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Captive insurance firms ‘rapidly expanding’ in mid market: Marsh


May 11, 2015   by Canadian Underwriter


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The middle market space will be a “robust growth sector” for captive insurance companies in the future, and some will underwrite risks such as crime and political risk that have not traditionally covered by captives, commercial brokerage Marsh Ltd. suggested in a report released Monday.

The middle market space will be a "robust growth sector" for captive insurance companies in the future: Marsh

“Captives have been rapidly expanding throughout the middle market space, which is anticipated to be a robust growth sector for the captive industry in the future,” wrote Chris Lay, president of Marsh Captive Solutions, in the introduction to a Marsh report titled The World of Captives: Growth and Opportunities Without Borders.

Marsh Canada defines a captive as a “legal entity formed primarily to insure the risks of a corporate parent or a number of similar corporations (e.g., trade associations), thereby contributing to a reduction” in the parent entity’s total cost of risk.

“Once almost exclusive to the Fortune 500 and Financial Times Stock Exchange (FTSE) 100 companies, captives now can provide benefits to organizations of all sizes, industries, and geographic orientation,” Lay wrote.

The report included an analysis of 1,109 captives managed by Marsh. Of those 25% are owned by financial institutions, 14% by health care organizations, 7% by manufacturing firms and 4% by firms in communications, media and technology.

“The CMT industry is the seventh-largest user of captives; however, it generates the second-largest amount of premium totaling US$3.2 billion, representing 8.3% of the total captive premiums written,” Marsh reported. “General liability, property, auto, employers liability, and workers’ compensation (WC) are coverages likely found in captives owned by companies in the CMT industry.”

In financial institutions, “property lines and financial product coverage such as errors and omissions and directors and officers liability are most common,” Marsh added.

Marsh also included a table showing the extent to which some non-traditional lines – including supply chain (business interruption and contingent business interruption), crime, medical stop loss, political risk, trade credit, cyber risk liability, contractor/vendor, extended warranty and surety, among others – are being covered by captives.

“Political risk written in a captive, either with or without reinsurance, can add much value,” according to the report. “For example, a captive can write multiyear contracts, with customized terms and conditions and obtain reinsurance protection above a certain threshold from a carrier.”

In its report The World of Captives: Growth and Opportunities Without Borders, Marsh Ltd. analyzes the captives it manages

Marsh also suggested that political risk “can be a complimentary coverage,” for global entities operating in the United States, to the U.S. government’s terrorism risk insurance program.

The Terrorism Risk and Insurance Act was originally passed in 2002 and essentially requires commercial property insurance in the U.S. to cover terrorism, with the federal government sharing losses under certain conditions. It was renewed Jan. 12 with the passage of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA).

In order to qualify for TRIA coverage, an attack would have to result in aggregate losses, to the insurance industry, of more than $100 million, Risk and Insurance Management Society Inc. (RIMS) wrote in a paper in 2013. At the time, TRIA had a deductible, to the private insurers, of 20% of their annual direct earned premiums from commercial P&C lines. Once that deductible is exceeded, the federal government covers 85% of the insurer’s loss above the deductible, until the total losses are $100 billion.

With TRIPRA, the $100-million “program trigger” will increase to $120 million in 2016, and will go up by $20 million every year until it reaches $200 million in 2020.

In its World of Captives report, Marsh found of the 374 U.S. captives that it manages, only 83 “actually access TRIPRA for property coverage, writing either conventional terrorism coverage for property damage or the excluded nuclear, biological, chemical, and radiological perils (NBCR),” according to the report. “Based on this fact, we suggest all owners with a US captive to investigate whether adding TRIPRA coverage to your captive could provide economic value, address a self-insured peril, and add overall protection and value to the organization should a devastating terrorism event take place.”

TRIA was originally enacted because “terrorism risk insurance quickly became either unavailable or very, very expensive and unaffordable,” after the Sept. 11, 2001 hijacking of four civilian airplanes, said Gregory W. Meeks, who represents a portion of New York City in U.S. House of Representatives, during a debate last December in Congress.

Many companies and captive owners do not realize that most property TRIPRA coverage is only for ‘conventional’ perils and not for excluded perils such as NBCR,” Marsh wrote in The World of Captives. “We challenge you to ask your property brokers to investigate if a captive for TRIPRA could provide a ‘backstop’ to your property and/or general liability exposures for this significant risk.”