The case for captives: a new paradigm for insurance

June 3, 2024

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By James Norman, International Business Development Director

Captive insurance, self-owned insurers established by businesses to manage and potentially reduce their own specific risks, is on the rise. Once a relatively niche part of the market, we have seen steadily accelerating in recent decades, culminating in 20% growth over the past decade. But in recent years, this steady increase has become a steep spike, as businesses and insurers adapt to a market and operating environment that is far removed from the relative stability of the last decade. As demand for captives rises and the industry adapts, it’s important to take stock of the trends and changes that are shaping the market. 

A new landscape

To understand the current state of play, it’s important to examine the context, and how captives fit in to the turbulent operating environment of the post-pandemic years. Inflation and interest rates remain high, geopolitical and environmental factors continue to weigh on supply chains, and emerging risks such as cyber are rising up the agenda for businesses worldwide. 

Insurers have not been insulated from these challenges — and with the costs of claims escalating, so too have premiums, putting further pressure on businesses who are already taking on more risk and grappling with rising costs. In this challenging environment, the case for captives has grown. At its core, insurance is a tool that allows businesses to transfer risk to a third party — but as this risk increases, the upside of retaining some of this risk internally becomes an attractive proposition. 

Regional shifts

In response to this demand, we’re seeing an interesting shift in where captives are domiciled. For decades, this sector of the insurance market has been highly concentrated — roughly 50% of captives sit in the US, particularly in states like Vermont, with Bermuda and the Cayman Islands also home to around one third of global captives between them. 

This dominance was established largely due to favourable regulation and tax efficiencies – simply put, it’s historically been cheaper and more straightforward to establish a captive in these regions. Over time, this industry concentration leads to a deep pool of experienced professionals establishing themselves locally, including captive managers, as well as specialist accountants, lawyers, and risk consultants. 

However, there are signs that this is changing. Whilst captives remain highly concentrated, European insurance hubs like London and Paris are taking notice of surging demand and are making moves to build out their captive offerings, hoping to entice companies to set up shop in their home markets. This change is still in its early stages, with insurers consulting with regulators and clients, and building out the talent base needed to compete. But with abundant resources, demand from domestic businesses, and a deep talent pool, it seems set to remain a key focus area for traditional insurance powerhouses. 

A broader remit

As companies take on more risk, there is a desire for captives to retain more of this internally. Traditionally, captives have focused primarily on relatively core lines of business such as property and casualty, and health and life insurance for employees. However, given the rise of emerging risks like cyber and environmental liability, we are seeing a pronounced demand from businesses for captive insurers who can take on these specialist lines. This is also being driven by the diverse range of businesses that are now exploring captive insurers. With over 90% of the Fortune 500 now owning at least one captive, its increasingly important to adapt to specific risks and requirements across a spectrum of industries. 

Solving for complexity

With pronounced shifts in where, what, and for whom captives do business, the emerging picture is one complexity. Large companies increasingly want to retain as much risk as possible, which can be a challenge for captives working on behalf of sprawling multinationals with supply chains, employees and customers spread across the globe. To manage risk effectively, a captive may be required to be on top of emerging risks across continents, have knowledge of regional regulations, and visibility of operations across expansive supply chains. This complexity is not unique to captives. In fact, it’s something that the wider industry has been grappling with. Advances in technology and promising developments in automation and AI will be key to resolving this, as will collaboration. 

This gets to the heart of why captives are appealing in the first place — by closely aligning business with insurance, a layer of complexity is removed, and leadership can feel confident that their insurers are fully immersed in their world. By solely focusing on one client, captives can often comprise smaller, more agile teams, often with deep domain knowledge. With a persistent skills shortage and rising demand for bespoke specialist solutions, establishing such a team can be a challenge. However, by outsourcing claims handling, fronting, and third party management, captives and insurers alike can ease these pressures, and continue to adapt to this new paradigm.  

Learn more > Contact [email protected] to find out how captives can help your program

Tags: collaboration, Insurers, Outsourcing, Property, regulation, regulations, Restoring property, Risk