The Tennessee Department of Commerce & Insurance (TDCI) has licensed its 1,000th risk-bearing entity since the Captive Insurance Section began licensing captives.
In total, Tennessee risk bearing entities are now writing more than $2.4bn.
“This is a defining achievement for Tennessee and shows how the hard work of the domicile and everyone involved has helped to create dramatic growth over the last 12 years,” said Kevin Doherty, president of the Tennessee Captive Insurance Association (TCIA).
“It is also emblematic of the success of the public-private partnership in Tennessee pursuant to which the Department and the captive insurance industry have worked together to create one of the top U.S. domiciles.”
Formed in 1983, Distributors Insurance Company, a wholly owned subsidiary of the Tennessee Valley Public Power Association (TVPPA), is the oldest continuously operating association captive insurance company domiciled in Tennessee.
Douglas Peters, TVPPA President and CEO, highlighted that the captive was created to provide workers’ compensation, general liability, and auto insurance to TVPPA member distribution utilities.
“The parent company and most of our members are located in Tennessee, so it was natural for us to consider Tennessee as the domicile for our captive,” Peters said.
“In addition to our location, Tennessee’s innovative approach to captive insurance regulation caused Distributors Insurance to choose to domicile in Tennessee and, we have found no reason since to question that original decision.”
German industrial insurer HDI Global is targeting $100m in gross written premium by its new US fronting business within five to six years, expanding into auto, workers’ compensation and potentially cyber.
HDI launched its US Captive Solutions in January with Jason Tyng brought in from Amazon to lead the new unit. He is now vice president of the US Captive Solutions Group.
Tyng and Marco Hensel, senior vice president and chief underwriting officer for HDI Global in the US, discussed the insurer’s recent entrance into America’s booming captive fronting market, in an interview recorded at RISKWORLD last week for the Global Captive Podcast.
“We’re looking to be in the $100m frame as far as a gross written premium over the next five to six years,” Tyng said. “We want to be considered a major player.”
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HDI Global is a well-known and established fronting option in the European market and it already works with European captives that are insuring US-based risks.
Hensel said it was after attending American captive conferences in 2022 that he realised they needed to target the US market for fronting.
“I found out very quickly that there is a big need in the US market for carriers that can front for captives,” he said on GCP #85.
“Coming back to Chicago with that information, we built a business plan, we got support from our US CEO, but also from our board in Germany to execute this business plan and to offer captive fronting solutions to US based clients.”
Tyng said the response since launching in January has been “overwhelming”.
“I don’t think that I’ve had a day off since the World Captive Forum,” he added.
“We’ve received submissions from just about everywhere that you can think of. The brand is well known globally, not so much in the US but we’re doing what we can to make that happen.
“And once they find out, it’s like we’ve opened the floodgates and it hasn’t let up.”
HDI is already offering US fronting for property and casualty, but plan to bring auto and workers’ compensation online in the coming months, while they are also seeing a lot of requests for cyber.
On cyber, Tyng believes that is because a captive can facilitate much broader coverage than is currently available.
“If you look at some of the coverage forms, there’s not a whole lot of coverage that’s being provided,” he said.
“You’re basically listing a bunch of exclusions. But when you put that kind of coverage into a captive, it now allows the insured to tailor a form and actually get the coverage they need.
“That’s definitely something that we’re going to continue to explore and take on and potentially we’d like to become a major player in the market for that as well.”
In episode 85 of the Global Captive Podcast, supported by the EY Global Captive Network, Richard shares three of the interviews he recorded while attending RISKWORLD in Atlanta, Georgia, from April 30 to May 3.
1.50 – 14.00: Ellen Charnley, President of Marsh Captive Solutions, sat down with Richard to discuss the world’s largest captive manager’s latests statistics and trends, which included forming 370 new captives over the past three years and 1,900 under management in total.
14.00 – 21.40: FERMA president Dirk Wegener joined the pod for the first time, discussing Solvency II, the new home domiciling trends in Europe, and captive activity on the continent more generally.
21.40 – end: Jason Tyng, Vice President of HDI Global’s new US Captive Solutions Group, and Marco Hensel, Senior Vice president and Underwriting Lead for HDI Global, based in Chicago, discuss the insurer’s recent entrance into America’s booming captive fronting market.
Marsh will be launching a special purpose cyber reinsurance facility in the coming weeks, which will be made available to captive owners who are seeking additional cyber capacity.
Ellen Charnley, president of Marsh Captive Solutions, previewed the new innovation for attendees of the broker’s Captive Luncheon at RISKWORLD on Tuesday, 2 May and elaborated further in an interview for released in GCP #85.
“We are working on a special purpose vehicle that’s going to be available for captive owners to access and their captives to access a reinsurance mechanism for cyber,” Charnley told GCP.
“We think it’s going to be a terrific tool for companies to help weather the storm in the commercial cyber market, which has been quite rocky of late.
“It’s going to be available for companies that don’t necessarily even put cyber in their captive at all, but they want to have access to a facility for cyber.”
Captives continue to play a growing part in corporate cyber programmes as rates have increased and capacity has been hard to access on favourable terms.
Marsh’s statistics show there has been a 57% growth in captive cyber premium over the last two years, with more than $133m in cyber premium now under management.
The number of Marsh captives writing cyber has increased 75% in the last two years.
Listen to the full interview with Ellen Charnley on GCP #85 here, or or any podcast app. Just search for ‘Global Captive Podcast’.
From 2016 to 2022, commercial market saw rate increases of 100% – 300%
Complexity of engineering risks leads insured to start with traditional property policies in their captives
Group captives the most common captive structures for construction companies in the US
Construction captives are frequently used for writing the primary layer of risk
The use of captives in the construction and engineering market is proliferating, as contractors look to battle rising costs and limited capacity for particular risks, during a prolonged hard market.
The last few years have presented a challenging environment across the construction and engineering sectors, with rates increasing significantly since 2018.
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Specialty insurance brokerage and risk management firm, Risk Strategies, has enhanced its captive capabilities with the acquisition of International Insurance Brokers (IIB), a full-service retail agency based in Oklahoma.
Terms of the deal were not announced.
“We’re building out our central region presence as a specialist that brings a client-first, business savvy approach to risk and liability management,” said Steve Giannone, Risk Strategies central regional leader.
“International Insurance Brokers is a great fit for us and this approach to expanding our capabilities without compromise.”
In addition to offering captive expertise, IIB offers commercial and personal lines insurance, as well as a portfolio of business and individual financial products and strategies including financial services, retirement plans, life insurance and annuities.
IIB has a strong concentration of clients across Oklahoma, Kentucky, and Texas.
“As we looked to scale our success, we saw cultural fit as key,” said Caroline Sniff, IIB managing partner.
“Risk Strategies client-first, approach, emphasis on collaboration and depth and scope of resources make them the right fit for our clients and our people.”
Davies has strengthened its presence in Guernsey with the acquisition of the insurance management services portfolio of Ortac Underwriting Agency.
Davies Management Services (Guernsey) was approved by the Guernsey Financial Services Commission in February 2021, but the Ortac deal now delivers significant boots on the ground in Europe’s largest captive domicile.
Ortac’s insurance management division will rebrand to Davies with Ortac CEO Richard Tee continuing to lead the team, reporting into Nick Frost, president of Davies Captive Management.
Steven Crabb, CEO – Insurance Services at Davies, said: “We launched our captive management facility in Guernsey in 2021, with a view to create a captive management centre of excellence for the UK and Europe on par with our successful operations in the U.S. and Bermuda.
“The Ortac team’s expertise, in one swoop, accomplishes that. The team is exceptionally experienced, and in combination with our existing insurance management services and tools, Davies now has the scale, breadth, and talent to provide an invaluable, independent captive management service to companies around the world.”
Davies has made several captive management acquisitions over the past five years, including US assets of USA Risk Group in 2018 and Bermuda’s Citadel Risk in 2022.
The group also acquired Lloyd’s managing agent Asta last year, one of the agents leading development of the Lloyd’s Captive Syndicate project.
Richard Tee, CEO of Ortac, said: “This is an exciting development for the growing Ortac insurance management team.
“The resources, reputation, and ambitions of Davies will be an enormous accelerant to our growth. And our goals are comfortably aligned: to bring full-service, high-quality, leading edge insurance management and underwriting services to clients across the spectrum of sectors.”
Lloyd’s of London is working with an applicant which could establish the first Captive Syndicate in over 20 years, while the London Market Group (LMG) remains confident that the UK government remains keen to pursue a wider captive regime outside of Lloyd’s.
There are two separate captive initiatives in development in the United Kingdom.
One is the Lloyd’s ‘Captive Syndicate’ offering that would facilitate the formation of a captive within the iconic insurance market, while the other is based on an effort to create a new class of captive insurer, within the UK’s current regulatory framework, that would experience a lighter regulatory touch than commercial (re)insurers.
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These projects are not in competition with each other, and present quite different offerings to the captive market.
The LMG, which has been lobbying government to welcome captive insurers for over three years, is in favour of a bifurcated insurance regime which would ensure captives writing only first party risk would be treated proportionally in a framework that would look more similar to Bermuda and Guernsey than those regulated within major European Union domiciles, such as Luxembourg and Ireland, that have to follow Solvency II.
Captive Intelligence understands that the UK Treasury has intimated captives will be back on its agenda in January 2024, as it is currently prioritising the Financial Services and Markets Bill and Solvency UK.
The latter project is to reform and update Solvency II, post Brexit, into a more tailored regime named Solvency UK.
Speaking as president of the Insurance Institute of London in a speech in November 2022, CEO Marsh of UK & Ireland Chris Lay threw his support behind the idea of a UK captive regime.
Lay, who ran Marsh’s global captive business from 2014 to 2016, said at the time: “An ambitious regulatory model for captives, combining a proportionate risk-based solvency regime with London’s global reinsurance market, could make the UK a unique and attractive location for captive investment.”
Lloyd’s Captive Syndicate
At Lloyd’s, the reintroduction of Captive Syndicates has been discussed and consulted on since 2019.
The first and only captive formed within Lloyd’s was by SmithKline Beecham Plc in 1998, but was put into runoff in 2001 after a merger with Glaxo Wellcome and a review of the group’s captive strategy.
The new offering, which was approved by the Council of Lloyd’s in August 2021, is now being more widely marketed by the corporation itself and several managing agents touting the offering.
A Lloyd’s captive could bring several unique advantages, such as a Lloyd’s rating, access to
insurance licences around the world which would remove the need for a front, and a ready-made insurance infrastructure to support the operation and management of the structure.
The disadvantages, however, are likely to be higher frictional costs, a reliance on managing agents rather than experienced captive managers and restrictions on business plans and the type of insurance that can be written.
Lloyd’s has been very open that the Captive Syndicate will be a niche offering, only really relevant for the largest accounts.
It is also thought that clients who explore this option will likely already have a captive in place and use the Captive Syndicate as an additional tool.
The syndicate application fee is £100,000 and the expected minimum annual premium threshold to make it feasible is predicted to be $20m.
Despite the narrow criteria, there has been interest from large coporates in America, continental Europe, the Middle East and Asia and Captive Intelligence understands there is confidence the first Captive Syndicate could be established by the end of 2023 in time for a 1/1 renewal.
Fluid Truck’s captive insurance programme began writing on 1 April and in an exclusive interview for the Global Captive Podcast, head of insurance Courtney Claflin explained the rationale and motivations for the new formation.
Captive Intelligence revealed in February that the American commercial vehicle truck rental company had established Nereus Insurance Co Inc, domiciled in Washington DC, and would begin by writing auto liability, commercial auto physical damage (APD) and excess.
Fluid Truck makes it easy to rent commercial vehicles 24/7 and currently operates in 400 cities in the U.S. It offers trucks, vans and electric vehicles to more than 100,000 users on its platform.
Claflin said the drivers for Fluid Truck to go down the captive route were for two-fold, and not dissimilar to the motivations for many new captives right now – “control” and to “offset the commercial pricing of product”.
“We’ve reached the point where our premiums far outstrip the claims, and so consequently, much like everybody else, you’ve got two main components behind the formation of a captive, which is capture the underwriting profits and corresponding investment income from your risk financing arrangement,” he said.
“And two, to control your own destiny and be able to chart it out yourself. As opposed to being the tail on the dog.”
When it came to choosing the domicile, for Claflin it was a straightforward decision to return to Washington DC where he has extensive experience from his time at University of California.
“I enjoy the law, the law is fantastic,” he added.
“The regulators themselves, Sean O’Donnell and Dana Sheppard, I have a very good relationship with them. I’ve built a lot of captives and a lot of programmes with them. it’s stable for me in the captive world.”
Listen to the full interview with Courtney Claflin, head of insurance at Fluid Truck, on the Captive Intelligence website here, or on any podcast app. Just search for ‘Global Captive Podcast’.
Peter Johnson, FCAS, MAAA is a Senior Actuarial Consultant with Spring Consulting Group, LLC and Spring’s Property & Casualty Practice Lead. He has 17 years of actuarial experience in reserving, pricing, alternative risk funding, risk optimization, captive feasibility and reinsurance risk transfer work. This experience includes workers’ compensation, medical professional liability, professional liability, automobile, general liability, cyber liability, mortgage insurance and other enterprise risks.
You’re not new to the captive world. You’ve had your captive for several years and generally feel good about its performance. However, you’re now in one of the most difficult markets we’ve seen in a while.
Peaking in June of 2022 at 9.1%, the annual 2022 inflation rate leveled out at 6.5% at the close of the year. This is significantly higher than the average inflation rate for the last ten years (1.88%), as reported by Forbes.
COVID-19 (especially the stimulus packages), supply chain problems, widespread worker shortages, Russia’s invasion of Ukraine and resulting oil price surges, the housing market, and more predictable market cycles are some of the driving forces behind such high inflation.
Is the worst over? Possibly, but a recession is still a very real threat.
So, you feel good about your captive, but you look around and the market is hard, premiums are rising, capacity is inadequate, underwriting standards are rigid, an unstable economy is keeping many up at night, natural disasters seem par for the course, and the world is still picking up the pieces after a global pandemic.
Through all of these changes and more, it is critical that your captive adapts.
Instead of crossing your fingers that the status quo will pull you through, we recommend taking this opportunity to understand how to better align your captive with the market and/or rebuild an underperforming aspect of your current risk funding solution.
With organisations hyper focused on every dollar, this is a time to leave no stone unturned regarding maximizing the advantages offered by a captive. Enter, risk optimization.
Risk optimization is the process, related to a risk, of minimizing the negative and maximizing the positive consequences and their respective probabilities.
The idea is much easier to conceptualize with Spring’s graphical representation. The following chart illustrates an insured’s measure of variation in risk along the x-axis (coefficient of variation) and the measure of the insured’s expected retained profit along the y-axis.
There is an optimal combination of retained risk that maximizes the ratio of profit to risk volatility (“PR Ratio” = “Profit to Risk Ratio”) for each insured within a captive programme.
This is represented by the red dot and is similar to the concept of modern portfolio theory, except we are looking at retained profits relative to retained insurable risks and are not focused on investment strategy.
The key takeaway is when it comes to an insured’s captive risk funding programme, there are various other reasons why optimizing your risks is important. These reasons include:
Your aggregate risk profile hasn’t been examined from the ground up for several years (or longer) and things may have changed significantly
A fresh set of eyes can objectively determine how to get the most out of your captive using captive risk optimization
The opportunities for creating efficiencies in your risk funding solution only increase while going through hard market cycles like the one we are currently experiencing, where various casualty and property lines are seeing double digit rate increases on top of forced retention increases and reduced coverage limits/sub-limits from the commercial market
Change implementation can be planned based on your priorities and strategic objectives
Additional savings for risks or risk layers currently insured by the commercial market could be brought into your captive, leading to a decrease in volatility and an increase in savings
We generally find that moving most risks/risk layers from the commercial market to a captive result in between 10% and 40% in long-term savings. These savings generally come from a combination of investment income on the captive’s invested assets, captive underwriting income and the lower operating costs of a captive (compared to commercial coverage)
To demonstrate such savings, a large healthcare system client of ours with a captive insures a combination of P&C and benefits risks. In the last 10 years they have saved approximately 40% of guaranteed cost premium levels, or $100M. By recently adding medical stop-loss and coverages to their captive, they continue to create more savings while stabilizing results (i.e., reducing the CV illustrated in the chart above).
Claims experience is better or worse than originally expected, therefore capital adequacy and pricing sufficiency should be reviewed
Regulations may have changed, such as recent practices that have come out of captive court cases
Taking into account these various issues that drive the need for occasional but regular risk optimization studies, Spring has developed the following five-step process:
Goals
Impact
Strategies
Structure
Measurement
Goals stage
In this initial stage, it is important to focus on confirming the goals and objectives of your captive, both new and old.
Have the older goals been achieved? How have they changed over the years? Will your current corporate strategy elicit the creation of new goals?
Also critical at this early point is the collection of data, and not only the stats and facts of the captive, but also the more subjective (qualitative) data that can be gleaned through management interviews and informal stakeholder surveys.
The goals stage highlights your current insurable risks and your means to fund that risk. Some of the most common P&C risks to insure in captives include, but are not limited to:
Strategies stage
In this phase, a professional captive optimizer would first analyse any additional lines of coverage that could be insured by your captive. The key is to determine the possible return by line and then prioritize them.
The risk hierarchy exhibit below shows the typical order of prioritization, starting with the bottom layer and working up.
Secondly, a surplus management strategy would be developed. There are many considerations in appropriately managing the capital and surplus levels over the life of a captive, including average cost of capital, retention levels, reinsurance use, taxes and others that a team of actuaries and consultants would review and develop strategies to address.
Structure stage
Now that you know what you want to do and how, it’s time to take a closer look at how it will all work together in a logical structure.
Economic trends and market changes should give you some food for thought. For example, pure captives are increasingly changing to sponsored entities.
It is important to identify investment management best practices as well as the optimal collateral structure.
Impact stage
The Impact Stage of a Risk Optimization Study involves looking at all the different pieces of the captive puzzle to determine how they would be affected by the changes you’re considering.
A few activities here would include:
Conduct the analysis of your risk financing optimization
Includes quantification of benefit/cost over lifetime including cost of capital
Allows for a better understanding of the optimal PR Ratio considering the insured’s P&C and benefits risk tolerance
Cost of capital and risk premium loads can be minimized
Appropriate modeling of correlation between risks is instrumental to this process
Review your current reinsurance levels and optimize your use of reinsurance
Stress test the captive with reasonable adverse case outcomes
Measurement stage
Finally, all sound captive projects end with measurement. This is the time to determine to what extent goals were met and impacts made.
A great deal of this stage relies on the creation of solid industry benchmarks against which to measure current and future captive performance. It is also important to develop implementation plans based on what you uncover.
At the conclusion of the measurement phase, Spring would produce a risk optimization study report detailing all the findings of the risk optimization study that are outlined and reviewed along with the recommendations developed in this last phase.
These findings can serve as a baseline for measurement going forward.
Regardless of how old or new your captive is, there are bound to be numerous internal and external factors that have changed since it was created.
In 2023, the market is a bumpy ride, making it a great time to have a professional not only take a snapshot of how your captive is currently performing, but also help you project and strategize as to where your captive should be in the future.
