Captives: A Global Perspective

We find ourselves back in hard market territory, and it is 20 years since we saw such sustained captive growth. Clients must contend with the hard insurance market alongside unprecedented economic uncertainties – from pandemic and supply chain disruption to increasing cyber attacks and climate change.

Conditions are strengthening existing headwinds and encouraging many organizations to rethink their approach to the insurance market.

Over the past two years, price increases in primary markets have capped out risk management budgets and prompted captive owners to retain more risk within their organizations to maintain an appropriate level of cover while keeping overall costs stable. Indeed, since 2018 we have seen a significant 73 percent increase in premium retention among captives we manage, including a steep 361 percent increase in property damage/business interruption (PD/BI) retentions and a 26 percent increase in general liability (GL) retentions.1

Alongside these more traditional risks, some innovative organizations use captives to support their risk management strategy for several hard-to-place or emerging risks, like cyber and environmental. Our data show that cyber has seen a 650 percent increase in captive premium over the last five years, with environmental also seeing a sharp increase –up 400 percent since 2018.2 With ransomware attacks increasing and environmental, social and governance (ESG) issues at the top of many board agendas, we expect these utilization trends to continue.

Globally, we have seen a pronounced increase in captive programs being used to support more flexible employee benefits (EB) schemes, exceeding the market's coverage limitations. Market capacity and pricing are driving this change, in addition to companies with active diversity and inclusion (D&I) programs looking for broader coverage than is available as standard in the commercial market. We expect to continue to see greater use of captives in this area to provide more uniformity of EB cover across multinational organizations.

There has been a marked increase in clients looking to access reinsurance market capacity through the use of protected cell facilities. Between 2019 and 2020, Aon's White Rock Group3 saw 24 percent growth in the number of cells deployed, with premiums increasing at a similar rate.

Captive owners are also exploring ESG funds to invest their assets – a trend we expect to continue. This ESG investment activity helps organizations align their captives with the values of their parent company.

What is the Data Telling Us?

We continue to see an increased level of interest in captive and protected cell solutions. Since 2019 this has coincided with significant price increases and reduced capacity in the insurance market – a sustained trend until recently. And while in 2021, the rate of increase in the price curve has started flattening out, many loss-hit lines remain challenging to place, causing organizations to look for alternative risk financing options.

In 2020 we saw a 50 percent increase in the number of captive feasibility studies we undertook for clients, and 2021 is on track to top this increase again. Feasibility studies are a good indicator of interest in captives, and this interest surge signals the trend for more captive formations in the coming months.

Results from Aon’s 2021 Captive Benchmarking Survey show that PD/BI and GL still dominate in terms of premium volume written by our client captive insurance entities. But we are seeing sizable growth in captives writing certain lines, including D&O, cyber, environmental and credit insurance, largely in response to hard market conditions.4

Companies are increasingly embedding effective risk management in their culture worldwide, and this trend will continue to evolve. Greater use of protected cells and captives and their reserving methodologies can help companies overcome short- to medium-term economic volatility.

And the unique data capture opportunities that captives present – providing parent companies with a deep understanding of risk in-house – have clear benefits from a claims perspective too, particularly for emerging and fast-evolving areas like cyber and ESG-related risks.

Looking further down the line, we do not expect an immediate return to soft market conditions. This, combined with increased rates in loss-hit lines – including property lines impacted by natural catastrophes – leads us to predict continued steady growth in existing captive use, plus the demand for new captives and protected cells to navigate coverage gaps and budgetary challenges.

Footnotes

1 Aon’s 2021 Captive Benchmarking Survey

2 Aon’s 2021 Captive Benchmarking Survey

3 The White Rock Group is Aon’s wholly-owned protected cell, incorporated cell and segregated account facility

4 Aon’s 2021 Captive Benchmarking Survey