WTW's Captive Insurance Insights: Navigating Risks and Challenges

In alternative risk transfer markets, "options continue to be in high demand, especially for clients with challenging risk profiles and/or poor loss experience," says WTW in Insurance Marketplace Realities Spring Update 2024.

And the WTW report also says, "As rate increases have moderated and indeed, in some cases, reductions are the norm, captive [insurance] activity nevertheless remains strong.

"Captives have been undergoing somewhat of a resurgence in interest over the last 3 to 4 years, evidenced by increases in formations since 2021. As reported during 2023, there is continuing involvement in specialty lines and the creation of diverse portfolios of risk rather than in a monoline approach," WTW says.

Captives are increasingly utilized to navigate challenges in the property market and manage internal risk financing costs. Additionally, while interest in addressing climate risks through captives is on the rise, actionable program structures are still in development. Furthermore, the optimization of capital deployment and risk management is becoming a focal point for corporations, sparking renewed interest in captives, according to WTW.

Data and analytics are playing an increasingly vital role in decision-making and risk quantification within captive insurance companies. Concurrently, there is a growing interest in parametric solutions to address emerging risks, the May 8, 2024, update finds.

In the United States, the update says, captive domiciles like Vermont have seen a surge in new formations, driven by the need for property coverage and risk optimization strategies. Additionally, terrorism captives are capitalizing on improved pricing in commercial reinsurance markets.

The update also finds that Atlantic and Caribbean captive domiciles are witnessing an uptick in new captive licenses, propelled by internal capital management efforts and global program needs. Meanwhile, international employee benefit captives are gaining significance for their role in risk diversification and cost savings.

Alternative risk transfer (ART) options (structured programs, parametric natural catastrophe, parametric non-catastrophe, portfolio programs, and captive stop loss) remain highly sought after, according to WTW, particularly for clients facing challenging risk profiles or poor loss experiences. In 2024, parametric and structured solutions are anticipated to dominate the ART market, providing critical coverage where traditional insurance cannot. Parametric solutions are increasingly addressing a wide array of risks, from natural catastrophes like earthquakes and hurricanes to emerging threats such as pandemics and cyber risks. These solutions complement property placements, protect against revenue loss due to adverse weather, and support broader initiatives like lender financing and government-led climate resilience projects. With rising capacity and expanding perils, including wildfires, hail, and temperature stress, parametric insurance continues to gain traction, driven by client education and proven efficacy, WTW says.

Structured solutions are also being used, particularly where premium-to-policy limit ratios exceed 40 percent annually. These solutions are prominent in real estate property programs and auto fleet risks, with a growing trend toward multiline deployments as reinsurance of captive insurance companies. Additionally, the ART market is exploring collateral-free fronting for creditworthy companies and portfolio/integrated risk programs. The capital markets are increasingly playing a role in these innovative solutions, further broadening the scope and appeal of ART options, according to WTW.

In the broader overall insurance markets, a degree of optimism is in order, WTW says.

"Collectively, we have a trillion-dollar-plus surplus in the bank, investment yields are trending upwards from 3.7 percent and insurers are generating meaningful improvements to net income," the report states. "That means our industry is exceptionally well positioned to bring some much-needed stability to the wider world. You might want to whisper it, but it's still the truth: this is a good market, and we should all be celebrating it.

"Context and perspective are everything," WTW continues. "This is worth bearing in mind when we consider our clients are trading largely in a buyer's market where capacity remains prevalent—sans excess casualty in distressed risk classes (e.g., auto and terrorism)—and they can start pushing to improve programs in every way, from structure and pricing to policy terms."

On the other hand, WTW says, "pessimism is forever in fashion and, as always, there's plenty to go round. Political unrest is rife. War is raging in two major global regions. Social inflation continues to push runaway liability claims. And we all know what high surface temperatures in the Gulf are harbingers of. The challenges and hazards we face are significant, wide-ranging, and very real."

Summary verdicts from WTW on major product lines include the following.

Property: Record insurer profitability in 2023 and favorable 2024 treaty renewals have contributed to noticeable stabilization in the property marketplace during Q1 2024.

Domestic casualty: Loss trends continue to outpace rate in most casualty product lines, leading to combined ratio pressure.

International casualty: The international liability marketplace remains stable thanks to a depth of competitive insurers that invest in tools and talent that help insureds deliver solutions in a complex landscape.

Middle market: While the property landscape has continued to trend favorably, insurers have refocused their attention to deteriorating results across their casualty books.

Canada casualty: Insurance buyers can cautiously expect to remain in a consumer-friendly marketplace amid the lengthening of a moderated marketplace.

Canada property: 2024 has seen the return to stable reinsurance treaty renewals at both January 1 and April 1.

Bermuda: The Bermuda casualty insurance market remains a dynamic and evolving landscape. For property, the 2024 outlook indicates a nuanced landscape of rate predictions, capacity shifts, and underwriting discipline.

In professional liability lines, WTW says the following.

Cyber risk: While market stabilization has continued into 2024, conditions could transition to a firming market later in the year.

Directors and officers (D&O) liability: Availability of abundant capacity continues to drive competitive market dynamics, but where insureds had experienced material premium relief in previous renewal cycles, the extent of decreases may begin to taper off.

Employment practices liability (EPL): Competition keeps the EPL market stable, but with a rise in claims and employee-friendly regulations, significant loss history can elicit rate increases on the higher end.

Errors and omissions (E&O): Although the primary market is beginning to trend softer, with little new competition, several recent large claims have kept an upward pressure on rates.

Fidelity/crime: Pricing remains stable and competitive, which is largely attributable to the profitability of this product line.

Fiduciary: Despite conflicting positive and negative risk developments and some insurers remaining wary, a few insurers with increased appetites are leading to improved market conditions.

Financial institutions: Capacity in the marketplace remains plentiful as it continues to drive competition across all lines of business for financial institutions.

WTW's verdict on specialty lines and solutions is as follows.

Aviation and space: The aviation market remains strong and advantageous for buyers as insurers compete for premium share due to the abundance of capital deployed in the segment.

Architects and engineers: Adverse severity claim trends reported by most professional liability insurers continue. Social inflation is being cited as a primary driver.

Construction: Market corrections of the past few years have contributed to improved insurer-combined loss ratios and a more stabilized rate environment.

Energy: Sector profitability in 2023 paired with stable treaty reinsurance backing has yielded a more predictable market environment.

Environmental: Differentiating environmental exposures by industry has allowed clients and markets to have deeper and to-the-point conversations about specific exposures, trends, risk appetites, and the true value of their coverage.

Healthcare professional liability: Underwriters remain concerned about aberrational/nuclear verdicts.

Life sciences: Product and professional liability rate predictions remain in the mid-single digits.

Managed care E&O and D&O: Pricing conditions for managed care organizations have softened, and anticipated additional primary capacity could cause additional rate reductions.

Marine cargo: Generally, the marine cargo market remains stable and, for accounts with a favorable loss ratio, continue to see close to flat rate renewals.

Marine hull and liability: The marine market has slightly softened but generally requires low single-digit increases due to claim inflation.

Personal lines: WTW continues to predict a pervasive hard market in personal lines across all lines of business with rate increases persisting in 2024.

Political risk: The ongoing crisis in the Middle East underscores that geopolitical flashpoints are becoming not only more common but also more pronounced in their intensity.

Product recall: WTW says it expects that, going into the 2024 and 2025 renewal cycles, the market will be looking to increase rate on more difficult risks that do not have long-standing relationships with their incumbent insurers.

Senior living and long-term care: Continuing frequency of severity, coupled with overall inflationary pressures on many fronts, is driving rate increases for property, general and professional liability, and auto coverages.

Kidnap and ransom: The special risks insurance markets have almost uniformly either restricted or excluded coverage for exposures in Belarus, Russia, and Ukraine.

Surety: The US surety industry has begun to experience a modest increase in loss activity. Claim activity is picking up in the commercial surety market; however, losses appear to be remaining low.

Terrorism and political violence: Insurers are cautious of 2024, given this is the year of elections and the heightened possibility of a wider conflict in the Middle East.

Trade credit: Economists continue to predict an economic slowdown for North America; however, the United States has shown much resilience in staving off any material decline.