The impact of COVID-19 has accelerated change in this industry, and new ways of working are increasing pressure on non-financial risks such as fraud, conduct and cyber. This is leading to rapidly evolving risk profiles, and coupled with the hardening insurance market, is making it more challenging for banks to find available and appropriately-priced coverages for their risks. Banks are increasingly looking at risk financing with a wider perspective and as a result, the role of the captive is becoming more significant.
Strategic use of captives
Indeed, we’re seeing more banking clients explore the use of captives with a view to supporting price stability, and gaining more control over capacity variations in the marketplace for those dominant risks such as fraud, conduct and cyber. Certain clients with established captives are adjusting their buying strategies and using captives to provide coverage for key exposures where there are shortages of external capacity and uncertainty in pricing. Additionally we are seeing increased interest in the use of cell captives and other retention structures for banks that do not currently have a captive. The speed to market and ease of these structures is an appealing factor for many.
Results from Aon’s 2021 Captive Benchmarking Survey show that there has been a 90% increase in Gross Written Premium (GWP) for Crime/Fidelity being underwritten by Aon’s banking captive clients since 2016, from a stable experience previously. Our survey also shows that the net aggregate capacity in captives is increasing. This demonstrates that for certain banks, captives are becoming more commonly used for Crime/Fidelity programs as competitive capacity is harder to secure.
Additionally we’ve seen a 276% increase in captive retentions for Property Damage/Business Interruption, outstripping the increase in premium of 90%1 - indicating that the globally hardening market has caused captives to increase their retentions to keep costs stable.
In the next few years we expect captives to continue to play a greater role in risk financing for the banking industry. COVID-19 has driven banks to look at non-financial risk with a sharper lens, and many now want to analyze financial risk more closely and quantify their overall risk appetite.
The continued focus on Environmental, Social and Governance (ESG) considerations at the Board level is likely to lead banks to move towards the ‘green captive’ concept. This includes exploring the potential for the captive to play a part in the financing of transition and litigation risks and investing assets into ESG-funds to align the captive strategy with that of the parent company.
There is also growing interest in captive utilization in the cryptocurrency space, with the first digital asset captive being established last year2. We expect this market to grow as the industry develops further.
Risk managers are recognizing the value of captives as a tool to help support their enterprise risk management strategies and deliver stability in what is an increasingly volatile market environment.
1 According to data from Aon's 2021 Captive Benchmarking Survey
Insurance entities under management
in Gross Written Premium (USD)
Lines of business written
Percentage of Aon-managed insurance entities writing line of business
Medical Professional Liability
Property Damage/Business Interruption
Type of entity
Percentages rounded to nearest whole number