Report Advises Insurers To Find Captive Collaboration Opportunities

While the continued growth of captive insurance could be viewed as competition by the traditional commercial insurance market, there are in fact opportunities to be had for insurers that find ways to collaborate with captives, a new report suggests.

In its 2024 Global Insurance Outlook report, EY notes that as the hard commercial insurance market has continued, captives have become a fixture on the insurance landscape.

"Up until a few years ago, captives were rightly considered to be part of an alternative risk transfer market," the EY report says. "That is no longer the case. Nearly every Fortune 500 firm owns and operates its own captive insurer."

Indeed, captives now represent nearly 25 percent of the overall commercial insurance market, the EY report says, diverting hundreds of billions of dollars in premiums from traditional insurers over the past decade. From 2017 to 2022, the volume of premiums managed by the top five global captive managers doubled, the November 29, 2023, report says.

The report notes that the captive insurance market is growing in Europe as well, as a result of friendly legislative and regulatory environments in many jurisdictions.

"Captives have grown because companies weren't finding what they wanted on the open market," the EY report says. "They came to believe they could devise more effective risk solutions in more direct alignment with their needs than could traditional carriers."

Outperforming the commercial market in key metrics shows that captive insurance company owners were right on that score, the report says. Citing data from A.M. Best, the EY report says that while US-domiciled commercial casualty insurers posted an average combined ratio of 98 percent from 2018 to 2012, captives posted an average combined ratio of 83.9 percent over the same period.

"Superior combined ratios have not only led to remarkable growth in captives' retained earnings and surplus, but also translated into billions of dollars in savings for captive owners," the report says. "As a result, more companies are more comfortable putting more risk on their balance sheets and keeping it there."

In addition, there are now "super captives" capable of taking on huge amounts of risk, such as covering their parent companies' supplier networks, EY says. Meanwhile, captives have matured in their use of reinsurance to reduce portfolio risks and volatility. And captives are well positioned to build out ecosystem platforms and provide unique forms of embedded insurance, the report says.

The 2024 edition of the EY Global Insurance Outlook focuses on three broad areas that are shaping the strategies of businesses around the world: preparing for the transformative impact of artificial intelligence, a spotlight on delivering societal value, and ever-evolving customer needs and blurring industry lines.

The continued growth of captive insurance and the need for insurers to find ways to collaborate fit into that third category, with the EY report suggesting that commercial insurers can stave off competition by seeking optimal ways to integrate traditional coverage within organizations' risk mitigation strategies.

The EY report suggests a number of ways commercial insurers can collaborate with captives by engaging and innovating with solutions that address strategic, functional, or geographic gaps in the captives' operations. Those insurers should seek to identify captive insurance company partners and the specific consulting and advisory services that would benefit their businesses, EY says.

EY's suggestions for potential areas of collaboration between commercial insurers and captives include the following.

• Fronting. Insurers can issue policies to captives covering certain risks or offering protection in specific geographies in exchange for a percentage of the premium, EY says.
• Reinsurance. More commercial insurers are acting as reinsurers for the captive insurance market, particularly in the Middle East and sometimes in combination with fronting strategies, according to EY. Such arrangements can help captives reduce their exposure while gaining capacity and stability.
• Geographic coverage. Global insurers can provide coverage solutions that address the needs of multinational companies, helping them manage risks across different jurisdictions, EY says.
• Management support. Among the management support services commercial insurers can provide the captive insurance market are feasibility studies, operational reviews, accounting, regulatory filings, and in-domicile administration. They could also act as licensed managers in multiple locations and deliver local market expertise, according to EY.
• Analytics and insight generation. Some insurers might be in a position to leverage sector-specific knowledge and provide insights that can help captives improve their risk management capabilities, EY says.
• Claims management. EY notes that many captive insurance companies look for support for their claims operations or other functions. Third-party administration could be a growth opportunity for some insurers, EY says.

"With captive insurers typically focused on their parents' main risks, traditional insurers can offer complementary services," the EY report says. "For instance, solutions and expertise that address mortality and health-related risks for employees can improve captives' approach to risk mitigation."

In addition, the captive insurance market can provide exposures to different industries and risk profiles for insurers that are looking to diversify their portfolios, EY says.