More Companies Look to Captives to Insure Emerging and Dynamic Risks

As the number of exposures organizations face grows in number, complexity, and severity, captives play an important role in keeping up. The number of captives writing non-traditional risks such as terrorism and cyber rose substantially in 2015.

Cyber liability, for example, is one of the most well-known emerging risks. Although capacity remains abundant in the commercial insurance market, pricing and appetite has deteriorated for companies in certain industries, and gaps remain in traditional coverage for exposures the market will not write.

So it’s not surprising that we’re seeing an increase in the number of captives being used for cyber risk. We’re also seeing more companies turn to captives to write coverage under the federal backstop for terrorism, the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA), formerly known as the Terrorism Risk Insurance Act (TRIA).

Over the last year, we have seen a 17% increase in captives accessing TRIA for terrorism coverage and a 30% increase in captives writing cyber coverage.

With both terrorism and cyber risk changing quickly, companies are looking to captives to insure them.

Advantages of Using Captives for Terrorism and Cyber Risks

Writing a TRIPRA policy provides access to the Federal backstop for certified terrorism events. A captive can offer the following benefits:

• Premium savings — If there isn’t a terrorism loss, premiums paid to a related party are retained on a consolidated basis.
• Broader coverage — Captives can offer coverages that are often restricted by or unavailable from commercial insurers, including the following risks:
  • Nuclear, biological, chemical, or radiological (NBCR) attacks.
  • Cyber terrorism risks.
  • Contingent time-element losses.
• Policy wording flexibility — Captives are not generally subject to strict policy form requirements, so they can offer greater flexibility in customizing policy wording.

Using a captive to cover cyber risks can offer financial benefits:

• Market pricing may be cost prohibitive and the parent company might find retaining the risk a more efficient use of capital.
• Reduced volatility of retained losses and less balance-sheet impact by segregating funds in the form of premiums to pay potential losses.
• Captures and quantifies all loss costs versus expenses within the retention being siloed among the various claim stakeholders (such as IT, legal, public relations, risk, finance, customer service, etc.).

A captive can also provide broader coverage through access to the reinsurance market as well as coverage for gaps in traditional insurance policies.

In addition, captives may provide access to higher limits and more comprehensive coverage for these growing risks. Marsh Captive Solutions expects these risks will continue to affect the insurance market and that the appetite for domestic and international organizations to write these coverages through a captive will increase.