While Some Commercial Lines Stabilize, Captive Resurgence Continues

While the stabilizing trend across most commercial insurance lines that began in early-to-mid-2022 is continuing, increased use of captive insurance is as well, according to a new report from Willis Towers Watson (WTW).

With the commercial insurance market continuing to present some challenging areas, the resurgence of captive insurance use continues, WTW says in its Insurance Marketplace Realities 2023 Spring Update.

WTW's latest Insurance Marketplace Realities report suggests that while many commercial insurance lines continue to see price increases, those increases are more manageable than they were 6 to 12 months ago. That trend around softer renewal rates in some lines is creating opportunities for buyers, the report says.

For captives, in addition to the continued use, captive owners are increasingly putting additional coverage lines into their captives, diversifying their risk portfolios, the WTW report says.

"While there is now less consistency in insurance rate movements than in the previous period, some difficult areas remain," WTW says. "Property markets particularly remain challenging, and this is reflected in increasing use of captives as vehicles to assume greater levels of risk retention. We continue to see additional consideration given to emerging risks and risks not previously financed through captives, such as cyber risks."

Captive owners are increasingly turning to the risk financing vehicles to address specialty lines, the report says.

The WTW report suggests that data and analytics capabilities are driving captive insurance change, facilitating advances in the quantification of both individual risks and portfolios of risk, including across multiple lines of business.

"Captives may be able to cover emerging risks based on advanced analytical capabilities before traditional insurance markets have realized the opportunity to develop their own products," WTW says.

WTW says it continues to see increased use of analytics to support decision-making and to optimize the cost of risk transfer. That's particularly true among captive insurance company owners looking to optimize their use of capital and quantify their risk tolerance, the report says.

"Interest in parametric solutions, especially around climate and environmental risks remains strong, as clients seek capacity that may not be available in traditional insurance markets," the WTW report says.

In the US captive market, the report notes that all but one of the 10 largest US captive domiciles reported an increased number of captives in 2022, and the pace of formations this year remains strong.

"There is more interest in property captive programs given the difficulties in the property commercial market," the WTW report says.

WTW says it sees mature US captives with sufficient capital and surplus continuing to be used as excess capacity in all lines of business to address pricing and reduced capacity in the commercial insurance market.

Meanwhile, US captives' investment portfolios are being monitored and re-evaluated due to unrealized investment losses and their impact on captives' capital and surplus, WTW says. "Additionally, with increased yields on investment portfolios, sensitivities are heightened around maintaining an insurance vehicle rather than an investment vehicle," the report says.

Among offshore Americas domiciles, the WTW report notes that both Bermuda and the Cayman Islands have seen renewed growth in the issuance of new captive licenses.

Last year, Bermuda issued 18 new captive licenses compared to 8 in 2021 and 6 in 2020, WTW says. The Cayman Islands issued 33 new licenses in 2022, compared to 37 in 2021 and 32 in 2020.

In the offshore Americas domiciles, "New activity remains largely focused on business from North America, but there is a marked increase in interest globally with these domiciles tending to be favored for captives involved in large and complex global programs," the report says.

The WTW report says that while Bermuda's core captive insurance business remains focused on large and complex global programs, growth of segregated account cell business remains very strong. That segregated account business targets smaller clients and offers solutions for individual programs as opposed to portfolios of risks, WTW says.

WTW says it has handled some Side A directors and officers (D&O) business on a funded basis through Meridian Insurance Limited, its separate accounts cell company. Easing in that market might slow further growth of that activity, however, according to the report.

"International employee benefit captives continue to grow in importance and aside from the savings they may generate, they can help in creating a greater diversified portfolio view of risk," the WTW report says.

The report says WTW is seeing more and more start-up platforms based on blockchain and similar technologies in which the business proposition focuses on greater contract standardization and immediate settlements, all of them automated. Such technologies are being applied to such lines as marine cargo, travel cancellation, and cryptocurrency theft, where complex manuscript policies aren't necessary, according to WTW.

"Such solutions are being considered in the captive market, but the trend is in the early stages of development," the WTW report says.

In a statement, Joe Drummond, head of broking, North America at WTW said, "While the economy remains predictably uncertain, the softening of the market across many lines of business is creating opportunities for buyers. Those that are taking proactive positions and questioning the status quo are driving the best outcomes for their organizations."