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Survey Report

Insurance Marketplace Realities 2021 Spring Update – Captive insurance

Cyber Risk Management
N/A

April 21, 2021

As the hard market continues, we continue to see an increased deployment of captives.

Key takeaway

We are seeing increased deployment of captives as a response to the continuing hard market. While the pandemic initially dampened new captive incorporations earlier in 2020, activity has increased into 2021.

We anticipate ongoing interest in using captives to secure gaps in coverage, particularly for those risks seeing the highest rate increases (e.g., D&O, excess liability, trade credit, cyber, pandemic and property/business interruption).

  • Despite continuing economic stress in some industries, other sectors have weathered the pandemic reasonably well. Organizations in these sectors are now able to focus more on their risk financing programs.
  • We have even seen instances where the careful preservation of cash in 2020 has positioned buyers to take more aggressive risk retention positions in 2021.

U.S. domiciles

  • Many U.S. captive domiciles reported increases in new licensee numbers in 2020 compared to the last several years. However, this growth was offset by continued decline in the 831(b) captives due to the IRS crackdown on abuse in this sector of the market. This and closer regulatory scrutiny have caused a slight (roughly 2%) decline in the number of captives in the U.S. to 3,107 (Business Insurance Managers’ Survey, March 2021).
  • We have also heard from several domiciles that applications for new captive licenses have continued into the early part of 2021, leading us to expect 2021 will be another strong year for new captive formations.
  • Several domiciles have also reported an uptick in the licensure of captive cells within sponsored protected cell facilities.

U.S. offshore

  • The key Atlantic and Caribbean domiciles of Bermuda and the Cayman Islands saw captive numbers continue to fall by a net 17 in 2020. There were 48 new licenses issued during 2020 in these domiciles. (World Domicile Update 2020, Captive Review March 2021)
  • The removal of a similar number of licenses was largely attributable to merger and acquisition activity as well as continuing pressure on the 831(b) captive sector as the result of IRS investigations. This left net growth in the number of captives at less than 1%.
  • New activity remains largely focused on business from the U.S. and Europe, but there has also been some activity from Asia and Australasia.
  • Cayman has seen much new activity in the healthcare sector, which remains its largest generator of captive business.

Growing use of analytics in captives

The anticipated increase in the use of analytics to support decision making and to optimize cost of risk transfer in market negotiations is already manifest in the early part of 2021. We see this at all stages of captive development, from new captive feasibility to strategic planning for existing captives.

We have seen much greater focus on risks that are driven more by severity than frequency, such as professional liability, cyber and complex products liability risks. This has created additional demand for analytical services that can better model such risks and that can assist an owner in capital and portfolio management for the captive.


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

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