More captive portfolios diversify

Organisations are increasingly looking at ways to get more value out of their captive insurance vehicles, whether that be through diversifying their portfolios in areas such as third-party risk and cyber, or simply retaining more risk.

This is according to Robert Geraghty, business development manager for EMEA and Asia-Pacific at Marsh Captive Solutions, who spoke to Airmic Today ahead of the 2019 conference this week.

“Companies are looking to diversify their portfolios, looking at what else they can add to their captives, and whether they can use their captives more.

“That could be from either a revenue generator or a retention point of view,” said Geraghty.

“The retention point of view is key, as we’ve seen a large increase looking to retain, write and diversify more in the captive, and getting as many lines of business in there as possible.”

According to Marsh’s 2019 Captive Landscape Report, the number of Marsh-managed captives writing third-party business increased 62 percent between 2014 and 2018, with a 12 percent year-on-year growth in this area over five years. Third-party risks include independent contractor and customer risks, extended warranties and employee benefits.

“It is different from the pure captive business,” Geraghty explained.

“Captives are initially set up to retain your own risk, and the risk you are in control of. But many of these companies are adding on products, such as extended warranty, that they are able to offer alongside their own service.”

Extra coverage

In 2018, 22 percent of Marsh-managed captives were writing some form of third-party coverage, with a value of $18.7 billion in premium.

In the past five years, the number of captives offering extended warranties has grown by 22 percent. Extended warranties may be offered by retailers or manufacturers on products such as household appliances, electrical goods, and automobiles.

“A lot of these businesses offering third-party insurance products can potentially be profitable, and the captive allows them to retain that risk within the vehicle itself,” added Geraghty.

There was a 138 percent increase in the number of Marsh-managed captives writing independent contractor and customer risks—another third-party risk captives can offer—between 2014 and 2018. A construction company might offer general or professional liability insurance to contractors, vendors or independent contractors.

Auto liability, where a manufacturer might offer personal auto liability to its contractors through a captive, generated more than $1.2 billion of net premiums for captives in 2018.

Separate from third-party risk, cyber risk is another area that is continuing to grow, as more captives seek to diversify their portfolios, retain more risk and close gaps in their coverage.

The number of captives writing cyber liability coverage has increased 95 percent over the past five years, and grew 15 percent in 2018.

“It’s a large amount when you remember that a few years ago, no-one would have been writing cyber. In the captive insurance world that’s a fairly large increase in companies implementing it,” said Geraghty.

Writing in the foreword of the report, Ellen Charnley, president of Marsh Captive Solutions, stated that the number of organisations and risk professionals embracing captives as a tool to secure their future continues to grow.

“Captives in all their forms—including single-parent entities, group captives, protected cell captives, and special purpose vehicles—prove their value every day for a wide variety of industry sectors and types of risks.

“No matter their structure or premium volume, all captives offer flexibility for their parent organisations’ stakeholders to access and protect capital, accelerate business unit objectives, and protect human capital,” Charnley wrote.

“Organisations see multiple value drivers for maintaining captives, including acting as formal funding vehicles for self-insured risks, accessing alternative capital, and designing customised insurance coverage.

“Captives also provide cost efficiencies, including purchasing commercial reinsurance coverage, potentially reducing tax liabilities, and generating profits by underwriting third-party risks. And as you’ll see in the 12th annual Captive Landscape report, organisational stakeholders—chief financial officers, treasurers, chief information officers, chief technology officers, human resources executives, and risk managers—all have their own views on captive value propositions.

“The financial benefits afforded by captives are one side of the coin. On the other, captives can facilitate the funding of employee benefits and programmes that promote a culture of wellbeing and safety, thus supporting employee engagement, recruitment, and talent retention.”