In the US, the property and casualty (P&C) insurance industry plays a significant role in the national economy, contributing approximately $38 billion to the country's nominal GDP and generating nearly 300,000 jobs.
Speaking to IB, Prabal Lakhanpal (pictured), senior vice president and national captive practice leader at Alera Group, said that recent economic shifts and market pressures have fueled this growth, bringing a once-niche solution to the forefront of broader risk management strategies.
“Pre-COVID, insurance companies relied heavily on investment income, thanks to a bullish market that lasted almost a decade,” Lakhanpal said. The reliance on investment returns softened the underwriting approach, keeping premiums in check. When COVID-19 struck, this equilibrium crumbled. Market volatility dried up investment gains, forcing insurers to reevaluate their underwriting models.
“That, to me, was one of the critical triggers that pushed the market into hardening,” he said.
This hardening had ripple effects for employers, many of whom were unprepared for volatility in insurance costs. According to the Wall Street Journal, in 2023 businesses faced significant premium hikes, with some struggling to meet the rise of 20% or more. And this trend is indicative of a market shift in general, with US real estate insurance soaring from 7.6% in 2017 to 17% in 2023.
Lakhanpal said that rising property values, inflation and increasing severity of catastrophic risks intensified these challenges.
“COVID changed the risk makeup for a lot of employers,” he said. The resulting “perfect storm” led many to seek alternative risk strategies, with captives gaining traction as a cost-effective and flexible option.
Historically, captives were exclusive to the large organizations, but Lakhanpal said that market evolution has made them accessible to mid-market and even smaller entities.
“Group captives are now catering to different segments in the market, usually on the smaller side, while cell captives serve mid-sized markets,” he said. This segmentation, paired with standardized solutions and better access to intellectual property, has driven significant growth in the industry.
From the Alera Group’s perspective, Lakhanpal highlighted a comprehensive approach to risk.
“We don’t view risk as silos of P&C or employee benefits,” he said. “We consolidate these into an enterprise risk view, supported by actuarial insights, enabling employers to better understand their entire risk profile.”
Regulatory scrutiny is an unavoidable topic in the captive space, particularly concerning 831(b) captives sometimes flagged for misuse.
“IRS is focused on identifying bad actors who’ve abused captives as tax loopholes. It’s fair for those to receive regulatory review. We’re committed to educating clients and brokers to ensure captives are set up for the right reasons,” he said, underscoring the importance of feasibility studies.
Alera Group’s studies integrate qualitative and quantitative assessments, providing a 360-degree view of the ecosystem surrounding captives.
“It’s not just about potential cost savings,” he said. “We help clients consider legal implications, domicile selection, and other critical qualitative factors.”
Lakhanpal also touched on the evolving role of captives, predicting they will continue to gain relevance as enterprise risk platforms. He pointed to their expanding utility beyond P&C, particularly in managing employee benefits. “The cost of healthcare is skyrocketing, pushing employers to rethink their strategies,” he said. Captives, he said, provide a much-needed bridge, applying risk management principles traditionally reserved for P&C to address rising healthcare expenses.
The industry’s complexity grows in tandem with its adoption, but Lakhanpal sees this as an opportunity rather than a hindrance.
“Captives are becoming the lens through which organizations view their consolidated risk,” he said. And, looking ahead, Lakhanpal anticipated continued evolution in captives’ role within enterprise risk management. In fact, predicted a broader adoption of these solutions as organizations seek to mitigate costs and bolster financial resilience in a challenging insurance landscape.
“The more complex the risk environment becomes, the more critical captives will be.”
