Spotlight: Captive Solutions Are More Than Just a Capacity Play​

Captive Solutions Help Organizations Manage Their Total Cost of Risk (TCOR)

Organizations are increasingly leveraging captives as an integral part of their renewal strategies to help them manage their Total Cost of Risk. For example, captives are supporting the financing of increased retentions and are stepping in to address coverage and capacity gaps where insurers have effectively withdrawn.

Risk managers are also using their captives to create economies of scale among their subsidiaries. Operating divisions within organizations can have widely differing appetites on levels of risk to retain or transfer, but a captive can bridge those divisional needs and enable the whole organization to adopt a more strategic posture on where and how to bring market capacity into play, driving cost efficiencies and reducing TCOR. In the process, the captive can serve as a focal point to measure all aspects of the risk in question, providing valuable data and claims history insights that can be leveraged in future renewals.

Underwriting profits can also be used to fund bursaries for risk improvement, demonstrating an increased level of maturity to insurers and providing value to the parent.

While captives can’t displace an organization’s reliance on market capacity, with the right approach, they can serve as an effective tool to smooth pricing and – to a degree – capacity volatility over time.

Captive Solutions Help Support ESG Strategies

Faced with increased pressure from investors, governments, regulators and consumers, many organizations have undertaken measures to assess their ESG profile and define their ESG strategy, and captives are playing an important role. For example, some captive parents are:

  • Using micro-insurance in developing countries as part of a corporate social responsibility (CSR) initiative
  • Using captives to harmonize employee benefits across borders to support their inclusion and diversity agenda
  • Investing captive assets in accredited ESG fund instruments
  • Seeking accreditation under the UN’s Principles for Sustainable Insurance

Captive Solutions Can Provide Relief for Cyber Risk

In Aon’s 2021 Global Risk Management Survey, Cyber was ranked as the number one risk companies are facing. With ransomware attacks showing no sign of abating and insurers still in recovery mode, more organizations are leveraging captives for short term relief from increases in Cyber insurance price and retention levels.

Aon’s captive portfolio saw a 650% increase in Cyber premium between 2018-21 — with most of this increase coming from US organizations. The two main drivers of this increase have been accommodating higher retention levels and accessing alternative capacity. Today, captive use is expected to further expand as organizations look to smooth market pricing changes, demonstrate risk maturity to insurers, and leverage retained underwriting profit to support risk improvement bursaries within the parent organization.

When Conventional Market Capacity Is Not Available, Captive Solutions Can Play a Vital Role

Since the first signs of pronounced market hardening in 2019, organizations across all sectors were required to look beyond the conventional insurance marketplace to find an appropriate level of coverage within their risk budgets. Organizations who owned captives were equipped with more tools to respond, with many, for example, tapping into the reinsurance market directly to find capacity. Where capacity wasn’t immediately available, some captive owners opted to retain risk within their captive in the short term and look for reinsurance opportunities to mitigate that exposure over time.

Without an existing captive to call on, a growing number of organizations have sought to solve the capacity challenge through the use of protected cell companies. Where it is used solely as an access point to the reinsurance market, a cell can be established and licensed often within a typical renewal planning cycle (3-4 months) and without the upfront capital commitments needed to form a captive. Indeed, Aon has seen a 25 percent increase in demand for such solutions.

While competitive market pressures and a focus on profitable growth served to tamp down rate increases in the second quarter of 2022, rising inflation and valuation scrutiny increased exposures, resulting in continued high premiums. In this market environment, and with continued widespread economic uncertainty, organizations are exploring the alternate, potentially cost-saving risk financing option of captive insurance in growing numbers. Variations in regional, geopolitical, macro-economic and industry conditions mean organizations have unique risk profiles and risk management strategies, and implementing a captive insurance program can help manage total cost of risk more efficiently and open the door to new opportunities for firms.

For additional information on captive and insurance risk management, read the findings from our latest Captive Benchmarking Survey or contact a member of your Aon Team.

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