A conservative approach to captive utilisation should be taken and increasing rates should not automatically lead to self-insuring a risk, according to Alex Littlejohn, EVP and managing director at Alliant Insurance Services.
Captives have surged in popularity, particularly in the United States, since an extended hard market bit in 2019, particularly for distressed lines of business such as D&O and professional indemnity followed by cyber and property, but not every line of business or exposure will be suitable for a captive.
“I think it’s actually a little bit scary in regard to what people will consider putting in their captive today,” said Littlejohn, speaking on episode 104 of the Global Captive Podcast, at RISKWORLD in San Diego.
“Maybe we should be thinking a little bit about it, because anywhere there is a crisis does not mean throw it in your captive.”
Littlejohn said can be a bit concerned when witnessing the current auto trend, for example.
“I talked at the start of the year about how I thought auto would be where the next disaster is and clients are going to have to start taking major decisions on how auto is going to go,” she said.
Littlejohn noted that auto has seen up to 160% rates increases, which has still not been enough for the commercial market.
“What’s scary is that people are throwing exposure into their captive like auto, and that to me is probably not a sustainable model for the captive,” she said.
“Conservatively, we should be considering lines that make sense, such as excess layers, property, not necessarily all your catastrophe.”
Littlejohn said insureds and consultants should be considering a more conservative approach when it comes to captive utilisation.
“I think it’s a great vehicle for the long-term, but you just must be responsible about what you’re putting into that captive so it’s sustainable for the long term,” she said.
Pete Kranz, senior vice president for risk finance and strategic solutions at Alliant, said risk finance should be looked at in a broader way when deciding what risk to write in a captive.
“We need to determine how much risk we should take,” he said.
“What does the analysis tell us strategically about the optimal level of risk to retain? How much are we saving by retaining this risk, and does that equation work in our favour? Then, where should we transfer the remaining risk?”
Listen to the full interview with Alex Littlejohn and Pete Kranz, of Alliant, in GCP #104. You can find the episode on Captive Intelligence, or on any podcast app by searching for ‘Global Captive Podcast’.