Captive market grows in spite of soft-market conditions

Although the growth of captive insurance companies has been relatively “flat” in the current soft insurance market, growth is still possible during soft markets because captives are driven more by market volatility than by market cycles, keynote speaker Nancy Gray said at the 4th annual Captives Insurance Strategies Summit Conference in Toronto.
In a slide presentation, Gray noted more than 4,861 captives existed in 2007, less than the number existing in 2006. “When you look at more recent years, you can see that a plateau has definitely been reached,” said Gray, the executive director for North America of Aon Insurance Managers in Vermont.
“However, new formations [represent] only one of the indicators of growth in a captive marketplace. You can’t overlook premium volume, retention levels, assets under management these are all important indicators, and [for captives] these have increased.”
Gray noted the current risk climate remains uncertain and volatile, which she said accounts for the fact that captives still have a place in the current softening market.
[Hard markets create the conditions to launch captives, it is said, because captive formation is associated with high retentions and deductibles and reduced availability of coverage and capacity seen during hard-market cycles.]
“Can captives solve all new global risk considerations?” Gray asked. “This area touches on the issue of emerging risk and whether the traditional market or the captive market is the right home for the risk. In reality, a lot of risk that starts in a captive market ends up being underwritten in the traditional markets over time.”
She offered terrorism and E&O coverage by way of example.
Various emerging risks underlining the volatility of the contemporary insurance market include:
terrorism
climate change
cyber-risk, and
global pandemics.
Bill Morgan, the managing director of Aon Insurance Managers in B.C., noted the soft market allows newly formed captives an opportunity to prepare for a hard market. If everybody waited until the hard market to launch a new captive, he said, the result is going to be “captives that are put together too quickly,” with not enough foresight and forethought.
“I think you do need some lead time to work out the business plan for the captive,” Morgan said. “And trying to do that under the threat of an imminent hard market in a month or two doesn’t work very well. We see clients still forming captives in a soft market, maybe taking up low rates of participation initially and then, when the hard market hits, they’re ready to go.”