Corporations Turn to Captives for D&O Coverage in Volatile Market

Captive insurance is an appealing option for providing directors and officers (D&O) insurance as corporations tackle fast-rising premium rates and struggle to find the desired capacity.

In a Global Captive Podcast episode, Beth Thurston, head of the Marsh UK Management Liability Practice, said that in the past 18 months the use of a captive to participate in a D&O program has been coming up in conversation more frequently with clients as the D&O market became increasingly volatile.

"In our [Financial Times Stock Exchange] FTSE 100 portfolio, clients on average saw a 74 percent increase in their premium cost and, in 2020, that increased to 266 percent," Ms. Thurston said. "They have also seen a very significant reduction in the capacity available in the London market. In 2020, 66 percent of that same portfolio of clients have renewed their programs with a reduced overall limit and, on average, that reduction has been 33 percent."

Lorraine Stack, international advisory and sales leader at Marsh Captive Solutions, noted that historically few captives had participated in D&O programs. Until 2019, only 48 of the 1,400 captive insurance companies managed by Marsh were writing some element of D&O, with premium totaling $56 million.

The Marsh 2020 Captive Landscape Report, however, showed a 25 percent increase in premium between 2018 and 2019, reflecting early activity as the market began to harden. The figures for 2020 are expected to show continued premium growth and more captives participating.

"With low premiums and lots of capacity available in the insurance market, there wasn't a huge incentive to retain risk, but that has changed," Ms. Stack said. "We certainly expect to see a lot of growth in this area."

The above figures refer to Side B and Side C coverage, since it is relatively straightforward to provide coverage through a single-parent captive. Side B insurance responds in the event a corporation provides indemnification to an individual that is facing a claim or investigation. Side C responds in relation to securities claims against the corporate entity itself.

Side A, however, is insurance that responds in the event that there is no corporate indemnification for an individual facing a claim or investigation. As a result, while Side B and C capacity can be provided by the insured's captive, Side A must be transferred to a third party, and a single-parent captive is not appropriate.

As the market hardens and capacity can be tough to find, corporations are looking for alternatives and the utilization of cell captives is gaining traction.

Marsh said it now has five clients using Bermuda cells to provide this coverage, and it is in conversations with clients around the world considering this option.

"A cell captive is a stand-alone entity where ownership, management, and control are independent of the company looking for coverage," Ms. Stack explained. "It is important to point out that this is a developing concept; it hasn't been tested in a court of law. When a company might be considering a cell captive for their Side A coverage, we recommend that they consult with legal and tax advisers, as well as their accounting teams, to ensure that the setup will work for their organizations."