It has taken some time for the hardening commercial insurance market to have a ripple effect on the captive sector, but the sharp rate increases over the past three to four years have led to an increase in captive formations l year after five years of decline.
The proven alternative risk transfer vehicles that many large companies have had in their risk management tools for decades are proving useful resources as they seek to retain more of their exposures. Small businesses also benefit from captives of all types, often for the first time, as they respond to price increases and capacity shortages.
As we report in articles beginning on page 19, commercial policyholders can pivot quickly during renewals, with some establishing new cellular captives within weeks to lessen the impact of more restrictive underwriting.
None of this should come as a surprise to insurers or policyholders, as captive training trends have long mirrored commercial market pricing cycles. And insurers who impose unwarranted price increases should not be surprised if policyholders remember how they were treated during the hard market when prices inevitably fell.
What is different this time around is the extent of the risks placed in captives. While auto liability, general liability, workers’ compensation and some property coverages have been held in captivity for years, only a few years ago captive owners were extremely reluctant to take on risks related to disasters, including cyber liability.
Captive managers and regulators report that an increasing number of captives are being used to hedge these risks. Clearly, policyholders feel more comfortable assuming some of the risk and confident that they can obtain additional protection through quota shares or captive reinsurance.
In another development, Delaware amended its corporate law to allow captives to provide Part A directors and officers liability coverage to corporations incorporated in the state. Although the details have yet to be ironed out, the move could add another option for struggling policyholders who previously had to purchase commercial insurance to cover the exposure.
However, the outlook is not all rosy for the captive sector. The IRS’ ongoing lawsuit against abusive 831(b) microcaptives cannot be ignored, and details of all the cases the government has won in court over the past four years show just how much some captive owners can be. creative with tax advantage structures. While it’s easy to dismiss the cases as only a concern for small entities attempting to use captives for estate planning purposes, the IRS has a long history of fighting captive owners of all sizes, and any legal victory he wins will likely reinvigorate his efforts. .
Despite concerns over 831(b), the captive sector continues to provide buyers with alternatives and help them navigate a difficult environment. A cautious expansion of captive use also has the potential to energize risk managers.