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Caught between a rock and a hardening insurance market?

Consider a captive or these other measures to get the most from your risk management spend


By Vittorio Pozzo and Marc Paasch | January 27, 2020

If you’re facing premium hikes, tougher terms and conditions or other insurance challenges, you might want to consider a captive or other measures to help keep costs in check.

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About our ‘Insurance Market 2020’ series

In this two-part blog series, we cover some of the factors that are driving insurance rates higher and strategies organizations can use to keep risk management costs in check.

The growing likelihood of a hardening market in many lines of commercial insurance has companies caught between the proverbial rock and a hard place. In our previous post, 3-factors-driving-insurance-rates-higher, we looked at the insurance market in general, while here we examine viable alternative risk transfer solutions, particularly captives. These alternatives may offer new opportunities for organizations to obtain the right coverage at rates that are more aligned with their need to lower, or at least control, costs. 

Here’s the problem…

Conventional insurance solutions are becoming more costly even as management teams and boards are pressured to control or lower costs. Part of the reason costs may seem high and not accurately reflect a company’s unique risk profile is that conventional insurers often set rates using broad industry classifications and not by the specific loss experience of an individual company. Price volatility can result.

One way to offset higher rates is to opt for higher insurance deductibles. This may be successful at the group level, but not at the division or geography level.

…And a solution

Captives can offer another alternative to retain levels of insurance coverage jeopardized by higher deductibles or higher insurance costs. They can also offer prices that better reflect an insured’s actual loss experience, benefiting companies that have a stable and reasonable loss experience. 

Additionally, they can help with an organization’s financial planning and control functions, and are often used to balance larger retention needs at the group level and lower retention strategies at the local or subsidiary level. 

With the greater flexibility captives can offer, it’s no wonder that active captives have proliferated: 3,157 U.S. captives at year-end 2018, and more than 800 in Europe. Companies’ interest may intensify, particularly in industries where hardening markets could push up rates by 20% to 30%. In fact, risk managers using the commercial property insurance market are shifting more of their property exposures to captive insurers amid rising costs and tightening terms and conditions. 

Captives may also be flourishing because, of late, they have had a more collaborative relationship with commercial insurers and reinsurers as the traditional risk transfer market seeks to manage business in a hardening market rather than compete for business. This newfound collaboration may warrant a review and redesign of an organization’s coverage to optimize program structures.

Dealing with a hardening insurance market

Specific actions can help mitigate a hardening market, including:

  • Maintaining solid relationships with insurers and brokers
  • Using sound analytics to provide accurate rate submissions and better compete for capacity
  • Investigating risk retention vehicles like captive (re)insurance companies
  • Increasingly using existing captives
  • Establishing a risk retention strategy that accurately reflects the organization’s risk tolerance, particularly when reducing policy limits is not an option for risk management professionals
  • Reassessing loss prevention practices
  • Reviewing all-peril deductibles as a starting point to assess the amount of risk to place in a captive and how much premium this could save. (Industry sectors hard hit by rate increases, such as retail, are increasingly looking to place their all-risk property deductibles and other non-traditional risk classes like trade credit risk into their captives.)

Rethink risk mitigation

Organizations will benefit by rethinking the traditional risk transfer market and considering how moving risk to captive programs will control costs and strengthen their risk mitigation efforts.

Captives will also benefit if they cover new risks such as trade credit, employee benefits, non-damage business interruption and cyber risk. By diversifying beyond traditional property and casualty risks, surplus will grow in the captive market creating the capacity to retain additional risks. New opportunities are created to access the reinsurance market and to enter into pooling arrangements. Success will also depend on strong administration of underwriting/claims and adherence to accounting/regulatory requirements that ensures good quality financial reporting.

While nobody can consistently predict where insurance rates are headed, but organizations can enhance their risk management programs by looking beyond commercial insurance and considering what they can do to improve their risk profiles.


Captive Advisor, Western Europe and Great Britain

Managing Director
Global Head of Alternative Risk Transfer Solutions
Global Head, Strategic Risk Consulting

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