Sunday, April 21, 2024

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Captive USA 2024 Part I: Property to dominate the US captive market

  • Increased retentions and quota shares for captive property programmes
  • High emitting companies could struggle to attain property capacity
  • Third-party risk and cyber expected to proliferate in the captive space
  • Increased interest in ERISA exemption, reliant on ExPro return

Companies seeking property coverage will continue to be the driving force behind captive formations in the United States in 2024, as companies look to negate rising costs and reduced capacity in the commercial market.

There is also expectation more companies will look to get the US Employee Retirement Income Security Act (ERISA) exemption from the Department of Labour (DoL), while captive interest in wider employee benefits programmes will continue flourishing.

Cyber and third party risk are also predicted to be hot topics in 2024.

Elizabeth Steinman, managing director of risk finance & captive consulting for the Americas at Aon, believes there is going to be a lot of introspective studies in 2024 and beyond, due to the significant number of mature captives in the US.

“Companies will want to look at their captive to determine if the programme still makes sense, that it is fit for purpose, that it is helping to reach objectives, and whether the captive programme should be expanded,” she said.

Steinman previously told Captive Intelligence that she was probably involved in twice the number of captive feasibility studies than she was four years ago, with many clients revisiting the captive concept for the second time.

Anne-Marie Towle, CEO global risk & captive solutions at Hylant, said we are currently in the “golden age of captives”.

“I tell my younger staff to enjoy it while they can because this isn’t going to last forever,” she said.

“The insurance market is cyclical, but I do believe this part, coupled with the hard market and with the interest in captives, and the sophistication of risk management and data analytics, is here to stay for quite some time.”

Michael Serricchio, Americas consulting leader at Marsh Captive Solutions, said that although the captive industry had a strong 2023, he does not think that growth was as strong as 2022 or 2021.

“I think we will see through the numbers that there will just be a modest tapering off, and that will have to do with the modest tapering off of the hard market,” he said.


Property has been one of the most popular lines of business written in captives for some time, but companies are now using their captives to take much larger property limits because of the hard market.

“Captives are assuming much higher retentions, they’re participating in the property tower where they feel that the risk is overpriced or when they are unable to find the capacity in the market,” Steinman told Captive Intelligence.

“They are also being used to infill for contractions in coverage, such as exclusions, or differences in conditions.”

Steinman said that in 2024, energy companies and other “highly emitting” companies are likely going to find the property insurance market increasingly challenging, and as a result will need to find solutions.  

“Captives are going to be one of the solutions that they’re going to need to explore,” she said.

In July, Captive Intelligence published a long read highlighting that the current environment for property risk has created the “perfect storm” for writing the line through captives although important questions concerning collateral, retentions and long term strategy need to be considered for insureds.

Barry White, EVP for sales advisory and analytics at Artex Risk Solutions North America, said he has seen numerous situations where an insured may not have had a problem for many years with their property programmes, but have now been forced to go with a “shared and layered approach” because their carrier has decided to cut back on capacity and exposure.

He said property was a key driver of Artex’s captive book in 2023, and how captive utilisation was accomplished was “interesting in a few ways”.

White noted that sometimes it would be a relatively simple deductible buy down policy issued by the captive to the insured.

In other instances, White said Artex needed to involve fronting carriers, which can be a “challenge”, and is one aspect that is potentially preventing further development and growth.

“We have certainly seen opportunities we think would be advantageous for captive formation, and the insured has the appetite to retain the risk, but the economic business case can be challenged very quickly when we need to incorporate a fronting carrier,” he said.

White said the fronting carriers have minimum levels they will operate with, and very quickly that minimum fronting fee, plus the collateral that accompanies it has prevented a number of projects going forward. He can see that challenge continuing in 2024.

“We are reaching out across the marketplace to try and get more carriers interested in fronting at more economical values,” he said.

“We also have models where the insured is taking the full programme into the captive, and then the captive is accessing reinsurance markets, and that has been quite interesting.

“It is allowing those captives to get access to capital they would not have had before.”

Third party risk

Captive Intelligence published a November long read detailing that companies are increasingly leaning towards utilising captives to write third-party extended warranty coverages.

“We are only at the front end of folks starting to leverage captives to fund third party risk,” said Prabal Lakhanpal, senior vice president at Spring Consulting.

“One of the things third party risk does compared to lots of other risks, especially when we think about warranty and guarantee risk, is it is non-volatile, predictable risk.

“It is creating a completely new line of revenue for most organisations and captives, so a lot more employers and captives, as they mature in their growth cycle with the captive, are going to want to do more with it.”

Cyber too has become more prominently discussed in the captive market.

Captive Intelligence published an article in May highlighting that a lack of capacity and high pricing is resulting in increasing captive utilisation for cyber risk.

Lakhanpal said pricing in the cyber market is maturing quickly, and a lot of employers are underwriting cyber not from a perspective of taking on a layer of risk, but taking on a quota share across the tower.

“For a large organisation that has 10 carriers in their tower, each of those 10 carriers have nuances to their cyber pricing models,” he said.

Lakhanpal said that since the cyber pricing model is still evolving, employers want to benefit from each of those pricing models rather than take on a big chunk of a retention and price for that themselves.

“A lot more organisations in my view are going to continue to use that approach because it does two things for them,” he said.

“Firstly, from their perspective it creates pricing efficiencies because they are benefiting from pricing methodologies across the tower.

“Second, it attracts more carriers to their towers because carriers appreciate a client wanting to create a quota share arrangement.”

A lot of employers are also funding medical stop loss (MSL) in their captive using a variety of different structures.

Captive Intelligence published an article in March indicating that the number of captives writing MSL is continuing to increase substantially, primarily because of hard market conditions in the commercial market, as well as the general state of the healthcare landscape in the US.

Lakhanpal said that once clients get comfortable with the idea of benefits, it is organic for them to want to do more with their programmes.

“Benefits have a very different pay out pattern compared to property and casualty risks,” he said.

“Adding stop loss gives risk managers an insight into understanding how non-correlated premiums from a benefits perspective play with their existing (mostly property and casualty) portfolio, and once they understand the value of that diversification, it is organic for them to want to do more.”


After a four-and-a-half-year hiatus, 2022 and 2023 saw more companies look to get ERISA exemption approval from the DoL, and Captive Intelligence understands there has already been substantial interest going into 2024.

In February, Captive Intelligence explored whether the 2022 exemptions for Phillips 66 and Comcast were laying the path for further employee benefits activity in the United States.

In November, the DoL granted an ERISA benefits exemption to Fedeli Group, making it the most recent company to get the exemption.

“In the last couple of weeks to last month or so, I’ve had more inquiries about employee benefits and captives than I probably did in all of 2023,” Serricchio said.

Despite the uptick in interest, Serricchio said ERISA benefits will always have slow growth in captives, but the non-ERISA benefits like medical stop loss and international employee benefits will continue to “flourish”.

“If there’s a couple of percentage points in savings that can be had, and it could develop a captive and bring in some diversity and more profit and more cash flow, I think we’ll continue to see clients do that.”

White said that Artex is starting to hear murmurings that clients are looking to start exploring ERISA again.

“We’ve heard that a few times in the second half of 2023, and I think I can see that happening,” he said.

White said it can also be a positive step for the ESG journey of a large corporate, particularly concerning the Social aspect as there is the ability to enhance and broaden those benefits offerings for employees.

He stressed that clients need to fully appreciate the level of work involved to get a DoL exemption and it is a big investment.

“Companies need to have a material premium spend and it is not something that will be achieved overnight,” he added.

“It is a long-term strategy and if a company has a large employee base it can be a good feature to self-insure within the captive.”

Towle said she is seeing more companies wanting to go through the ERISA process, revealing that she is working with one large client on this today.

“I believe people took a hiatus from it and were trying to figure out whether it was worth it,” she said.

“For some of these large companies that have existing captives, they have surplus, and deciding what they can leverage and how they can do it is becoming a little more meaningful now.”

Lakhanpal said a lot of potential interest will depend on the DoL’s stance on bringing back the Expedited Process (ExPro).

ExPro is when the application is fast-tracked once the filing is submitted, so that within 45 days, the Department cay say whether the application has been approved or denied.

In order to use ExPro, applicants had to cite one or more previous successful applications that are materially similar.

“The DoL has been contemplating some overarching ERISA regulations and it remains to be seen how that will play out, and how it will impact the exemption process,” Lakhanpal said.

“But I think employers using benefits in a captive is continuing to grow, and the interest in the past year has been the extremely high in the past year.”