How captives help companies manage hardening rates

A hardening market is prompting companies to use their captive to help dodge or offset rate increases.

Many companies, even with loss free portfolios, are being hit with rate increases of 10 percent or more on property business, said John English, CEO, captive and insurance management at Aon. For those that have suffered losses, increases can be more than 30 percent, he said.

“This is an unbudgeted cost for many clients and they are looking to their captive to help navigate what is going on,” said English.

One option is to use a captive to place a cross-class aggregate cover directly into the reinsurance market, with the net effect being a lower retention. Another is to strip out the natural catastrophe element from a property programme, placing it separately into the reinsurance market via a captive.

Meanwhile, other companies are leveraging analytics, including actuarial, catastrophe risk models and stochastic models, to get a more holistic sense of overall risk exposures - and turning to their captives to improve risk management.

“People have been used to 15 years of a soft market; now, we are seeing rate increases across many lines of business including property, D&O and workers’ compensation,” said Jason Flaxbeard, executive managing director, captive management and consulting, Beecher Carlson.

“People are wondering how to deal with that and one natural conclusion is to self-insure more, to use their captive,” said Flaxbeard.

Instead of buying monoline insurance coverage for a set of uncorrelated risks, for example,  companies can self insure them in a captive, offsetting rate increases, added Flaxbeard.

Both English and Flaxbeard were speaking at the annual Bermuda Captive Conference this week.