While a relatively soft commercial market can sometimes lessen the emphasis or desperate need to form a captive, CFOs and treasurers are increasing the pressure on their captives to deliver more “strategic value”.

Speaking on the latest episode of the Global Captive Podcast Aon’s Diane Hanson, Jay Curtis and Michelle D’Amico discussed how they are seeing captive utilisation evolve in a softer insurance market.

“Despite the relative improvement in market conditions, we’ve had a very busy year with new formations, feasibility studies, and a notable increase in expansion analysis for our existing captive clients,” D’Amico, associate director of Aon Risk Finance & Captive Consulting, said.

 While the market has improved on cyber, directors and officers liability, and most recently on property, the US auto liability market is very challenging right now. So primary auto, umbrella liability, excess liability have been a major focus area for both our existing captive clients and new clients.”

She added that while the adoption of captives in the healthcare sector is relatively mature, medical malpractice capacity is hard to come and exclusions for sexual misconduct liability is driving an increase in captive utilisation in that space.

It is the greater attention paid by the C-suite as existing captive owners though, despite the market softening in many areas, that is pushing risk managers to find more value from their self-insurance vehicles.

“ We have seen a lot of focus from existing captive owners on evaluating the strategic value that they’re getting from their captives,” D’Amico added.

“There’s a lot of pressure right now from treasurers and CFOs on making sure that the assets that are in the captive are being utilised in a strategic way.

 ”We’re seeing a lot of interest in medical stop-loss, global employee benefit programmes, trade credit is a new topic of interest that we’re seeing with US clients, as well as exploring alternative options, like multi-year structured reinsurance deals.

“Taking a hard look at the cash that’s in the captive, make sure it’s being effectively invested, whether that be loan backs to the parent or being invested or being used to support additional lines of business.”

Hanson is Aon’s managing director & head of its Vermont Captive Management Office. She said that getting that buy in and support from treasury and senior management is important to facilitate the captive to be “nimble” in how it responds and interacts with the commercial market.

“In order to be nimble, it’s very important that they make sure that their leadership is aligned because it can’t be something that only the risk manager needs and wants to do,” Hanson explained.

“Capital and the funds that you need come into play and so you need your treasury team involved. Your legal team needs to understand how the captive is going to be constructed, and meet both long-term and short-term needs, and making sure that your tax team is in agreement with what you’re intending to do.

“You need to have those team members aligned through the whole journey, so that when you do need to be nimble and quickly utilise your captive, you’re ready to do so and be able to make those decisions quickly.”

Curtis works as director of enterprise client captive solutions in the Americas for Aon and recognises that a hard market does prompt more captive feasibility studies and formations, but just because the landscape may have changed (for now) does not mean captive utilisation will dip.

Risk manages do not lose sight of the fact that the hard market dictated rate increases, even when their own loss experiences do not justify it.

“I think for a period of time after a hard market we do see companies continuing to expand their increased retentions, to remove the premiums they’re paying to the commercial markets, to avoid the volatility,” Curtis said on the podcast.

“And so I think we’re going to see that trend continue for another three to five years. We’ll see the cycle slow down a little bit, but I do believe that we’ll continue to see active utilisation of expanding the use of the existing captive programmes as well as new captive formations.”Listen to the full Global Captive Podcast episode here, or on any podcast platform. Just search for ‘Global Captive Podcast’.