A view from the top

Captives:

A global perspective


It is 20 years since we have seen such captive growth on a sustained basis across all of our operations.

The price increases in primary markets over the past two years have capped out risk management budgets and prompted captive owners to retain more risk within their organizations to maintain an appropriate level of cover while keeping overall costs stable. Indeed, since 2018 we have seen a significant 73% increase in premium retention among captives we manage, including a steep 361% increase in Property Damage/Business Interruption (PD/BI) retentions and a 26% increase in General Liability (GL) retentions.1

Alongside these more traditional risks, some organizations are innovating and using their captives to support their risk management strategy for several hard-to-place or emerging risks, like Cyber and Environmental. Our data shows that over the last five years, Cyber has seen a 650% increase in captive premium, with Environmental also seeing a sharp increase - up 400% since 2018.2 With ransomware attacks increasing and Environmental, Social and Governance issues (ESG) at the top of many board agendas, we expect these utilization trends to continue.

Globally, we have seen a pronounced increase in captive programs being used to support more flexible Employee Benefits (EB) schemes, going above and beyond the coverage limitations in the market. Market capacity and pricing is driving this change, in addition to companies with active Diversity and Inclusion (D&I) programs looking for wider coverage than is available as standard in the commercial market. We expect to continue to see a greater use of captives in this area to provide more uniformity of EB cover across multinational organizations.

There has been a marked increase in clients looking for access to reinsurance market capacity and achieving this through the use of protected cell facilities. Between 2019 and 2020, our White Rock Group3 has seen 24% growth in the number of cells deployed, with premium growing at a similar rate.

We’re also seeing captive owners show a greater interest in exploring ESG funds for investing their assets, and this is a trend we expect to see more of. This ESG investment activity helps organizations align their captives with the values of their parent company.

As a result

We continue to see an increased level of interest in captive and protected cell solutions, and since 2019 this has coincided with significant price increases and reduced capacity in the insurance market - a trend which continued until recently. And while in 2021 the rate of increase in the price curve has started flattening out, many loss-hit lines remain challenging to place, causing organizations to look for alternative risk financing options.

In 2020 we saw a 50% increase in the number of captive feasibility studies we undertook for clients, and 2021 is on track to top this increase again. Feasibility studies are a good indicator of interest in captives, and this surge in interest is indicative of the trend for more captive formations in the coming months.

Results from Aon’s 2021 Captive Benchmarking Survey show that PD/BI and GL still dominate in terms of premium volume written by our client captive insurance entities. But we are seeing sizable growth in captives writing certain lines including D&O, Cyber, Environmental and Credit Insurance4, largely in response to hard market conditions.

Effective risk management is becoming increasingly embedded in the culture of companies around the world, and this trend will continue going forward. Greater use of protected cells and captives and their reserving methodologies can be a huge help in supporting companies in overcoming short to medium-term economic volatility.

And the unique data capture opportunities that captives present - providing parent companies with a deep understanding of risk in-house, has clear benefits from a claims perspective too, particularly for emerging and fast-evolving risks like Cyber and ESG-related risks.

Looking further down the line, we do not expect an immediate return to soft market conditions. This, combined with increased rates in loss-hit lines - including property lines impacted by natural catastrophes - leads us to predict continued steady growth in the usage of existing captives and demand for new captives and protected cells to navigate coverage gaps and the budgetary challenges that organizations are facing.


Footnotes

1 Aon’s 2021 Captive Benchmarking Survey

2 Aon’s 2021 Captive Benchmarking Survey

3 The White Rock Group is Aon’s wholly-owned protected cell, incorporated cell and segregated account facility

4 Aon’s 2021 Captive Benchmarking Survey

John English Chief Executive Officer Captive and Insurance Management Aon


"There has been a marked increase in clients looking for access to reinsurance market capacity and achieving this through the use of protected cell facilities."

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