Skip to main content
Survey Report

Construction Marketplace Realities 2019 – Captives

Captives|Insurance Consulting and Technology

March 29, 2019

U.S. construction’s use of captive insurance company programs is strong and crosses the insurance gamut from project-specific lines to property and casualty and more.

Key takeaway

The use of captive insurance company programs remains strong in the U.S. and spans across insurance lines both traditional and non-traditional.

U.S. construction’s use of captive insurance company programs remains strong and crosses the insurance gamut from project-specific lines to core (practice) property and casualty into the less traditional, such as contractual warranty and self-insured medical stop-loss. Alternative risk transfer strategies, are gaining a modest foothold in the construction industry. Acceptance and use of alternative collateral arrangements remain steady. With the hardening of certain casualty lines, carrier financial underwriters are imposing more restrictive collateral terms respecting LOC amounts and durations. We see insureds under high deductible or fronted casualty programs pushing against legacy collateral levels, and also exploring other options including carrier-approved reinsurance trusts, special escrows and security deposits.


Group captives (groups): Interest in group-based casualty captive programs has increased in recent years, driven largely by middle market-sized contractors wanting to consider market alternatives. Contractors transitioning from low deductible or guaranteed cost practice programs view groups as potential stepping stones toward risk assumption. Due diligence must include consideration of:

  • Premium underwriting, buy-in capital and additional loss contingency assessments
  • Adverse loss scenarios and pool performance
  • Adequacy of coverage, terms and conditions (especially for homogeneous groups)
  • Policy year closeouts and exit requirements

Potential participants are encouraged to partner with competent risk professionals in vetting these opportunities, as groups tend to be longer-term commitments.

Single-parent captives: Contractor-owned, single-parent captive programs remain strong and recent innovations are impressive, as owner-insureds tailor underwriting and risk assumption programs to the specific risk and insurance circumstances of their operations. Traditional captives remain the industry’s risk management pick-up trucks, insuring a broad range of its owner’s risk retentions or un(der) insured exposures. Stronger captive programs are often employed to underwrite project deductibles for large joint-venture projects where a CCIP is put into place or one GC partner assumes the insurance lead and assumes the risks. For owners and developers, captive access to the federal terrorism program (TRIA, TRIPRA, etc.) via reinsurance remains in high demand for high value, high visibility projects. For developers, there is some use of captive cell segregation techniques to provide Chinese walls between individual projects and facilitate insurance closeouts as finished projects enter permanent financing or investment portfolios.

Small captives: Often referred to as 831(b)s or ‘micro-captives,’ these are U.S. federal tax qualifying insurance companies that elect, under Internal Revenue Code §831(b), to be taxed solely on investment income; all underwriting activity is exempted from federal tax.

We do see sound small captive programs being formed and operated as true risk management mechanisms where there exists sound risk underwriting, good tax facts and circumstances, a risk control and facilitation mindset, and high-quality management and governance. Higher severity/lower frequency coverages, such as subcontractor default, high deductible builders risk, professional and pollution, and WC and casualty deductible buy-downs are the most common.

Alternative Risk Transfer

Alternative risk transfer (ART) shows some signs of industry interest where risk exposures are large, traditional insurance is limited and pricing severe.

We do see the development and placement of non-traditional, insurance-based approaches and products that have applicability to construction and development. Areas generating the most interest include:

  • Weather-related parametric triggers: Large projects or properties that are geographically climate sensitive areas are good candidates. However, because these products respond to causal events and not direct losses, in the past they may have resulted in a triggered payout where the insured did not actually suffer a loss and, of course, vice versa (basis risk). Modern data capture has addressed a great deal of that basis risk. The contracts can also be “insurance” where indemnity is validated by simple insured certification or as “derivatives” where the prospect of a gain is acceptable.
  • Multi-year, multi-line integrated risk placements: In the construction industry, pricing and terms are not yet uniform, and clients must become comfortable with aggregated limits across lines of business. Aspects such as clarity on terms including deductibles, deductible erosion, clash issues, potential specific coverage and sub-limits must also be addressed — the expected ultimate loss value determination, administration fees and collateral to remain consistent with traditional policy constructs, as these programs do not replace primary casualty risks (WC, GL, AL).
  • Structured (re)insurance: Today, new accounting rules are significant speed bumps, but the strategy is still quite popular albeit in more sophisticated constructs. Industry examples include “buffer” arrangements for NY general liability on large projects (addresses low insurer appetite for Labor law risk) and, on a much smaller scale, “matching deductible” covers for first and/or second level primary placements, where an insured wants to push up insurer attachment levels, yet needs evidence of lower retentions for contractual purposes.

Alternative Collateral Arrangements

Insureds seeking alternatives to LOCs can generally find carrier-supported options in the form of reinsurance trusts, escrow accounts and special deposits. We encourage insureds to pay close attention to the policy payment or collateral language and mechanics. Use of loss paying or depleting accounts is usually preferable since the account balance secures unpaid loss obligations and is also used to pay claims. These arrangements work well with single-parent captive insurance programs that fund the same deductible losses that the accounts secure to the carriers, avoiding “doubling-up” where captive loss premiums and carrier collateral exist concurrently to back, essentially, the same losses.

Contact Us