Market conditions are prompting more discussions around alternative risk financing. The trend towards increased retentions is leading to more extensive utilisation of captives, even by businesses that may have previously discounted this approach due to a lack of scale. The trend is typically towards increased retentions in an effort to offset the cost or risk transfer.
A captive solution is particularly relevant in situations where individual business units retain risk on their balance sheet, or are looking to diversify their portfolio, for example, in respect of insurable employee benefits. The risk bearing capacity of business units is often less than the risk tolerance of the overall group and increasing retentions for the business units can introduce levels of volatility which the operating unit’s balance sheet is unable to bear. A captive can help to bridge the gap between the levels of risk that the group wishes to retain and the levels that the business unit is comfortable taking.
Increasingly both new and existing captive owners are using their underwriting capacity to fill gaps in cover where no capacity is available in the insurance market or the cost is prohibitively expensive. Captives are also becoming more involved in newer lines of business such as cyber, or in areas where they did not traditionally play, such as D & O.
The use of ‘cell’ captives, where individual cell companies within a facility owned by a third-party provider can be used as a retention vehicle, reduces the barrier to entry for organisations that might not normally consider a captive solution, as cells generally have a lower cost profile when compared to a stand-alone captive at lower retention levels.
Exploring alternative approaches to risk financing is happening. Data from Aon’s 2019 Global Risk Management Survey indicates significant growth in captive and Protected Cell Company (PCC) usage from companies with revenues below USD 5 billion.
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