Dramatic Increase in Captive Insurance Use in 2020 Continuing in 2021

As a result of a hardening traditional commercial insurance market, captive insurance use increased dramatically in 2020 and there's no sign the trend is easing in 2021.

Speaking as part of a recent "Captive Trends and Data: What You Should Know" webinar presented by Marsh, Ellen Charnley, president of Marsh Captive Solutions, said there was historic growth in the number of captive insurance companies around the world in 2020.

"We had a crazy number of formations in 2020," Ms. Charnley said.

Of the domiciles around the world in which Marsh manages captive insurance companies, 15 saw an increase of more than 20 percent in captive insurance premium volume in 2020, she said, so the trend of increased captive use is indeed global.

"The growth really was historic, unprecedented, more than double our best year ever," said Michael Serricchio, Americas sales and advisory leader at Marsh Captive Solutions. The reason for it, he said, can be summed up in two words: challenged market.

"It's really driving clients of all sizes, of all industries, all regions to think more about their property program, their excess liability program, [directors and officers (D&O)], products liability, products recall," Mr. Serricchio said. "These are all lines of coverage that are just really giving a lot of pain points to clients, and there's no doubt in my mind that that's why we saw these historic formations in 2020. And that's going to continue."

Marsh saw more than 100 formations of all types of captives in 2020, including single-parent captives, cells, group captives, and risk retention groups, Mr. Serricchio said.

In addition, the parents of many dormant captives are putting their alternative risk transfer vehicles back to use. Meanwhile, existing captive insurance companies already writing a decent amount of coverage increased the volume they were writing in 2020.

Marsh manages more than 1,500 captives, and premium volume at the largest captives it manages—those with more than $20 million in premium—grew by about 5 percent in 2020, "showing that they're constantly looking with their brokers at what they can do, how they can leverage their captive, how they can perhaps take premium out of the market, raise retentions," Mr. Serricchio said. "[They're] being forced to do certain things, and that captive was just the perfect vehicle to bridge that gap."

In a hard market, a captive is a natural vehicle to do something different with a risk transfer program, using data and analytics to determine how to react to the market to drive down costs, he said.

"Even in soft markets, we've found that captives generally have been increasing," Mr. Serricchio said.

"It's not difficult to see the correlation between a difficult insurance market and increased premiums into captives," said Lorraine Stack, international sales and advisory leader at Marsh Captive Solutions. What's interesting, however, is that companies that form captives still buy insurance in the traditional market, they're just doing so in a more strategic and cost-effective way, she said.

"Companies are looking to find that value and that inflection point. What's the right balance between risk retention and risk transfer?" Ms. Stack said.

Of the new captive insurance companies being formed, single-parent captives remain the most common, but in recent years there's been a significant growth in cells.

"Cell captives are so efficient, they're relatively easy, they're a little bit less expensive to run, they're able to plug and play quickly at a renewal," said Mr. Serricchio. "I think you're going to find this phenomenon will continue. Everybody wants efficiency."

"In Bermuda, we've turned cells around in as little as 2 weeks," Ms. Charnley said.

Rent-a-cell captives provide another option for insurance buyers, "especially in the middle market," Mr. Serricchio said, and a cell captive can be a good way to get a start in captive insurance.

Ms. Stack noted that outside the United States, the Isle of Man, Guernsey, and Malta are the primary cell captive domiciles.

"The UK pricing is the highest in the world. That's really fueling growth in the Isle of Man and Guernsey," she said. Recently enacted regulations allowing fast-track cell authorization in Guernsey are also driving cell formations there, Ms. Stack said.

Several lines of coverage showed considerable premium growth in Marsh managed captive insurance companies in 2020. Excess liability saw a 10 percent premium increase, D&O saw 50 percent growth, cyber coverage experienced 54 percent growth, and medical stop-loss coverage saw 81 percent growth in premium.

"If you look at the growth numbers for these lines of coverage, 7 years ago, with the exception maybe of cyber, clients with captives, it just wouldn't have been thought of," Mr. Serricchio said. "It's just an amazing testament that says when there's an issue in the market, D&O coverage in a captive can become very relevant. Cyber for the last 5 years has been growing hugely, and 15 years ago you never would have seen cyber in a captive."

With excess liability a top pain point for many insurance buyers, a captive insurance company can offer flexibility. "A single-parent captive that's been around for a long time can easily be deployed,” Mr. Serricchio said. "A rent-a-cell can easily be formed."

Meanwhile, writing medical stop-loss coverage in a captive can reduce costs.

Captive owners are also placing more property coverage in their captives. In 2020, newly formed Marsh-managed captives wrote over $500 million in property coverage, according to Mr. Serricchio.

As businesses increasingly see the value of captive insurance, tax issues are fading as a consideration.

"We've even seen new formations in zero-tax jurisdictions such as Guernsey where the captive owner is choosing to be taxed in their parent's location because what they want is the value of the captive," said Ms. Stack. "So, tax issues are important to consider, but they're not a motivation."

In addition to the new captives being formed or the existing captives taking on additional premium due to the hard market, many start-up InsurTech companies are also forming captives, according to Mr. Serricchio.

Many of those companies want to offer managing general agency or managing general underwriter business writing, property, workers compensation, renters insurance, cyber insurance, or other coverages, using data and analytics to write the coverage. "A lot of these companies are basically forming captives to take some of the underwriting profit that they know is there," Mr. Serricchio said.

In terms of what sort of coverages a parent could write in a captive insurance company, "We can pretty much do anything in a captive. You may or may not need a front, or you may or may not need a rating," Ms. Charnley said. "The question is, 'Does it make sense, is there value to it?'"