While the captive market has seen unprecedented numbers of new formations over the past four years, it is important for owners to assess how to position the captive as the market softens.
Speaking on the opening panel at the HCIC Forum 2024 in Hawaii Amy Evans, executive vice president at Intercare Holdings, Inc and David Beyer, director of risk management at Alaska Airlines, explained that the reasons for initially establishing a captive may not be the same reasons it continues to bring value as the market cycle evolves.
While some lines such as property remain particularly problematic in the United States, and continue to prompt new captive set-ups, other markets are softening and the panel explained risk managers need to be thinking ahead and preparing.
“We are still somewhere in a hard market,” Evans said. “No one thought the last soft market would last as long as it did, but the beauty of having a captive is weathering the market cycle. We now see different lines going through different cycles.”
Beyer said while he prefers the captive not to exit lines of insurance completely, he does continue dialogue with the commercial market and work with it to adjust the programme as more capacity and coverage returns.
“We want to make sure we still have a foot in the door and continue to have dialogue with reinsurers and other insurance partners,” he explained.
“We encourage them to maximise coverage at new terms and we use the captive to push the market.
“If the policies in the commercial market are not covering all the things we need, then we turn to our captive. We incubate that risk and then present that back to the commercial market to see if they will support.”
Helen Kim, senior vice president and account executive at Old Republic Risk Management, agreed with Beyer that keeping in contact with the commercial market and maintaining relationships is key.
“Don’t burn any bridges in the hard market,” she said.
“The last time we had a soft market, what we saw was clients who had acquired companies with captives looking at closing the captive they had inherited. It is important to stop and consider if that is the right long-term decision.
“And every time there is a hard market, we get a lot of enquiries from single parent captives about fronting for new lines. We ask them what appetite they are comfortable with and see what programme we can build around that.”
Evans said while the captive’s value may be apparent and straight forward to communicate to senior leaders during a hard market, the real challenge to justify its existence can emerge if rates stabilise and commercial capacity returns.
“If you formed the captive in anticipation of a hard market, then the purpose and mission of the captive now might be very different,” she explained. “If you are the single parent owner, make sure all your leadership is engaged.
“You need to talk about whether you want to pull the captive back and find new capacity in the commercial market when the pricing is right.
“Think well in advance about what you want to keep hold of, what you might want to give to the commercial market. As the soft market approaches, which layers you might want to fill.”