Small Captive Insurance Companies Poised To Take Over
Captive Insurance Times (CIT) Issue 125 recently reported that small captive insurance companies (CICs) are on the march and preparing to take over as the mainstays of the captive insurance industry. The report covered Marsh’s 2017 Captive Landscape annual study which includes data from more than 1,100 CICs (almost one-sixth of the total captive industry). There are over 7,000 captive insurance companies worldwide.
According to CIT, the captive industry is growing steadily and growth is propelling change. CIT pointed out that:
Previously, captives were a luxury enjoyed only by larger corporations capable of bringing their risk management and financing in-house. Now, smaller and middle-market companies are benefiting from their own captives, while the larger entities are creating more than one, often to cover non-traditional risks ignored by the commercial insurance market.
Furthermore, alternative risk financing is gaining prominence and becoming mainstream.
Even in the face of catastrophic events such as the 9/11 attacks, Hurricane Katrina, the global recession, Hurricane Sandy and Brexit, captives have grown year over year, despite fluctuations in the average property insurance market rate, suggesting, to Marsh at least, that “captives are not only formed in hard insurance markets, as some might assume”.
According to Marsh, large captives (defined as receiving annual premiums of $20 million or more) made up only 20% of captives for the 1,100 surveyed. Small captives (defined as receiving premiums of $1.2 million or less) account for 44% of those surveyed, up from 24 percent in 2012. There has also been an increase in the number of mid-sized captives that have grown into larger captives.
As we reported on in Captivating Thinking following the Risk Management Society (RIMS) Conference, rapid change and complexity is creating new risks at a pace that makes it difficult for traditional insurers to keep up. And this largely explains why captives are growing in a soft insurance market (see quote above). The Marsh Study drew the same conclusion: “As the world becomes more complex, so do the risks that corporations must protect themselves against.” For instance, cyber liability programs in CICs increased a staggering 20% in one year, representing the fastest growing nontraditional risk in Marsh-managed captives. For many organizations today, cyber is their number one concern. Captives can fill gaps in standard policy language and provide coverages for emerging and unique cyber risks.
Not surprisingly, financial institutions lead the way with over $40 billion in CIC reserves. Life sciences, communications, media and technology, and manufacturing are next in line with CIC reserves of $9.5 billion, $8.4 billion and $8.16 billion respectively. According to the Marsh Study:
Financial institutions have led the way in captive insurance for as long as Marsh has produced the Captive Landscape Report. They have huge customer bases which provide third-party risk opportunities for captives, and they are knowledgeable of and experienced in risk financing, so captive insurance is a natural fit for them.
The Marsh Study highlighted that CICs have enabled businesses to “build a War Chest” with study participants having amassed $110 billion. And, a War Chest is exactly what businesses need to survive and thrive in the complex and rapidly changing 21st century global economy.