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Regional Director, Captives & Global Programs, Asia & Europe

As companies grapple with the changing dynamics of the traditional insurance marketplace, we’re talking to clients about using existing captives for different lines or limits of coverage and are seeing more enquiries about setting up new captive vehicles. Marine Charbonnier, Global Programs and Captives Regional Director, Europe at AXA XL, discusses these current and future captive trends. 

For many of our clients, rates for certain lines of business have been steadily increasing as the insurance market has digested large natural catastrophe losses, increased cyber exposures and the effects of the COVID-19 pandemic.

Over the past year, we’ve seen an increase in cessions to captives in response to this market shift. Many clients have sought to both retain higher limits for existing lines of business in their captive and to place new lines of business in there as well. The hardening market conditions in the traditional insurance market also have prompted some clients to include lines of business that they previously had placed with insurance carriers into their captives. 

Rates for many lines of business have increased quarter-on-quarter for the past two years and in some areas many insurance companies have restricted capacity in response to industry losses. Captives can play a particularly important role for a client at those times when it’s hard to find capacity in the traditional markets. We’ve recently seen many of our clients – new and existing – take higher retentions to ensure they have coverage for certain lines of business. Indeed, for clients in some industries, captive insurance is often the only solution open to them when capacity for certain risks is almost completely pulled from the traditional market; some of these clients, in industries such as energy or the chemical sector, for example, have been exploring putting coverage for some of their other risks into the captive too.

New and emerging risks that we’ve seen clients look to place into their captive include environmental impairment liability coverage and employee benefits, among others.

It’s not only capacity that has become costly or scarce for some clients. For many, a tightening of wordings has prompted them to explore using their captive to cover additional exposures.

This is because, in several lines of business, such as cyber or non-damage business interruption, recent losses and market shifts have prompted many underwriters to tighten terms and conditions and introduce new exclusions. 

Clients have also been “buying back” exclusions where wordings have been become restrictive. The coverage our clients require is typically highly tailored to their often complex and unique risks. And as captives take on more risk they potentially are exposed to greater volatility and become a more central part of the high-level risk management strategy of the parent group. We therefore work closely with clients to understand these risks and ensure that the captive layers give them the coverage they need, integrated into their enterprise risk management strategies. 

Product recall is a good example of an area where many clients have sought to involve their captive more closely within the company’s overall risk strategy. When captives take on more of these types of exposures, they’re given access to more stakeholders across the group – and vice versa – cementing the captive’s role as a strategic risk management tool.

Closer to home

Some clients have also been talking to us about the potential to re-patriate captives to domiciles closer to, or in the same country as, the parent company’s headquarters. There are several motivations for this. 

For some clients, the ongoing COVID-19 pandemic, coupled with concerns about climate change and a drive towards greater sustainability, has prompted a rethink about business travel.  

Meanwhile, in some countries, risk management bodies and regulators have expressed a preference for the governance of captives to be more explicitly linked to the risk management of the parent company, also prompting some clients to consider moving the domicile of their captive closer to home. 

This is a trend we‘re watching with interest and we stand ready to help clients make whatever changes in captive strategy that will work for them and their corporate governance and risk management strategies as we move into this new phase for captives and insurance. 

Partnership

In the current climate, risk managers’ concerns are not just around retention levels or terms and conditions; they’re also seeking support from their partners. We believe that long-term relationships are key to a captive’s success. Captives are, by their very nature, specific to the client and their changing risk profile. Setting up and running a captive requires specialist knowledge and good communication. We want to understand each client’s business and their evolving risk picture to help them make the captive work as a cornerstone of their risk management strategy.

As we move towards the year-end insurance renewal period, we look forward to many more interesting discussions with our clients about how their captives can play an important role in navigating this new phase of the cycle.

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