Introduction: Demand for Alternative Solutions Continues to Strengthen Amidst Ongoing Global Uncertainty

John English

Chief Executive Officer, Captive and Insurance Management

During 2020 and 2021, as organizations wrestled with a prolonged period of challenging insurance market conditions - with pricing pushing well beyond what was contemplated in insurance spend budgets and capacity constraints, in some cases, making it difficult to secure full tower limits - they sought alternatives to the traditional insurance market. Many re-evaluated their approach to managing risk, seeking solutions to help smooth pricing and coverage volatility. They increased retentions, leveraged reinsurance capacity, and engaged with Aon to conduct captive feasibility studies.

Over the past two quarters, market conditions moderated across many products, industries, and parts of the world. Indeed, this quarter’s Global Market Insights highlight a continued shift in market conditions from the challenging environment experienced over the last two years to a more moderate market, with modest price increases coupled with a capacity reprieve in many products and geographies. While the immediate need to smooth insurance market volatility that had been driven by pandemic-related uncertainty and poor underwriting profits seems to have largely subsided, widespread uncertainty continues amidst record breaking inflation, ongoing geopolitical instability, and widespread supply chain and labor challenges.

Against this backdrop, the number of Aon captive feasibility studies – which increased by 50% between 2020 and 2021 – shows no signs of slowing in 2022. Indeed, consideration of captives and protected cells has become a foundational element of renewal planning, and captive usage has grown across many hard-hit lines. Historically, high frequency, low severity products such as Workers Compensation, Motor, and General Liability were focal points for captive participation, but now, Cyber, Errors & Omissions and Directors & Officers frequently feature in captive feasibility assessments, as organizations look for alternative, strategic ways to manage these risks.

Highlighted in the Spotlight: Captives section are some of the important ways organizations are using captives to elevate their confidence related to future volatility, demonstrate their risk maturity to underwriters, and deploy their captive underwriting profits to implement risk profile improvements. While alternative market solutions such as captives are important and valuable levers, traditional risk transfer remains foundational in supporting organizations’ risk management strategies. This quarter’s insights describe the events shaping the Q2 market and how insurers have responded, including:

  • ESG concerns gained prevalence in underwriting: ESG-related challenges such as extreme weather events, supply chain disruptions and public health crises continued to create volatility and uncertainty for insurers and the risk community at large. Insurers scrutinized organizations’ ESG maturity and their plans for achieving disclosed targets and continued to consider the potential value of ESG ratings for underwriting purposes.
  • Rising inflation drove up exposures and claims costs: Rising inflation led to exposure increases across property values, revenues, and vehicle costs, and began to drive increases in claims costs such as labor, repair and rebuild expenses, and verdicts and settlements. Exposure growth and projected claims inflation were key topics of underwriting discussion. Meanwhile, increased interest rates and improved investment income reduced pressure on underwriting profit.
  • Insurance premiums increased modestly due to opposing market forces: While competitive market pressures and a focus on profitable growth served to tamp down rate increases, rising inflation and valuation scrutiny increased exposures, resulting in modest premium increases.

A convergence of macro factors – including a growing recessionary threat, labor challenges, and heightened scrutiny across the ESG landscape – has led to a dynamic risk environment that calls for both traditional and alternative capital solutions. On behalf of Aon’s Captive and Insurance Management team, I am pleased to introduce you to Aon’s Q2 Global Market Insights where you can learn more about how organizations are leveraging myriad solutions to support their risk management strategies.

Spotlight: Captive Insurance

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