BLAIR GARLAND
Producer, Captive Practice Leader
HUNTER HENDERSON
Producer, Captive and Alternative Risk Solutions
Why Companies are Turning to Captives to Finance P&C Risk
The property and casualty (P&C) insurance market has experienced a consistent upward trend for almost six years, marked by a continuous rise in premiums across 23 consecutive quarters. This steady growth has been primarily driven by factors such as severe weather events, costly legal settlements, and the changing interest rate environment. However, the landscape is shifting, especially in the commercial lines sector. Recent data indicates a divergence in rate trends. Notably, the momentum in rate gains for liability lines is decreasing, with increases now hovering around the single-digit range. Additionally, there is a noticeable slowdown in premium hikes in both Directors & Officers (D&O) insurance and cyber insurance. For cyber policies, the maturation of the market and the entry of new insurers are leading to more comprehensive coverage options being offered at more favorable terms. In response to these ever-evolving market conditions, more businesses are turning to captives to finance risk creatively, achieve rate stabilization and fill coverage gaps. In fact, the number of new captives formed has increased almost 40% since 2020. A captive is an insurance company that insures the risks of its owner, affiliates or a group of companies. Traditionally, captives have been used for a standard set of risks. These include Auto Liability, Workers Compensation, and General Liability. Due to the hard insurance market of the past several years, Insureds have strategically shifted towards financing other risks through their captive. Property and Excess have become common placements as premiums continue to increase while limits are being reduced. Organizations that set up captives years ago are better positioned to respond to market fluctuations than those without a captive because they do not have to solely rely on the commercial insurance marketplace. For example, when Excess Liability costs become too high (despite no losses), those captive owners can comfortably place that exposure in their captive at more affordable and profitable rates. In the same scenario, organizations without a captive are faced with a dilemma: either pay more in insurance costs, which cuts into their profit margins, or reduce the amount of insurance purchased, which exposes their balance sheet to potential losses. Despite these complexities, it's never too late to integrate a captive into your risk financing strategy. With the increasing availability of cell captives, which can be set up quickly and at a lower cost than single parent captives, it's easier for companies to find a captive solution that aligns with their specific needs. In our day-to-day work with clients, we walk them through three key considerations to help analyze which type of captive could be the right fit for their risk management strategy:
Premium Size:
What is your annual premium spend? Captives are a significant upfront investment, and finances typically determine the structure. Captives fall into three main categories:
- Group Captive: Like renting an apartment, a group captive is the least expensive way to join a captive, but it comes with risk-sharing potential and limited flexibility. This is a great option for clients paying $500,000 to $1.5 million annually, giving them more control than traditional insurance with minimal startup costs.
- Segregated Cell: This option is a little like renting a house. You’re renting space in a captive owned by someone else, but you have more control than a group structure and are typically not sharing risk. Target premiums are $1.5 million to $5 million, and startup costs are flat — typically up to $80,000 or 3% of the annual premium.
- Single Parent Captive: For clients with $5 million or more in premium, this is the “build your dreamhouse” option with full ownership and ultimate control but higher startup costs (at least $250,000) and a longer startup timeframe.
Risk Appetite:
How much risk do you want to insure yourself? How much are you willing to share in others’ risk and losses in a group captive structure?
Flexibility:
How much control and ownership do you desire? Is the ease of a group or cell captive more important, or is it more critical to have ultimate control on how your captive is operated?
Once we walk through this upfront analysis and a client decides to move forward with a captive, Graham has the capabilities to provide full-service support through every aspect of managing a captive and integrating it into a holistic risk management strategy. Our in-house loss prevention specialists build strategies to prevent claims from happening, and our claims consultants ensure each claim is aggressively handled. Every dollar saved is a dollar back on the captive’s bottom line. Our technical team can draft policies in-house, while account management reviews all contracts to make sure that risk is transferred away and considers creative ways to expand the use of a captive.
In addition to our team’s deep personal experience, we’re glad to now offer the benefit of MMA’s extensive captive data set for analytics and benchmarking, which draws on Marsh’s unique position as the largest captive manager in the world. This powerful combination allows our clients to create a roadmap to determine if/when a captive is right for them.
We expect that the demand for captives will only rise — in every industry sector — as pressures in the commercial marketplace continue to increase. We’re seeing more sublimited coverage, along with straight exclusions. In some parts of the country, property is becoming almost uninsurable because the costs have become so drastic. Limits and premiums are starting to equalize.
With captives, forward-thinking companies have the opportunity to gain long-term strategic control and some insulation from market pressures. And with a variety of structures and price points, now is an opportune time to consider whether captives should play a role in your risk management strategy.