A Mid-Year Look at 2023 Captive Insurance Trends

This article was originally published by Captive International and is reprinted here with permission.

A Mid-Year Look at 2023 Captive Insurance Trends

The pandemic brought several significant shifts to the ways companies did business. Remember how the futurists constantly claimed we’d all work remotely someday? That happened much more quickly than anyone expected, and it doesn’t look like many corporate leaders are interested in returning to what was. After all, they’re seeing their companies operate successfully in entirely new ways.

There’s a parallel in both the expansion and the diversification of the captive insurance strategy, and its scope is clearly global. The pandemic opened our eyes to how we can do things differently. It also alerted us to all sorts of risks most of us probably hadn’t considered, such as the impact a pandemic has on the supply chain, the availability of our workforce when schools closed, or even how political volatility can shape our daily lives.

As companies better understand the realities of risk management, they discover and recognize risks they have essentially been self-insuring all these years, because leaders weren’t doing anything to protect themselves. Finding affordable commercial coverage for these unique risks is unlikely. That’s one reason risk managers have been investigating the captive insurance strategy. This inherently flexible approach allows them to shore up the gaps in their coverage by designing their own insurance policy, then funding it in a way that maximizes the financial benefits. That increased flexibility is one of the biggest trends we’ve witnessed this year.

A prime example of that flexibility is the growth of cell captive facilities. Now a company interested in the captive strategy can establish its own captive insurance company for a fraction of the cost and time involved in pursuing the process on its own. Companies that have used captive programs effectively are setting up their own facilities to meet their own needs and funding them by renting cells to other organizations.

We’ve not seen it happening long enough to call it a trend, but we are seeing more companies look to captives as a way to handle risks that may be difficult (or impossible) to place in the commercial insurance marketplace. Take a manufacturer with a facility whose location poses unique environmental risks. Obtaining commercial coverage for an accident that compromises the local environment or puts neighbors at risk would probably be cost-prohibitive.

Instead, the companies create captives covering what we call differences in conditions and limits. The increased awareness of the risk leads them to become better at prevention, and showing they’ve got skin in the game makes them more attractive to reinsurance providers. We’ve nicknamed these captives “sleep at night insurance” because they help the folks in the C-suite do just that.

One of the first areas in which captives played an important role is employee benefits, and that continues to be a key driver for captive strategies, whether that involves medical stop loss coverage or part of a coverage tower. Captives are particularly appealing to global organizations facing different medical and insurance environments in the places in which they do business. For example, a company with operations in the U.S., Germany, and Indonesia is required to comply with different local requirements but can use the captive policy structure to serve the specific requirements of each market.

As for captives and other areas of risk, one clear trend is an increase in captives related to property coverage. Here again, combining a property-focused captive with loss control procedures can provide excellent coverage at a significantly lower cost over the long term. Some of the property-related use of captives is directly related to the effects of climate change, whether that’s coverage for extreme weather events or for situations in which key vendors or other business partners are unable to fulfill their commitments because of climate issues.

It looks as though the cyber insurance market is settling down from the chaos of recent years. As risks and mitigation steps become better defined, policies and exclusions are more well-understood and rate increases are becoming smaller. Captives continue to offer a viable tool for filling the gaps in cyber policies.

One last area in which there’s a healthy interest in the captive strategy is coverage for mistakes, misconduct and negligence. As shareholders and the public become more litigious, directors and officers of companies are aware they could face significant legal actions (or regulatory penalties) for deliberate or accidental actions resulting in liabilities. D&O (directors and officers) coverage provides protection in a wide variety of situations. Similarly, E&O (errors and omissions) insurance is there to protect companies when managers or other employees make mistakes while performing work for others. Here again, a captive program will tailor coverage to the unique and most likely types of liabilities a company and its leaders may face.