Taking captives to the next level

Optimizing and building resilience

Taking captives to the next level

Risk Management News


This article was provided by AXA XL.

Speeding up the flow of data and boosting collaboration will help take captives to the next level, according to Marine Charbonnier (pictured), who leads AXA XL’s Captives & Facultative Underwriting in APAC & Europe.

The captive market has seen historic levels of growth over the past five years driven by a challenging (re)insurance market, but also the growing maturity of risk management worldwide. More and more companies now see the value of owning a captive (re)insurer to optimise insurance spend and to help build resilience.

Growth in captives in recent years has been significant, across all regions and lines of business. According to AM Best, direct premiums written by rated captives in 2022 rose by 21%, the largest increase in a decade. Marsh says it has formed some 370 new captives in the past three years alone, while its captive premiums under management increased to $70bn last year from $49bn in 2018.

The captive growth trend is also reflected in our own portfolio in Europe and Asia Pacific. As a leading fronting insurer, we have seen strong growth in captives, and now support well over 200 captive cessions across 21 domiciles, with 79 captive cessions in France alone.

Mitigating a tough market

The main driver for growth in captives over the past three years has been the challenging insurance market. Global commercial insurance pricing continued to increase in the third quarter of 2023, marking the 24th consecutive quarter of price increases, according to Marsh. Various lines, including cyber, D&O and property catastrophe, have seen rapid changes in available capacity, limits and coverage terms and conditions.

Captives, however, have proved a versatile tool to mitigate the hardening of the insurance market, enabling companies to retain more risk and maintain continuity of cover. According to AM Best, from 2018 to 2022, captives accumulated $9.4bn in savings, comprising $4.1bn in surplus growth and $5.3bn in dividends that otherwise would have gone to the commercial market for coverage.

Where there was a lack of capacity for cyber at renewal, for example, we worked with clients to fill gaps in both primary and excess capacity at renewal. We also helped a client incorporate product recall insurance into their captive using additional capacity from the facultative market, after such cover was no longer available in the commercial insurance market.

Bringing captives closer to home

There is also ongoing interest among European corporates to explore options to bring their captive operations closer to home. This requires the fronting insurer to work with the captive and the captive manager to understand how this can be achieved, the time schedule, the value, and the cost implications.

We have helped several clients establish captive (re)insurers in France following changes to French captive legislation at the start of this year. We have other clients considering moving their captive within Europe, and we are also talking to both risk managers and brokers in other countries that are interested in developing local captive solutions in Europe.

From risk transfer to risk management

Interest in captives is expected to remain strong, with further captives established as more owners look to re-domicile, and as companies continue to add new lines and finance higher retentions in the current market. We are also seeing growing interest from countries with less mature captive markets, including those in Europe and Asia Pacific, and from the growing number of international companies around the globe.

Longer term, the evolving risk landscape and growing maturity of risk management will further reinforce the relevance of captives as a risk management tool. Sophisticated captives continue to expand into new lines of business, including employee benefits, cyber, political violence, product recall and cargo insurance. Captives are also helping their organisations find solutions to major risk challenges, from climate change to supply chains.

In particular, captives provide a mechanism for companies to share risks and experience with insurers and third parties. With the growth of intangible and emerging risks, like intellectual property and transition risks, captives enable companies to incubate risks and work with insurers on risk transfer and risk management solutions. For example, alongside AXA Climate, we are able to meet captive clients’ need for additional capacity through parametric solutions.

Speeding up the flow of data

As demands on captives increase, the sector will need to invest in people, processes, and technology if it is to meet the future needs of companies. Two areas, in particular, will be key to taking captives to the next level: data and collaboration.

Improving the quality and flow of data is currently a top issue for captives, from accounting and reinsurance, to business and risk insights. This requires fronting insurers to make significant investments in IT infrastructure and processes to improve the visibility, control, and flow of financial and risk data. For example, we recently issued a detailed format of bordereau in order to adapt them to the best practices of captives and captive managers.

In the future, captives will need modern tools for accounting on a more automated basis, to drive efficiency and free up valuable expert resources to provide value and advice. We are not there yet, and it will take time, but there is work being done in this area. 

Enabling innovation

As the sophistication of captives and risk increases, collaboration is becoming more important. Fronting insurers play an essential role in co-ordinating captive operations, as well as facilitating collaboration between the various stakeholders, including the captive, broker, and captive manager partners. Insurers need to be able to anticipate and respond quickly to their clients’ needs, and must be involved and proactive in this regard.

At AXA XL, we have a dedicated captive team working in a flexible, organised, and co-ordinated manner. In recognition of the growing relevance of captives to our clients as they face a changing risk landscape, we have made significant investments in the quality of service, building out tools and teams dedicated to managing captive services. Transparency, dialogue, and co-ordination are keys to the success of the captive.

In conclusion

The growth of the captive sector over the past three years has been remarkable. But we cannot rest on our laurels. As an industry we need to continually invest in our people and systems, raising the bar for service and innovation. Captive insurance is a complex business but, by working together, we can overcome problems and ensure the captive fulfils its ambitions and meets the growing needs of businesses.

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