Industry Insights

Banks

The impact of COVID-19 has accelerated change in this industry. New ways of working are increasing pressure on non-financial risks such as fraud, conduct and cyber, and risk profiles are evolving rapidly. The hardening insurance market makes it more challenging for banks to find available and appropriately-priced coverages for their risks. Banks are increasingly looking at risk financing with a wider perspective, and as a result, the role of the captive is becoming more significant.

Strategic Use of Captives

Certain clients with established captives are adjusting their buying strategies and using captives to provide coverage for key exposures where there are shortages of external capacity and uncertainty in pricing. Indeed, we’re seeing more banking clients explore the use of captives to support price stability and gain more control over capacity variations in the marketplace for those dominant risks such as fraud, conduct and cyber. Additionally we see increased interest in the speed to market and ease cell captives and other retention structures can offer banks currently without captives.

Notable Trends

Results from Aon’s 2021 Captive Benchmarking Survey show that there has been a 90 percent increase in GWP for crime/fidelity being underwritten by Aon’s banking captive clients since 2016, from a stable experience previously. Our survey also shows that the net aggregate capacity in captives is increasing. This demonstrates that captives are becoming more commonly used for crime/fidelity programs for certain banks as competitive capacity is harder to secure. Moreover we’ve seen a 276 percent increase in captive retentions for PB/BI, outstripping the increase in premium of 90 percent1 - indicating that the globally hardening market has caused captives to increase their retentions to keep costs stable.

Looking Forward

In the next few years we expect captives to play a greater role in risk financing for the banking industry. COVID-19 has driven banks to look at non-financial risk with a sharper lens, and many now want to analyze financial risk more closely and quantify their overall risk appetite.

The continued focus on ESG considerations at the board level will likely lead banks to explore the green captive concept. There is potential for the captive to play a part in financing transition and litigation risks and investing assets into ESG-funds to align the captive strategy with that of the parent company.

There is also growing interest in captive utilization in the cryptocurrency space, with Gemini Trust Company establishing the first digital asset captive in 20202. We expect this market to grow as the industry develops further.

Risk managers recognize the value of captives as a tool to help support their enterprise risk management strategies and deliver stability in an increasingly volatile market environment