Marsh’s Captive Premium Volume Up 40% Since 2019. How COVID and a Hard Market Boosted Business

The growth of captive adoption has increased at an unprecedented rate over the last two years, according to Marsh Captive Solutions experts.

By: Alex Wright | September 7, 2022

The growth of captive adoption has increased at an unprecedented rate over the last two years.

That was one of the key findings from Marsh Captive Solutions’ 2022 Captive Landscape Webinar, which revealed that 200 new captives were added to the broker’s portfolio in 2020-21, with premiums for the new formations up $3.4 billion over the same period.

To date, Marsh has 1,500 captives under management worth $68 billion in premiums on its book of business, up almost 40% since 2019.

“To put that in context, the total premiums we manage are bigger than the world’s largest property and casualty carrier by about $6 billion,” said Michael Serricchio, America sales and advisory leader at Marsh Captive Solutions. “The surplus running through our captives is also almost double that of the largest carrier at $119 billion.”

This accelerated growth has been driven by a combination of the COVID-19 pandemic and a tough traditional insurance market, which have presented a host of new and complex challenges for risk managers to tackle. Mirroring the hard market of the 1980s when new insurers were formed to provide much-needed liability coverage, as rates have started to increase over the last two years, so more businesses are turning to captives to self-insure themselves.

This has been exacerbated by rising inflation, and asset and claims values eroding insurer profitability, resulting in higher premiums and insureds having to take on more risk. That will only be magnified as the war in Ukraine and global supply chain problems persist.

Change in Company Profile

The profile of companies seeking captives is changing too. In the past, captives were the sole domain of large multinationals, but now increasingly more middle-market and smaller firms are looking for innovative solutions that enable them to take on more of the risk themselves.

Lorraine Stack, international sales and advisory leader, Marsh Captive Solutions

Largely, it’s parent companies with revenue of less than $500 million that are behind Marsh’s 200 new captive formations, currently standing at 37%. The majority of these formations are established by private parent companies (58%), while, by captive size, most have under $5m in gross premiums (77%).

“The number of new formations for private companies, in particular, is significantly higher than what we have experienced previously,” said Arthur Koritzinsky, product innovation leader at Marsh Captive Solutions. “Also, they tend to be smaller in terms of premium size because most new captives start small with the expectation that they will grow gradually over time.”

Within those companies, financial institutions represent the largest number of new formations at 29%. Next come health care (10%), automotive (6%) and transportation (6%). What they all have in common, though, is that they face many similar risks, including, but not limited to: employers’ liability, directors and officers (D&O) and cyber.

North American Bias

Most new captives were formed by North American entities (60%), which exactly reflects Marsh’s portfolio of U.S. parent companies. The big growth area, however, is Asia Pacific and Australia, whose companies accounted for 10% and eight percent of formations, respectively.

“Much of this has been driven by the challenging market conditions in Australia, where the hard market started far earlier than for the rest of the world,” said Lorraine Stack, international sales and advisory leader at Marsh Captive Solutions. “Added to that, there has also been an increase in sophistication of risk management in the Asia Pacific region.”

By domicile, 51% of captives were formed in the U.S., jumping from 38% three years ago. Europe has been gaining popularity as a domicile too, with Guernsey and Luxembourg the most in demand, the former because of its fast-track approval process.

Stack said that inquiries for new captive formations broadly fall into two categories: those organizations that want to reduce their insurance costs and pricing volatility over multiple different lines, and those that struggle to find a particular line of coverage.

“Those companies that want to reduce their costs tend to do a feasibility study of their risks,” said Stack. “For those that want a line of coverage that the traditional insurers aren’t providing, it’s a different matter altogether.”

Demand for Non-traditional Coverage

In terms of lines of business, there has been a surge in demand for non-traditional coverage. Of Marsh’s new formations, third-party business accounts for 10%, largely driven by managing general agents and Insurtech startups, closely followed by terrorism (6%) and medical stop loss (6%).

“These companies are writing everything from property to cyber and are using captives to get access to more markets and capacity, and reinsure some of that risk,” said Serricchio. “As terrorism is becoming more prevalent globally and companies are expanding their employee benefits programs, there has been a big uptake in captives there too, especially cell captives.”

Cyber is another area where take-up is on the rise, accounting for 6% of the formations. Business interruption (4%) and D&O (4%) are also gaining traction, precipitated by property damage and contingent business risks that emerged during the pandemic.

In spite this growth in new captives for non-traditional lines, traditional lines have remained strong too. Casualty makes up 44% of traditional coverages, while property accounts for 36%. Medical malpractice (8%) and professional liability (7%) take-up has also been driven by rising social inflation.

“It’s the perfect storm of a challenged market, social inflation and new captives being used to plug the holes in core coverages,” said Serricchio. “Added to that is demand for innovative, outside-the-box coverage from captives, which is only going to continue in the future.”

As far as structures go, single parent captives were the overwhelming favorite at 60%, versus 18% for cells. Within cells, property, and professional and general liability were the top three coverages written in the last two years.

“The appeal of cell captives is clear,” said Koritzinsky. “They are quick and easy to form and there isn’t a huge amount of compliance required or hoops to be jumped through — they don’t have be audited separately and there are no board meetings that have to be attended.”

Moving forward, Koritzinsky believes that there will also be greater opportunities with captives for risk pooling and aggregation. This will be driven by an abundance of capacity, he said.

“Risk pooling provides for a greater risk diversification,” said Koritzinsky. “It also helps to reduce variability, which makes everyone involved more comfortable with the captive.” &

Alex Wright is a UK-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.