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Captives: A broker's friend, not foe

Captives: A broker's friend, not foe | Insurance Business

Captives: A broker

It’s easy to see how the coronavirus crisis has dealt a massive blow to the global economy, with the aviation and hospitality sectors among the hardest hit during the pandemic-induced lockdowns.

For the insurance industry, though, the repercussions have been far more complicated – from policy wording battles between insurers and insureds, with brokers fighting tooth and nail on behalf of their clients, to a mad scramble for coverage as markets harden and insurance rates continue to rise, issues to be explored in more depth at Thursday’s completely free virtual event Broker Connect.

For instance, according to brokerage giant Marsh, the global average for commercial insurance prices in the first three months of 2020 grew 14% despite the minimal impact of the COVID-19 outbreak on pricing in the quarter. It’s a record-breaking increase, being the largest since the company first released its Global Insurance Market Index in 2012, with property insurance as well as financial and professional lines cited as the main drivers.

Read more: Commercial insurance prices skyrocket globally – Marsh

In a separate development, the British Insurance Brokers’ Association (BIBA) has pointed to a hardening in the professional indemnity market – an example of where coverage isn’t as easily available.

For companies with scale, such as large multinationals, among the viable options is to take the captive insurance route, essentially self-insuring either through a single-parent entity, group captive, protected cell captive, or special-purpose vehicle.

However, according to AIG – which provides captive-related services such as fronting, risk transfer, and captive management – self-insurance should be seen as a long-term risk financing strategy instead of a reflex action when commercial insurance rates take a hike.   

A captive insurer, whose primary role is to insure its owner, offers a host of benefits such as insulating the ‘policyholder’ or its parent organisation against the market cycle of insurance premiums, in addition to having a greater understanding of the insured’s needs and exposures and also serving as a potential capital source.   

Read more: How group captive solutions benefit the client and the broker

The rewards, though, aren’t limited to the owners; they are also reaped by brokers who play a role in the formation and management of captives, which can be an attractive alternative to traditional insurance. For one, it will allow brokers to increase not only their value but also their earnings by offering a solution for much-needed coverage – as long as they treat captives as another risk management option instead of an adversarial entity taking away their business.

Captive insurance is a growing market, too, meaning opportunities abound.

Between 2014 and 2018, the number of captives writing independent contractor/customer risks increased by a whopping 138%, according to a 2019 Marsh report which was based on data from more than 1,000 captives managed by the broker. Over the same five-year period, the number of captives writing cyber liability coverage grew by 95%.

To find out more about prospects and new growth areas in the world of insurance broking as we emerge from the crisis, join Insurance Business UK’s virtual event Broker Connect on June 04 – which is completely free for brokers and risk managers. Featured speakers include BIBA executive director Graeme Trudgill, Willis Towers Watson Great Britain head Nicolas Aubert, Be Wiser Insurance chairman Mark Bower-Dyke, as well as Brokerbility Group and BHIB Insurance Brokers executive chair Ashwin Mistry.