Davies Group: Capitalising on emerging risks

Nick Frost, president of Davies Group’s Captive Management business, and Oceana Yates, senior vice-president of captives, explore the state of the Bermuda and global market and the new trends in risk management


The last couple of years have been some of the busiest periods for captive insurance in recent memory. The Covid-19 pandemic as well as a hardening of insurance markets has led those in risk management positions to explore how captives can handle new and emerging types of risk.

The formation of new captive insurers nearly doubled in 2020 compared to the previous year, according to Marsh’s latest industry survey. Whether companies already have a captive or are considering the arrangement for the first time, the types of insurance lines being considered are expanding.

“Insurance rates are going up everywhere,” says Nick Frost, president of Davies Group’s Captive Management business. “For those who already have captives, they are in a really good position as they can take action. For the others, it can be a real challenge because it is hard to set them up quickly.”

In sectors such as medical malpractice, auto and long-term care insurance, providers have exited the market as the economic slowdown and limited investment income combined to make their businesses unprofitable.

This has resulted in higher insurance premiums, often with no indicators as to when these might fall again.

This global phenomenon has led to interest from companies in many jurisdictions outside of captive insurance’s traditional core markets, such as Japan, Australia, Mexico, Colombia, Chile and Peru.

“A lot of companies are looking to set up captive insurers, and many that already have them are seeking to transfer more risks to them,” Frost explains. “This isn’t just for large companies anymore. Small and medium-sized companies are setting up captives and looking to transfer all types of risks because the insurance marketplace pricing has become so hard in pretty much every line of business.”

A broadening market

One of the biggest areas of interest Davies Captive Management has seen in recent years concerns cybersecurity risks, Frost points out. With cyber-attacks becoming more prevalent, organisations of all kinds are seeking to protect themselves from hacks and other online crime.

“Everyone needs cybersecurity, and a lot of companies are choosing to put this into a captive insurance structure,” he continues. “Depending on what approach they take, companies can just pay for what they need.”

Putting cyber risks through a captive insurance arrangement gives a company flexibility to adapt the coverage for its specific needs rather than selecting a more expensive – and less customisable – off-the-shelf solution.

Linked to this, Frost says that companies with significant holdings in bitcoin or other cryptocurrencies are looking to insure these assets against theft through captive insurers. Many companies are also willing to self-insure property assets, according to Frost.

He cites nursing home operators as an example, with companies in the healthcare sector putting property insurance into captive structures.

“Five or six years ago that would never have happened,” he says, underscoring the rapid development of innovative approaches to captive insurance.

Sta­ff-related risks

Directors’ and officers’ (D&O) liability insurance has become extremely expensive in some markets as regulations have proliferated and public scrutiny has increased, bringing with them new and expanding risks for executives and board members.

At the same time, the number of D&O providers has drastically shrunk, adding further pressure to costs. As a result, some companies with captives have started using these to insure their senior management against claims.

As a long-term strategic risk, this is an obvious line of business to put through a captive, seeing it can provide a more flexible and tailored product.

Another long-term issue for companies is staff retention. Many firms are looking to improve the benefits they can offer their employees, says Oceana Yates, senior vice-president of captives at Davies, prompting some to explore providing personal insurance products through a captive.

“The company controls the frontend and what they provide to their staff, rather than just outsourcing to the insurance market and having no real control,” Yates says. “It’s been going on for quite some time but we’re seeing an increase in popularity recently.”

Innovative approaches

It is not just internal insurance needs that companies are putting through captive structures. Increasingly, innovative companies are starting to offer insurance services to entities outside their immediate corporate structure. The most obvious example is warranties.

Mobile phone retailers and networks, auto dealers and electronics sellers all often offer warranties and product-specific insurance to customers.

Increasingly, these products are underwritten by a captive insurer to enable the retailer to benefit from the insurance provision as well as the initial sale.

In addition, some companies are offering insurance services to their suppliers. This route can improve long-term relationships with firms in a company’s supply chain, Frost says, as well as giving added peace of mind that risks are being appropriately managed.

For Yates, the biggest area of innovation in the coming years is likely to revolve around environmental, social and governance (ESG) risks.

“There is a lot of talk about putting ESG risks through captives,” she says. “This is currently at a very high level and we’ve not yet seen our clients write specific ESG risk through their captives. It’s at the stage that cyber was five or six years ago, where people are trying to figure out how it could fi t into a captive structure.”

Those exploring this space are trying to understand how a company’s ESG programmes could be aided by captive insurance.

Yates says this could take the form of funding risk management programmes or providing cover to specific insurance lines. Linked to the management of ESG risks, pandemics on the scale of Covid-19 are expected to become a more common occurrence.

As such, part of the ESG role of captive insurers could relate to pandemic insurance or similar types of risk management, Yates explains.

“Companies with captive insurers can use them as part of their long-term risk management strategies,” she says. “Some are already looking at what they can do with the captive to help with this. It’s something I think will become mainstream in the next few years.”

Is a captive insurer right for you?

For those who are exploring captive insurance as part of a wider risk management programme, there are several things to consider. Taking this path involves substantial planning and investment in governance systems.

Frost explains: “You have to come in with a really good business plan, and you must have the capital to back up a captive. It is a proper regulated insurance company and so needs to be treated as such – it’s not just a shortcut to decrease your premiums. This is a long-term risk management tool to be used strategically. That’s where a captive really makes sense.”

Establishing a captive insurer allows a company to be prepared when market conditions change. If a strategic business risk becomes expensive to insure, it can be an attractive way in which to reduce premiums while developing a more bespoke and flexible insurance product that fits your company’s needs.

“It supports the philosophy of the company,” Yates concludes. “It’s an enduring tool, not just for one-off risks. It gives you flexibility when markets get tough.”

12 August 2024
5-6 November 2025

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