Skip to main content
Survey Report

Insurance Marketplace Realities 2021 – Captive insurance

Cyber Risk Management
N/A

November 18, 2020

As economic activity stabilizes and the hard market continues, we expect the rush to form and re-engineer captives will continue.

Key takeaway

As economic activity stabilizes and the hard market continues, we expect the rush to form and re-engineer captives will continue at a level approaching the frenzy of the mid-1980s.

We see growing interest in deploying a captive given the hard market, but the pandemic has delayed execution.

  • Given the economic downturn, owners are looking to balance capital and cash with risk financing needs to optimize their positions.
  • Many captives are re-rating policies to reflect changes in exposure due to the pandemic.

While interest has increased in 2020, the total number of captives fell in 2019.

  • In 2019, U.S. domiciles saw 278 new licenses and 343 surrenders, overall a net decrease of 65, according to Captive Review World Domicile Update 2020.
  • This trend was driven by the cull of tax avoidance vehicles following the IRS crack down on the abuse of captive rule 831b. Domiciles overweight with 831b captives (Delaware, Kentucky, Utah) are seeing some of the biggest net declines in captive licenses despite healthy numbers of new licenses issued.
  • Some states, including Vermont, have shown net growth, indicating that demand for new licenses in the small to mid-sized market will continue in established domiciles under the current market conditions. We expect this trend to continue into 2021.
  • Caribbean domiciles saw captive numbers overall fall by 119 despite a small net growth (four) in Bermuda. These trends are driven by U.S. and European parent companies reviewing offshore arrangements and the closure of 831b captives offshore following IRS investigations. A compounding driver has been the rate of merger and acquisition activity in the health care industry, leading to captive consolidations and closures. European requirements for captives have further impacted Bermuda, the Cayman Islands and their European captive sponsors.

Trends

  • In 2021, we expect greater focus on the use of analytics to support decision making, optimize cost of risk transfer, and find better leverage in negotiations with the markets. We see this at the captive feasibility stage, at the active planning stage, as well as the strategy review phase for existing captives.
  • Property renewals have been particularly challenging, inspiring increased interest in property captives.
  • IRS review of micro-captives resulted in significant surrender of 831b captive licences — this could continue in the year ahead.
  • We see continued interest in using captive management services to support fledgling MGUs and MGAs. Captive owners are looking to expand underwriting of third-party business in their pursuit of the dual objectives of acting as profit centers and risk retention tools.
  • We anticipate ongoing interest in exploring how captives can be used to secure gaps in coverage, particularly for those risks seeing the highest rate increases (e.g., D&O, trade credit, cyber, pandemic and business interruption).
  • Interest is rising in disposing of legacy liabilities to free up capital to write more business into existing captives.

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.

Contact

Peter Carter
Head of Global Captive Practice

Contact Us
Related content tags, list of links Survey Report Cyber Risk Management Insurance United States