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Captives’ appeal during a hard insurance market and hard times

Captives|Risk & Analytics
COVID 19 Coronavirus

By Jim Swanke, CPCU, ALCM, ARM | May 25, 2020

Purchasing comprehensive, affordable insurance coverage in a hard market is more challenging during a pandemic; captives can come to the rescue.

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About our COVID-19 coverage

In our ongoing coverage of the COVID-19 outbreak, experts from across Willis Towers Watson share insight into what you need to know to manage your business and employees and reduce your risk.

The hard insurance market we are currently experiencing has proven to be more than just a short-term blip on the risk management radar. The COVID-19 (coronavirus) pandemic and the subsequent economic impact will likely lengthen its duration well beyond what was originally anticipated. Recent conversations with underwriters in London, Bermuda and New York suggest hard market conditions will continue for another 24 to 36 months — meaning capacity will be cut further, substantial rate increases imposed and the scope of coverage trimmed. While most agree that this hard market may not be as severe as the historic one of the 1980s, even the mere comparison made by experts suggests the seriousness of what we are experiencing today.

Captives provide many advantages in all types of insurance market conditions, but they can be particularly attractive in hard markets.

If you already have a captive

If you currently have a captive in place, we urge you to reevaluate its use and identify opportunities to better insulate yourself from difficult insurance market conditions. Many organizations are reporting premium increases of 50% to 100% or more, and cutbacks in available limits are being reported across all coverage lines.

Captives can provide relief through greater risk assumption. Many captive owners maintain that they are better off paying substantial premium increases to their captive rather than to an insurer. A captive can also help your organization access additional risk transfer capacity from the reinsurance marketplace and fill risk transfer protection gaps or layers of coverage in towers where premium pricing is prohibitive.

Captive owners should also reevaluate the inclusion of coverage lines not currently in the captive. A study to reengineer your captive can help you take an informed, logical risk transfer approach to better understand the possibilities.

If you do not currently operate a captive

If you do not currently operate a captive, now is a great time to determine if one can provide you relief from the hard insurance market conditions. Even though there are more than 6,000 captives operating worldwide, there are still organizations that could significantly benefit from one. Undertaking a captive feasibility study can help an organization quantify whether a captive is the right step to manage risk in a more cost-effective way.

Technology has changed the game

Technology makes this hard market considerably different from the one we experienced in the 1980s. New technology tools can help you make informed and swift decisions. Analyses that used to take months to complete can now be done in a matter of days or weeks. Industry expertise combined with technology can help you:

  • Optimize captive decision making in a hard market, even when there are multiple coverage lines being impacted and alternative captive structures to consider
  • Get a handle on what coverages should be included, the amount of risk to be retained, reinsurance attachment points and how the risks interact with one another
  • Study multiple structures in real time — model the addition and subtraction of coverages, alternate reinsurance structures, diversification benefits from uncorrelated risks and the overall impact on captive capital requirements
  • Take control of your own destiny and make informed captive decisions

Unprecedented times call for innovative thinking

The overlap of an enduring hard insurance market and life-altering global pandemic is creating a daunting risk transfer sellers’ market. Resourcefulness is needed, and organizations should investigate better use of well-tested, successful alternatives such as captives. These vehicles are flexible enough to be incorporated into your risk management strategy in a comprehensive and cost-effective way, and well worth careful consideration.


Senior Director, Captive Solutions – North America

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