As organisations of all kinds face a continued hard insurance market, with significantly higher premiums and deductibles coupled with new coverage limits, establishing a captive insurance company becomes an increasingly attractive option.

The past year recorded increased levels of captive activity, and the trends suggest 2023 will be another banner year for this versatile, effective risk management strategy.

Given the uncertainty of the global economy and fears of a recession within the U.S., we may see a slowdown in captive formation during the early part of the year. But given the many advantages of a captive strategy and no signs of softening in the insurance market, we’re confident the growth rate will resume quickly.

In addition to new captive formations, we expect to see additional attention paid to the structure and scope of existing captives.

As organisation leaders become more familiar with the performance of their captives and increasingly comfortable retaining risk, they’ll examine opportunities for covering additional areas of risk and analyse whether increasing retentions would be prudent.

Companies that were once content to defer most risk-related activities to their insurance brokers or consultants are playing an active role in identifying and analyzing risk. Beyond addressing traditional property and casualty risks, they are turning to captives for non-traditional coverages such as business interruption, difference in conditions, supply chain, medical benefits, life and voluntary benefits.

This reflects increased sophistication with in-house risk management, a clearer understanding of risk exposures, and growing familiarity with non-traditional risk management opportunities.

Strategies that may have been considered exotic are becoming commonplace, and the increased availability of cell captives creates opportunities for more organisations to explore a captive.

Additional evidence of the increased sophistication is the recognition of the importance of data in risk management. Most organisations have long accumulated relevant data, but until recently, most spent little time analysing it to obtain tangible and meaningful insight into risk exposures.

The right data analysis tools can enhance an organization’s ability to determine how much and which types of risk they can comfortably retain and how best to address them. That provides greater confidence for decision-making and improves forecasting.

Cyber and climate drivers

As we get deeper into 2023, we expect to see increased captive activity around two categories of risk.

The first is the continued use of captives to address cybersecurity. Carriers bruised by large claims related to breaches and ransomware have tightened their underwriting and added exclusions and other limits, pushing many risk exposures back onto the policyholders.

Faced with significant premium increases for less coverage, organisations are seeking alternative ways to create safety nets for uncovered exposures, and captives have been the logical answer for many.

The second category is related to the climate effects on organisations. As regions worldwide experience extreme weather generally attributed to global warming, claims have skyrocketed.

Whether it’s the devastation wrought by Hurricane Ian in the southeast United States, record high summer temperatures across Europe, or droughts and resulting wildfires on multiple continents, weather-related events are threatening property, disrupting operations such as supply chain activity, and creating previously unforeseen liabilities.

As underwriters adjust coverages and premiums in the wake of large claims, organisations increasingly look to captives for creating customized solutions.

Additional risk categories are emerging and are likely to play more prominent roles in future planning and the use of captives.

As mentioned, supply chains have been affected by weather, but that’s just the beginning.

Geopolitical issues such as Brexit, the Russia-Ukraine conflict, and political instability in established and emerging economies threaten dependence on supply chains globally.

The impact of the computer chip shortage on the world’s vehicle production is a familiar example, and it’s far from the only one.

The lessons of the COVID pandemic are not lost on organisation leaders who recognise that increased global travel and commerce are likely to foster future pandemics.

Our captive team has been working with reinsurance providers to develop effective solutions for managing the risks associated with future viruses or other diseases which may threaten the world’s health.

Finally, growing attention to environmental, social, and governance concerns is a promising area for captive strategies.

As consumers and governments place greater emphasis on organisations’ activities and demand accountability for ESG initiatives, those organisations are likely to encounter risks that may best be addressed through captives.

As the world and the global economy grapple with a long list of unprecedented challenges, company leaders need to step up their planning efforts, looking far beyond the next quarter to understand and assess the potential business impact of these far-reaching changes.

In such an uncertain environment, risk management will play a more significant role in determining both big-picture strategies and operational details.

Organisations wise enough to look beyond 2023’s immediate needs will be more likely to include captives in their toolbox of solutions.