Hylant senior captive consultant Alex Gedge discusses the growing popularity of group captives among European clients, the benefits they can offer in the current hard market and how to ensure their implementation is successful.
Group captives have been used effectively and consistently for a long time. While they have been more prevalent in the US, there is increasing interest in them in Europe.
With the current constraints of the harsh market – increases in pricing, decreases in capacity and limits, and increasing deductibles – companies are considering alternative solutions. There has been increased interest in both traditional and cell captives (these may be attractive to those looking for lower operating costs or lower costs of entry, such as SME businesses or organisations facing a single problem), but many have also turned to group captives as a solution.
There are industries and lines of business where markets are withdrawing or reducing coverage. Directors’ and officers’ insurance and coverages for recycling and waste plants are being affected by the hard market, creating common insurance problems. Some organisations are facing challenges securing coverage at all, hindering operations.
Others are still suffering the long-lasting impact of the Covid-19 pandemic. Still, some have business contracts requiring specific insurance or employee coverage, which are becoming difficult to secure. These factors have all led to more companies exploring group captives in Europe.
A captive can provide organisations the coverage they want and control over their programme and pricing, as well as guaranteeing continuing operations with the required insurance coverage. Historically, European markets haven’t engaged in the use of captives in the same way the as the US. Indeed, the US has traditionally been quicker on the uptake of new insurance approaches, and healthcare and workers’ compensation have been significant contributors to captive use.
The European market has begun to express interest in this expanded captive use. Those businesses and industries particularly affected by Covid or struggling because of insurance conditions are keenly interested in exploring captive use. Though group captive use is becoming more appealing to the European market, it is crucial to remember there is still risk attached.
If a member experiences a total loss, one must be able to pay for it, requiring a captive to be recapitalised. An organisation new to captives should consider starting with smaller requirements, beginning more conservatively and slowly taking on more risks as profit grows.
The planning stages of a group captive are going to be crucial to its long-term success. Members should perform due diligence in understanding one another, ensuring everyone has the same goal and is generally aligned.
For example, what is the process should a member choose to leave a captive? What capital is included? What is left out? Addressing good governance and member participation is imperative for a successful group captive.
The inherent need to share data and loss history with other members of the group/ mutual leaves many balking and has contributed to the slower uptake of group captives. However, with strict agreements in place – in particular around the sharing of data, the right captive risk consultant and actuary, and the right structure of the captive to protect against massive losses – then group captives can be hugely successful for members, even if one member has large losses.
For example, a group captive can be established in such a way that if one member experiences a large loss then other members can still be protected from it. These group captives can ensure smooth coverage, share profits and reduce insurance costs for members.
Group captive members are finding they have greater control over pricing. In the traditional insurance market, programme pricing is against the wider market, meaning all losses over the past few years have contributed to the rising deductibles, lower coverage and overall harder market. When in a captive, members are priced against themselves and their own loss history.
A good combined loss history can lead to more competitive pricing. On top of that, organisations can leverage the profitability from the captive back into the insurance programme, into the parent companies or into loss control measures. With the hard market continuing and more pressure on organisations, it’s likely European group captive use will continue to rise.