Instability and uncertainty in the global commercial insurance markets are prompting companies to explore captive insurance, according to a new report from the Swiss Re Institute.
The report notes that commercial insurance markets are experiencing rate hikes, capacity cuts and tighter scrutiny of underwriters as the market responds to COVID-19 losses, social inflation, catastrophic above average losses and prolonged downward pressure on investment returns.
Exacerbated by the uncertainty caused by the pandemic, the current rate hike is the strongest in 20 years and is expected to continue until 2022. It notes that in response, many commercial insurance programs are increasing deductions, deductions and co-insurance as ways to contain insurance costs.
The report notes that pressure is forcing companies to increase the use of existing captive insurers and form new captive companies. He cites Marsh’s September 2020 survey showing that 59% of respondents expect to expand their captive use by adding more coverage lines, increasing captive retention.
The report notes that captives also benefit from better data access and greater proximity to the risks of their sponsors, so they can be more flexible in developing customized products that meet the changing needs of their corporate parent company. This is becoming increasingly important with the emergence of new risks and uncertainties about how to determine the frequency and severity of these risks. The report notes that advanced data analytics and actuarial developments help captives insure hard-to-insure risks such as cyber.
It also highlights the fact that there are currently more captive insurance companies worldwide than traditional insurers, with over 7,000 captive companies residing in over 70 jurisdictions.
The United States remains the world’s leading market for captive insurance, used by up to 70% of Fortune 500 companies. But with a high degree of saturation among large corporations in North America and Europe, captive use geographically extends to Asia and Latin America.
The report highlights that smaller companies are expected to investigate the use of captives. “Captive use is also expanding from traditional large global corporations to mid-sized companies. This is in line with the growth of alternative structures and business models for captive insurers that meet the needs of a wider range of organizations, ”the statement said.
“Structures such as Secure Cellular Communications (PCC) and virtual captive companies allow small businesses to access the benefits of captive insurance without having to build their own infrastructure. We expect the global captive insurance market to continue to gain momentum as companies seek more flexible and efficient insurance solutions in an uncertain and tough market. ”