Captive Insurance Industry Thrives Amid Market Challenges

In a recent webinar, independent captive manager Strategic Risk Solutions (SRS) said the captive insurance industry has experienced a remarkable year marked by significant growth and increased interest. SRS highlighted the surge in new captive formations, the evolving landscape of captive domiciles, and the shifting dynamics in response to market challenges.

There has been an exceptional number of new formations within the captive insurance sector throughout the year as well as new coverage lines being written in old captives, according to SRS. The captive manager attributed this surge to various factors, including the hard insurance market, where businesses are compelled to take on retentions due to limited coverage options. SRS further explained that reactionary formations have been triggered by discontent with renewal outcomes, emphasizing that some businesses upset with the handling of renewals have chosen to form captives as a strategic tool to mitigate future volatility, a sentiment especially prevalent in the single-parent captive sector.

While single-parent captives have witnessed a surge in formations, the captive manager cited explosive growth in the group captive market. SRS has seen consistent 10 percent to 15 percent year-over-year growth in group captives that it manages. This growth trend, according to SRS, is a testament to the effectiveness of the group captive model in providing stability and favorable conditions for diverse industries. Likewise, the captive manager has witnessed the number of new cell captive formations under its portfolio skyrocketing as organizations realize the advantages of renting versus owning their own captive.

The captive manager also highlighted the emergence of new players in domiciles, particularly in Europe. Previously in a dormant state, Europe has experienced a surge of activity, attracting attention from industry players. With the introduction of captive legislation in 2023, France has seen double-digit captive formations, which from a European perspective is material, said Peter Child, CEO of SRS Europe.

Furthermore, with the United Kingdom ready to consult on the introduction of captive insurance legislation and Italy and Spain potentially considering it as well, the European Union is moving toward full legitimization of the captive concept in contrast with the historical Organization for Economic Cooperation and Development-driven skepticism, which was to view captives as more of a tax play, according to Mr. Child.

SRS said there was a decline in worldwide captives until around 2020, which it attributes in part to the closure of micro-captives. However, since 2020, SRS said there has been a resurgence, with a growth of over 100 captives worldwide annually. The perception of captives as alternative insurance solutions is evolving, with captives becoming integral tools for risk management in large insurance portfolios.

Looking ahead to 2024, SRS expects to see continued growth in the captive insurance sector citing continued large jury awards in specific sectors as commonplace and much higher retentions being pushed on organizations by the insurance market. In particular, US commercial auto liability, medical malpractice, and wind-exposed property continue to feel the hard market pinch. The captive manager also touched upon the normalization of captive insurance, emphasizing that captives are no longer viewed as alternative entities but as essential tools in the insurance arsenal for both large and middle-market insurers.

A shift in perspective was discussed, moving away from a transactional consideration of captives to a more strategic, long-term approach. The idea of looking at captives holistically, across various lines of coverage and in conjunction with emerging risks, was presented as a progressive strategy for optimizing risk financing over several years.