Captive Owners Continue to Broaden Scope of Activity

Over the past several years, an increasing number of captive insurers have financed emerging and high-severity risks while also accessing alternative risk capital. In our most recent annual survey, we found that from 2012 through 2017, Marsh-managed captives showed cumulative growth of:

• 333% in accessing international terrorism pools.
• 240% in writing cyber liability.
• 83% in offering coverage under the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA).

Terrorism Coverage

US-domiciled captives are obligated to offer terrorism insurance under TRIPRA, which is activated only for certified acts of terrorism as defined by the departments of Treasury and Homeland Security. Many organizations are examining their captives to see if they can take advantage of TRIPRA.

The trend is aided in part by a December 2016 Treasury Department ruling that subject insurers writing cyber policies are included under TRIPRA, and are eligible for reimbursement for losses by the federal government. Coupled with the growing awareness of cyber threats, this has caused many businesses to reconsider their approach to managing cyber risk — including cyber terrorism — and to explore the benefits of using captives to underwrite it.

Using a captive to write cyber terrorism risk can be a cost-effective and relatively simple means to reduce net retained risk, especially for companies that already own captives.

It is, however, difficult to accurately forecast liability risk arising from terrorist acts, in part due to the changing nature of attacks. Protecting balance sheets from such uncertainty is one of the goals of a captive program. In 2017, Marsh-managed captives writing conventional TRIPRA coverage increased 17% from 2016, while captives writing non-TRIPRA terrorism coverage increased more than 60%.

Alternative Capital Access

Captive owners are also increasingly finding another advantage: access to alternative risk capital, such as insurance-linked securities (ILS). Captives typically use ILS to as a way to access reinsurance — especially where current markets have limited capacity for the type and level of risk involved — and diversify their reinsurance towers. Meanwhile, special-purpose vehicles (SPVs) — which also provide access to capital — now constitute more than 8% of Marsh-managed captives, with premiums of US$11.9 billion.

In addition to accessing capital through ILS and SPVs, captives can help their parents through the buildup of surplus. In 2017, Marsh-managed captives held shareholder surplus totaling more than US$106.3 billion. These funds enable captive parents to develop creative risk financing options.

Inherent Flexibility

When commercial insurance capacity is scarce or expensive or when the market offers few solutions to finance critical risks, an answer can often be found in captives. Captives are inherently flexible and can grow and evolve with their parents’ business. When placed at the core of a risk management strategy, captives provide financial certainty through solutions that can maximize value for their parents.

To discuss options for an existing captive or how to establish a new one, contact your risk advisor.