An Active Year for Captives and Even Brighter Prospects Ahead

This article originally was published on Captive.com and is reprinted here with permission.

Our industry is ending another banner year, and the road ahead continues to look bright. Despite macroeconomic concerns and worries about inflation that created uncertainty in early 2024, more organizations opted to start or expand captive insurance companies. We’ve seen growth in all forms of captives, from renting the simplest cell captives to complex programs handling multiple risks.

The combination of increased awareness of captives and the struggles of traditional insurers in the face of climate-driven disasters are leading risk managers to think about smarter strategies. The arrival of new domicile options during the year is a major factor in that growth, and as familiarity with the new opportunities expands, it’s safe to expect significant activity around those domiciles. We saw France become a domicile and grow steadily, and now the UK is looking at adopting captive legislation, potentially in 2025.

Property continues to represent one of the largest uses of captives, along with traditional lines such as auto liability, medical stop-loss, professional liability and other employee benefit-specific lines of coverage.

Creativity continues to flourish in the captive universe, particularly when it comes to leveraging the captive’s accumulated profitability. Captive owners are finding innovative ways to use their success to fund even more by reducing claims. That includes everything from leveraging those excess funds for a more expansive safety program to buying specific items like slip-resistant shoes for their employees or technology in vehicles to engaging experts to boost the company’s risk management objectives.

There are also signs that carriers increasingly see captives as strategic partners instead of competitors. Traditional carriers that have exited higher-risk direct insurance markets see value in reinsurance and fronting for well-managed, actuarily sound captives.

As we peer into 2025’s captive landscape, there appears to be some slight softening in the commercial insurance market. That doesn’t mean the hard market that’s been in place for several years is disappearing (particularly in the property arena). Instead, it’s a sign that the volatility displayed by carriers seems to be calming as they get a better handle on the cost of claims and steer themselves away from unprofitable areas of coverage. One wild card remains this year’s hurricane season, which started early and then slowed a bit until Hurricane Helene surprised the Southeast with unprecedented rainfall.

Expect to see expanded use of voluntary benefits as HR managers and risk professionals seek other opportunities to take control over benefit costs by using captive strategies. The savviest companies are also looking at ways to enhance their existing captives. For example, many are beginning to manuscript their own coverage offerings to ensure their benefits program reflects their employees’ level of comfort and understanding. Rethinking offerings and similar strategies can make a benefit program much more efficient, increasing employee satisfaction and participation. It’s much easier to do those things when your captive’s goals are aligned with those of your organization. Strategic goals like expanding economies of scale while comfortably assuming a portion of the risk are perfectly suited for the captive approach.

Keep an eye out for captive utilization assisting in managing the impact of supply chain and business interruption due to the ever-changing adverse events of weather and technology. Trade disruption can have major impacts on organizations that rely on sources outside of their home country. Planning to finance a portion of this risk in a captive and seeking reinsurance support can assist organizations in managing the impact.

Cybersecurity is another area with a good possibility of growth. What’s become a somewhat softer market is driven by a deeper company understanding of cyber threats and realistic, workable limitations from cybersecurity carriers. We anticipate continued use of captives as a strategy for addressing companies’ unique cyber risks that may fall outside the reach of traditional carriers.

One unknown at this point is how using artificial intelligence (AI) will affect the insurance universe and factors such as underwriting and claim handling. Additionally, what effects will AI have on insurance in general? What kinds of changes will surprise everyone? While the answers are likely to emerge from both the technology sector and government regulators, the captive industry needs to be ready to supply insight to both groups while adapting seamlessly.

As captives continue to become more sophisticated, the importance of drawing upon expertise cannot be overstated. Involvement in organizations for captive professionals has improved the specialty’s overall knowledge and reputation. Captive conferences have been drawing a bigger and more diverse group of attendees. Participants' willingness to share knowledge with their peers has boosted awareness of best practices, and the availability of expertise makes going it alone a fool’s errand.

Fortunately, captives will continue to offer significant benefits over the foreseeable future, and we can be confident the nature of captives and their interrelation with the traditional insurance industry will also continue to adjust to broader changes in the business world. Optimism is definitely warranted.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.