Increased Captive Use Includes Spread to New Markets, Report Finds

As companies increase their use of captive insurance due to the hardening commercial market, captive insurance use is spreading from advanced markets to Asia and Latin America, according to a new report from the Swiss Re Institute.

Meanwhile, in advanced markets, midsized companies are increasingly using new captive business models to achieve flexibility and efficiency, according to the Swiss Re Institute report, Hard Market Solutions: Captive Insurance Thrives in Tough Times.

The report notes that many commercial insurance programs are increasing deductibles, retentions, and coinsurance as ways to curb insurance spending, leading many companies to increase their use of existing captive insurance companies or form new captives. The Swiss Re Institute cites a Marsh survey from September 2020 that found that 59 percent of respondents expected to increase their captive use by adding more lines of coverage and increasing the risk retained in the captive.

"Captive insurance enables a corporation with large portfolios of risks to better bundle and diversify them, and to access global insurance and reinsurance markets directly," the report said. "By self-insuring high-frequency, low-severity risks through a captive, a corporate can reduce transaction costs (brokerage fees, underwriting expenses) and focus risk transfer on lower-frequency, higher-severity risks for more efficient risk management."

Captives can benefit from better access to data and closer proximity to their parents' risks, the Swiss Re Institute notes, so they can be better able to develop customized coverage that meets their parents' changing needs. "This becomes increasingly important with the emergence of new risks and uncertainties regarding how to determine the frequency and severity of those risks. Advanced data analytics and actuarial developments support captives to underwrite hard-to-insure risks such as cyber," the report said.