Hard Market Solutions in 2021: Captives and Other Options

A version of the following article originally appeared in Captive Review's Captive Formation Guide

Companies continue to explore self-insuring their risks as rates harden and COVID-19 related disruption affect the commercial insurance market. New business models for captives and other risk retention solutions are opening up options for mid-sized companies. Thomas Keist of Swiss Re Corporate Solutions reflects on the current challenges in the marketplace and highlights the advantages of utilising a virtual captive offering.

Captive Review (CR): As the COVID-19 pandemic continues, what are the clients looking for?

Thomas Keist (TK): Specific to the pandemic, we usually focus on helping on the policy side. We cannot assume risk related to pandemics -- at this point, risk appetite is extremely limited. However, if clients choose to move the risk into a captive, they require a fronting expert who issues the respective policy and then cedes the risk into the captive. We've seen an increase in demand for efficient captive fronting throughout the pandemic, especially for such risks as non-physical damage business interruption and cyber. 

CR: What is the current focus among your clients?

TK: The focus continues to be on the traditional lines of business including property, casualty, and credit because that's where the volatility is happening. D&O is trickier – a captive can only insure side B and C with side A being a problem since it's not possible to self-insure for it. At this point, there is no all-encompassing, clever D&O solution. With other lines of business, establishing a captive is a solid, particularly flexible hard market solution. 

CR: What captive trends are you currently seeing?

TK: In the context of COVID-19, we've seen a direct and indirect effect on clients. The direct effect is that a lot of the projects around establishing a captive have been put on hold. Customers looking to potentially set up a captive because of the hard market have been delayed as well.

The indirect impact – possibly even more important because it affects the longer term – people have started to look at their captive differently. Utilize it more creatively. The uptake on captive establishments may have been delayed by the pandemic, but what the captive can do for its parent has been brought into focus. 

In the past, the captive was viewed as an organisational unit to manage risk as well as control and steer the insurance buying process. Perhaps being a vehicle to arbitrage markets. Today, the focus has now shifted toward the sort of coverage a captive can actually offer. What can a captive do for you in terms of the risks that are emerging? And that's a new spin. I believe that, in time, this shift in focus will have a boost on new captive establishments.

CR: What are the advantages of Swiss Re Corporate Solutions' virtual captive product? What have the interest levels around this product been in recent times?

TK: As a hard market solution, the interest in our virtual captive continues to grow. Whenever customers approach traditional lines of risk, the volatility has been high, and prices have increased dramatically. At the same time, capacity has tightened. Customers have to ask themselves how to best manage this? The initial and most logical first thought they have is to optimise or increase the retention. Once you have decided that you want to increase the retention, then the question becomes, what is the best way to do that?

When you just increase the attachment point of your insurance programme, you might run the risk of having an extremely volatile balance sheet because you pay losses in the new higher retention as you go. The other option, instead of just keeping it on your balance sheet, would be to use an insurance mechanism. This, in principle, enables the financing of losses off-balance-sheet and enables reserves to be setup for these.

When you decide on utilising an insurance vehicle to manage your retention better, then you have two ways to go. One way is you start to think about an unconventional structured solution, where you work with an insurance carrier. One such solution is what we call a virtual captive. The reason to go for a structured solution like our virtual captive is that clients are working with us, an onshore legal entity, and don't go offshore. For many clients, this is an important criterion.

A further advantage to entering a structured solution such as a virtual captive with Swiss Re Corporate Solutions, is that when you enter the agreement, you also buy the exit strategy. Whereas when you open a unit somewhere offshore, the commitment is open ended. In other words, there is no clarity about the exit strategy, and this may be a further salient point for those looking to ‘dip their toes’ in the captive insurance marketplace and decide whether a captive is the best solution for their insurance needs.

Whether you are interested in a hard market solution or efficient fronting options, contact us today for more information.