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Innovation Overcoming Uncertainty: The Captive Landscape As 2023 Ends

December 19, 2023

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

It was a year in which climate-fueled disasters caused unthinkable destruction in unexpected places. Twelve months of constant political brinksmanship in global governments once respected for their decorum. There’s really no need to mention uncertainty when it has become an overwhelming part of our daily lives.

While most businesspeople are trying to better understand the uncertainty, our industry has long been hard at work creating innovative ways to mitigate their biggest risks. This year’s continued expansion of the captive model is an excellent example. As awareness of the roles captives can play in a company’s risk management efforts has grown, and as the traditional insurance market has remained stubbornly hard, more CFOs and risk managers are exploring captive strategies.

That’s a clear sign of increased sophistication in corporate risk management. Managers have strengthened their grasp of the total cost of risk and whether their company’s risk profile is safely balanced or hinting at trouble ahead. They’re thinking about everything from their vulnerability to those news-making weather events to that long list of ways the production process could be derailed. Where commercial policies are available for those risks, they carry hefty price tags.

Those factors have fueled the expansion of the captive marketplace, along with continued expansion of available domiciles. With no sign of the hard market easing for at least another year (or two), captives provide a way to reduce costs while exerting greater control over a company’s most challenging risks. Whether leadership wants to reduce benefits costs without cutting coverage, is seeking ways to trim the cost of all the company’s facilities, or structure liability coverage to accept the realities of today’s nuclear verdicts, a captive may fulfill the need.

At the same time, more organizations that have long operated captives are taking a look at the structure of their programs to consider other opportunities. How would moving to a different domicile affect compliance and operating costs? Would the benefits of changing outweigh the costs? Is it time to consider restructuring the captive to address a growing company’s changing risk profile? An organization’s broker and captive advisors are invaluable sources of guidance during these conversations.

The rapid expansion of cell captives has added substantially to the supply of options for companies interested in establishing their first captive -- or those seeking to remove a specific category from their current captive and place it in a separate cell. Cell captive growth should continue at its current pace for the foreseeable future.

Innovation in structure and approaches continued throughout 2023. While companies continue to make effective use of captives in the familiar workers’ comp and liability sectors, they’re exploring what we consider niche areas. Some are thinking out of the box when it comes to cyber and property coverage, investigating whether they can take on an upper limit or partner with other companies and take on a quota share. Aggregate stop loss is also getting attention, using a captive to provide protection across multiple lines of coverage, even lines that might not previously have been considered appropriate for a captive.

Strategies such as the use of parametric factors are seeing wider use, especially where climate-related issues are involved. A parametric-focused captive can automatically generate claims payments when certain extraordinary weather events occur, such as rainfall exceeding a set amount or the temperature reaching a peak that impacts operations or energy availability.

Finally, the year also saw captives playing important roles in how companies are led and managed. As companies become more focused on ESG initiatives, they recognize the need to cover potential exposures related to falling short of those goals. Many find captives an effective way to address specific risks or categories. Properly addressing those exposures involves developing a detailed assessment of potential risks they may not have considered or examined in the past.

Along with that comes taking a closer look at the actions taken by company leaders. The year has seen a long list of prominent leaders from business and other sectors find themselves in the media spotlight for poorly chosen public words or business decisions that proved to be destructive. Damage awards in some cases have been staggering. Traditional D&O coverage is unquestionably the right place to start, but companies need to consider their exposure beyond what fits into the D&O sphere. They may need additional coverage, enhancement to current captives or other plans, or even some kind of wraparound that adds a layer of protection.

As 2024 draws near, every indication we see suggests no slowing in the development of new captives, expansion by current users of the strategy, and an ever-growing number of governments creating and promoting captive domiciles. That’s good to know in such an uncertain world.

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

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