Captive numbers rise despite market easing

Captive formations increased again last year despite the slowdown in some commercial insurance rates.

Owners made broad use of the alternative risk transfer vehicles as they sought to control costs and manage risks strategically across their organizations, experts say.

Property exposures remained a growth driver despite stabilizing insurance pricing, as weather-related claims made insurers more selective about risks.

Captives also wrote an increasing volume of liability lines as owners restructured their risk management programs to address rising jury awards.

The rising cost of health care led more businesses to integrate employee benefits into captives, often using cell structures to fund medical stop-loss exposures.

The total number of captives worldwide increased 1.8% to 6,290. Growth varied among domiciles, with U.S. domiciles often adding more captives than their European counterparts.

Captives see broader use

Marsh saw a slight slowdown in new captive formations in 2024, though it still set up more than 100 captives, and premium volume continued to grow, said Michael Serricchio, Norwalk, Connecticut-based regional leader, U.S. and Canada, at Marsh Captive Solutions.

“For the last three or four years, the insurance market’s been very hard,” but with the softening in property and casualty markets, fewer clients are forming new captives, Mr. Serricchio said.

Property premiums in Marsh-managed captives increased by 29% from 2023 to 2024, while casualty premiums rose by 14%, he said.

Aon PLC has seen captive formations grow in North America, and requests for captive feasibility studies are also increasing, which suggests further growth this year, said Nancy Gray, regional managing director, Americas, at Aon in Burlington, Vermont.

Ms. Gray noted the focus of some of the feasibility studies has changed.

“We are seeing continued activity, but maybe a little bit more shifting away from property to some of the casualty lines, following the direction of the market,” she said.

Despite the moderation in pricing in some insurance lines, there’s an ongoing need to use captives, said David Arick, Memphis, Tennessee-based managing director, global risk management, at Sedgwick Claims Management Services Inc.

“When the market calms down a bit, it gives captive owners an opportunity to really look at the strategy,” Mr. Arick said.

“Even if the market has moderated, it still may not be cost-effective to buy risk transfer. The captive may be a better long-term value in certain areas,” he said.

More companies are integrating captives into a broader risk financing strategy, said Peter Kranz, Burlington, Vermont-based senior vice president and director at Alliant Insurance Services Inc.

For example, captives can be used to achieve multiyear, multiline, integrated aggregates, he said.

Mars Inc., which acquired a Vermont-based captive when it bought its parent in 2007, began making significantly greater use of the facility in 2019, said Vicki Sandberg, Frisco, Texas-based director of captive risk financing at Mars.

The food company began by placing deductible reimbursement coverage in the captive and examining claims data to determine what other risks to cover, she said.

Six years later, “just about every insurance cover that Mars has is touching the captive somehow,” Ms. Sandberg said.

In addition to mainstream property/casualty risks, the captive participates in Mars’ international employee benefits, Side B and C directors and officers liability, and representations and warranties coverage, she said.

“We’ve been hit once or twice with a large claim, but nothing that has gone beyond our risk appetite,” Ms. Sandberg said.

Greater use of the captive has helped other executives at Mars understand the importance of risk management and helped the company navigate the changing insurance market, she said.

“The captive is one of the tools to help protect the business as well as retain risk where we see it’s appropriate. So, we really level out the ups and downs of the cycle,” Ms. Sandberg said.

Liability

The auto liability market remains hard, which is driving increased interest in risk retention groups and captives with fronting capabilities, said Anne Marie Towle, Indianapolis-based CEO, global risk management and captive solutions, at Hylant Group Inc.

Transportation businesses are using captives to build excess towers, she said.

Medical professional liability is another area where “we’re starting to see some pain points,” due to “nuclear verdicts,” Ms. Towle said. In the next couple of years, health care organizations, long-term care facilities, assisted living facilities, and physician groups will be looking for solutions, which could lead to more captive formations, she said.

Captives have long been used to cover primary liability layers, but owners are now also using them in higher layers of programs to fill in coverage gaps, Ms. Gray said.

In addition, owners use them to finance increased deductibles that insurers have enforced, she said.

Cyber

Marsh saw 17% premium growth in captives writing cyber liability from 2023 to 2024, Mr. Serricchio said. Cyber captives sometimes write $1 million deductibles and above, in addition to quota share, and various excess layers, he said.

More companies are looking to cover cyber terrorism risk in captives under the federal backstop for terrorism risk, he said.

Wealthy individuals and some companies looking for specific coverages are also using cell captives to provide fully collateralized capacity for cyber risks, said Nick Frost, Bermuda-based president of Davies Captive Management.

Companies are looking at specific layers of their cyber programs that may not be efficiently priced, Mr. Arick said. “They’re using their captives to stop that pricing from going up through the tower,” he said.

Cyber pricing has stabilized, but owners are still looking to take a layer of cyber in the captive, Ms. Towle said. Captives can provide manuscript forms that offer broader coverage where the commercial market might have exclusions, she said.

“Being able to plug those gaps or holes within your captive is really important,” Ms. Towle said.

Property

Despite moderating property rates, captives continue to play a key role as organizations look to mitigate the rate increases of the past few years and take a more strategic approach to risk financing, experts say.

Even with the price decreases, some commercial property owners can’t obtain the capacity they need at a reasonable cost in the commercial market and are using captives to provide coverage at various layers through their programs, said Mr. Frost.

“This is even for companies that have not suffered a hurricane loss,” he said.

Property continues to be tough, said Alliant’s Mr. Kranz. “Even if you don’t necessarily see much change on the pricing side, you see forced increased retention” of risk and decreased capacity on the top side, he said.

A California-based client with high-risk properties of lower values is open to assuming attritional risk, for example, Mr. Kranz said. The only insurer willing to write the program is seeking to increase the deductible, so Alliant is exploring ways to redesign the program, he said.

That’s where risk financing comes into play, Mr. Kranz said. It’s not just about funding it into a captive but considering options such as a stop-loss or even a structured monoline property program.

Benefits

Companies with overseas operations are more frequently using captives to cover international employee benefits risks, said Ms. Gray of Aon.

Increasingly, companies are breaking down the “silos” between human resources and risk management and looking for opportunities to make greater use of their captives, she said.

“It makes it more efficient because you’re bringing it all into a central company and can deal with all of the different countries that you have,” Ms. Gray said.

Self-insured employers are more often using captives to provide stop-loss coverage for health care risks, as the commercial market remains challenging, captive experts say.

Health 180 LLC set up a cell captive in Vermont this year to provide stop-loss and other coverages, said Jim Bode, CEO of the Minneapolis-based health care risk management company.

Previously, the company had used facilities offered by stop-loss insurers, which limited options for purchasing stop-loss reinsurance coverage, he said.

“It gives us the ability to shop. If you are using a cell from a stop-loss carrier, you are held hostage, and we did not want to be held hostage,” Mr. Bode said.

The Vermont facility will also allow cell owners to diversify their risks, said Troy Hanratty, president of Health 180.

“Currently, it’s for health risks, but long term, it could be for employee benefits and property/casualty risks,” he said.