Captives

In this section:

Organizations That Use Captives | Key Risks Underwritten | Captive Utilization by Industry

Organizations That Use Captives

Captives continue to provide companies with a valuable tool to navigate volatile market conditions, including hardening insurance markets and also as a means of financing especially challenging risks such as cyber.

Globally, reliance on captives remains steady from 2019 at 17 percent in 2021, according to the survey results. Regionally, the captive (re)insurance industry is dominated by North America, followed by Europe. Together, the two regions account for as much as 80 percent of total captive premiums underwritten.

Organizations That Have, or Are Considering Creating, a Captive Insurance Company or Cell by Region

Organizations That Have, or Are Considering Creating, a Captive Insurance Company or Cell by Revenue

North America — already the global leader in the captive (re)insurance market — saw a pronounced increase in organizations that currently have a captive or an active cell in a PCC, to 39 percent in 2021, up from 27 percent in 2019. Although some year-over-year variations are to be expected, use of captives in the U.S. is higher than ever before. This trend is further supported by the fact that an additional 12 percent of North American respondents to the 2021 survey said their organization is planning to create a new or additional captive or cell in a PCC in the next three years. Although 49 percent of respondents answered no to this question, we expect more of these companies will fit the profile of a captive user as the market continues to challenge risk transfer placements.

Europe, the region with the second-highest reliance on captives, saw a 4 percent jump since 2019 to 15 percent, with another 5 percent planning to create new or additional captives in the next three years.

Companies that may only now be considering adding captives to their risk financing toolkits should start by assessing their total cost of risk and the optimal program design to balance risk retention and risk transfer.

Organizations with a Captive or Cell, by Region

Key Risks Underwritten

Globally, organizations are using captives to underwrite risks as expected, with 62 percent covering property, 48 percent covering general liability (GL) and 35 percent covering workers’ compensation, according to this year’s survey. North America is likely to show an even higher percentage of respondents saying their organizations cover these three risks in addition to auto.

Beyond those expected findings, we find that not only is use of captives rising—sharply in North America and moderately in Europe—but the risk being retained within captives has also increased. Over the past two years, companies have turned to captives to a greater degree to fill gaps in coverage caused by market pricing and capacity constraints.

For example, survey results show an increase in premiums being underwritten with captives for hard-to-place cyber risks, from 16 percent in 2019 to 31 percent in 2021, a finding that’s in line with our underlying captive benchmark data. The percentage of organizations using captives as part of their cyber risk financing programs has been increasing at roughly 10 percent per year for the past five years. As a result, our 2021 Captive Benchmarking Survey shows a massive 600 percent increase in cyber liability premium. Moreover, organizations that had previously expressed an intent to use captives in this way are following through on their plans; in the last edition of this survey, 34 percent of survey respondents said their organizations planned to use captives to cover cyber risk within three years.

Lines of Business Underwritten in a Captive or Cell by Region

Conditions are coalescing to increase the appeal of captives to cover cyber risk. First, cyber liability is increasing, influenced by the growth in high-profile cyber crimes and ransomware attacks in recent years. Second, cyber insurance prices have skyrocketed, with much more restrictive terms and much higher attachment points. Additionally, cyber insurers prefer to see an alignment of interests; that is, they expect companies to carry some cyber risk themselves, either on the parent balance sheet or via captives. Third, organizations are doing a better job of quantifying their cyber risks (46 percent in 2021 compared with 41 percent in 2019). Finally, using a captive allows a company to control its data and better understand cyber risk over time. Companies can use benchmark data to analyze their cyber risk relative to peers and use this information to better articulate their risk to the reinsurance market.

They can also use the data to make operational adjustments aimed at reducing risk going forward. Thirty percent of respondents said their companies are underwriting directors’ and officers’ (D&O) liability risk within captives in 2021, compared with 24 percent in 2019. More captive owners likely want to write more coverage elements of D&O in their captives. Country or state regulations can make this challenging but not impossible. Organizations that cannot find a viable commercial option to cover D&O risk can find a way to do so with captives, as evidenced by the roughly one-third that already are doing so. This trend is likely to continue to increase.

Meanwhile, 19 percent of respondents are writing employee benefits (EB) within their captives in 2021, up from 15 percent in 2019. This steady growth, which we expect to continue, reflects companies’ efforts to gain flexibility and control costs in response to an underlying trend of rising EB costs in Europe and the U.S.

An increase in the use of captives to cover health and medical — from 13 percent in 2019 to 21 percent in 2021, according to the survey — bolsters our belief that captives can provide enhanced coverage in this tight labor environment.

With respect to environmental risk, the survey shows only a slight uptick in reliance on captives, from 17 percent in 2019 to 19 percent in 2021. However, attention is increasingly focused on environmental risk, and with a rising sense of urgency, specifically with respect to climate change. Often, this aligns with the environmental, social and governance (ESG) aspirations of multinational parent companies. Moreover, in 2018 just 12 percent of survey respondents thought their organizations would use captives to cover environmental risk within three years, whereas 19 percent have actually done so. Finally, climate concerns may also be reflected in responses related to the high use of captives to cover property and business interruptions (again, 62 percent) and catastrophes (23 percent).

In addition, we have seen captive owners use their captives to self-insure their risk rather than accept premium increases that are not supported by losses. For example, the large number (62 percent) of organizations that use captives to retain property risk reflects growing confidence in their ability to track their total cost of insurable risk (TCOIR) and, of course, their investment in loss control. By retaining more risk in their captives, organizations can also fill coverage gaps for challenging risks, such as wildfires, while maintaining control of their overall premium spend. We also see a marked increase in the use of protected cells, as well as stand-alone captives to access reinsurance market capacity, either to obtain more competitive terms and pricing or to cover risks no longer covered by the insurance market.

Lines of Business Underwritten in a Captive or Cell

Captive Utilization by Industry

Overall, roughly one in four (24 percent) of respondents to this year’s survey said their organization already has, or is considering creating, a captive insurance company, or is using a protected cell within a PCC.

The responses to this question are similar even within many sectors. For example, 25 percent of respondents in the food, agribusiness and beverage (FAB) industry say their organizations either use or plan to use captives. Given the hard market conditions for FAB risk, we expect this trend to continue.

Healthcare respondents reported the highest current usage of captives within their organizations (30 percent). However, a regional breakdown is likely to reveal that these answers came mostly from the U.S., which is heavily reliant on captive utilization, particularly in the healthcare industry. Physicians and hospital groups turned to captives — through professional indemnity programs — about 15 years ago to fill the gap left when insurers withdrew capacity from the sector. Over the past 18 months, this already hard market has hardened even more, prompting those healthcare companies that heretofore have not relied on captives to do so in greater numbers. Again, these current market conditions suggest this trend will continue.

Respondents working in industries that arguably are most affected by this year’s top risks — cyber, business interruption and the economic slowdown — are also most likely to report that their organizations use or plan to use captives. This includes healthcare (39 percent), life sciences (31 percent), energy, utilities, natural resources (31 percent) and professional services (29 percent). The healthcare sector also suffered the effects of the pandemic more than any other industry and so may be turning to captives to bolster resilience.

The vast majority of respondents across all sectors said that their captives and PCCs are active; that is, not dormant, in run-off or set to close within the next three years.

Current and Planned Captive or Cell Utilization by Industry

In conclusion, the hard market conditions are reminiscent of the late 1990s, and captives are seeing a similar resurgence in use of existing and new setups. There are some differences this time, however, in that we are seeing significant growth in PCCs and cell use as well as increasingly sophisticated and accessible risk modeling to support informed decision making on risk financing alternatives and total cost of risk program optimization. As captive owners are becoming increasingly prepared to retain larger portions of traditional property and casualty risks, clients are also grappling with the emerging risks mentioned above.

Deciding what to keep, what to spend on risk and loss mitigation, and what to transfer out to the commercial market is a significant challenge for the risk management community. There is little doubt that captives, including PCC cells, will play a pivotal role.

The Role of Risk Management in M&A and Divestitures

Have a question? Contact us

©2021 Aon plc. All rights reserved | Privacy Policy | Legal