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Summary
- While captives traditionally began as a pursuit for larger, heavily capitalised companies capable of weathering significant losses, more frequently, other companies are coming together to form group captives.
- As smaller companies often require more resources to create a captive of their own, they can enjoy many of the same benefits by combining forces with other like-minded companies. This formation is known as a group captive.
- There are two main types of group captives: heterogeneous (member captives from a diverse set of industries) and homogeneous (member companies from the same industry).
- One of the unique challenges that come with a group captive situation is the increased amount of data you need to validate and make sense of this information to derive value.
- With the help of data management platforms like Insurwave, group captives can receive critical data well before their renewals, giving them time to implement solutions for problem areas.
- In today’s complex business environment, captives have become an indispensable solution, offering companies a strategic means to counter shrinking capacity, rising premiums, and stringent carrier restrictions in the risk transfer market.
In an environment where there is a shrinking of available capacity in the risk transfer market, tightening carrier restrictions and ever-increasing premiums, it is more attractive than ever for companies to seek a captive arrangement to regain control over costs, market stability, and loss management.
While captives traditionally began as a pursuit for larger, heavily capitalised companies capable of weathering significant losses, more frequently, other companies are coming together to form group captives. In this article, we will explore the origins of group captives and why good data management is crucial to their success.
What is a group captive?
Captive insurance can be defined as an insurance company owned by the organisation that it insures. Rather than paying a conventional commercial insurance company, a captive owner retains certain risks at lower costs while transferring others (often catastrophic losses) to an insurer. As smaller companies often require more resources to create a captive of their own, they can enjoy many of the same benefits by combining forces with other like-minded companies. This formation is known as a group captive.
There are two main types of group captives:
- Heterogeneous (member captives from a diverse set of industries);
- Homogeneous (member companies from the same industry).
Which category your captive may fall under is based on your company’s risk profile, industry, loss history, and risk management needs.
“Why is this mutualisation likely to happen? In the hard market, capacity is reduced while premiums are increased. How do you deal with that? You create your own capacity, and the most effective way to do this if you’re a small company is joining forces with other similar entities and creating a mutualised captive,” explained Mark Costin, Commercial Director at Insurwave.
What are the benefits?
In times of economic hardship, organisations will often turn to captives to retain more risk when commercial insurance becomes expensive or too difficult to obtain. For smaller organisations, participating in a group captive can provide savings on insurance costs and access to extensive risk-management resources, including industry-specific expertise.
And their popularity is growing, according to new data released by insurance broker Marsh, with captive premium growth over the past two years has continued to rise. Guernsey and Luxembourg, two of Europe’s leading domiciles, have seen premium growth of 13% and 36%, respectively, while in the UK, premiums increased 8%.
“The theme for captives right now is growth — growth across all regions, growth across all lines of business, growth everywhere; places where you’d expect it and places you might not,” said Ellen Charnley, President of Marsh Captive Solutions.
On the risk transfer side, captive solutions can also create much-needed leverage with insurers.
“[Captives] create additional capacity, mitigate the effect of a hard market, and automatically put organisations into a position where you can more effectively leverage insurers on the risk transfer side,” Mark Costin added.
The importance of data
As has been said before, data is the lifeblood of insurance; however, nowhere is it more critical than when it comes to profitability and the ability of captive owners to understand their risk exposure.
“When you are bringing together the exposure of several companies and trying to understand what those exposures are, the more accurately you can consolidate that data while maintaining the integrity of the member companies, the better decision-making process will be – you don’t want to co-mingle data if it’s proprietary, however. Captives can then charge the right premiums and give you a much better idea of how your risk transfer might work,” said Mark.
One of the unique challenges that come with a group captive situation is the increased amount of data you need to validate and make sense of this information to derive value. Therefore, with proper data recording, collection and analysis, captive owners can use technology to match the needs of their insureds.
With the help of data management platforms like Insurwave, group captives can receive critical data well before their renewals, giving them time to implement solutions for problem areas.
“The more accurately and more effectively you manage your data and understand the exposures of a number of companies, the more effectively you can consolidate those exposures with that data, which will equal a better outcome for the captive owners,” Mark explained.
What next?
Similar to the evolutionary path of banks, captive insurance companies have emerged as crucial facilitators for businesses, rising far beyond their original scope. While the history of captive insurance stretches back over a century, it is a concept that has been introduced previously in the context of risk management practices. However, like many of the significant financial innovations of the past, captives have been able to move beyond traditional risk mitigation to become tools of economic empowerment for insurance buyers.
Rather than simple risk management tools, captives are increasingly enabled to use their vast data sources to price new business and significantly impact renewal decisions. For example, despite its relatively new emergence, cyber risk is another area where the use of captive insurance companies for cyber cover has doubled in recent years.
Captives have been used to fill gaps in the cover provided by the market but also to insure primary layers and reinsure higher value cyber risk into the (re)insurance market. They’re keeping risks in-house and selling some to the broader insurance market. For instance, more and more captives in Guernsey are now providing coverage for their parent companies’ cybersecurity risks.
Reshaping risk management
In today’s complex business environment, captives have become an indispensable solution, offering companies a strategic means to counter shrinking capacity, rising premiums, and stringent carrier restrictions in the risk transfer market. Group captives represent the latest development in the evolution of captives from conventional risk management to financial empowerment tools. Small and mid-sized businesses, once excluded due to scale, can now harness their collective strength, pooling resources and reshaping insurance dynamics. Data has remained a crucial linchpin in these developments, enabling captives to make the most of their data, navigate complexities, price new business, and influence renewal choices, fundamentally altering the insurance landscape.