion , while the U.S. commercial market has $413 billion, per the Insurance Information Institute. Hence, as capital becomes constricted, reinsurers will want to deal with the more credit-worthy insurers. Captives are usually quite small relative to the commercial market, most are not rated, and so are less desirable credit risks.

CICR also expected more underwriting interest by all, such as more interest in understanding catastrophe modeling and more underwriting questions, which was supported by the responses.