According to a new report from rating agency AM Best, European captives have been resilient to the COVID-19 shock, generally maintaining stable ratings fundamentals during 2021.
The rating agency believes that captives are an important risk management tool for their owners as they provide them with the flexibility to navigate the insurance and reinsurance underwriting cycle and maintain access to the risk cover they require on an ongoing basis.
In the hard phases of the insurance cycle, captives can offer tailored risk solutions to their parents on lines of business where commercial capacity has contracted, or where cover has become too expensive or even unavailable.
Captives also provide owners with access to reinsurance market capacity. A captive can be an efficient vehicle to manage the risks groups are willing to retain relative to the price of cover.
According to the report, price increases in the re/insurance market began to appear as early as 2018 in some segments, and the market has continued to harden since, with commercial insurers and reinsurers commonly reporting rate-on-rate increases, and a tightening of terms and conditions.
Casualty lines in particular have experienced significant price increases, as insurers have responded to the impact on loss experience of social inflation stemming from increased litigation and so-called “nuclear” verdicts.
Amid tougher renewal discussions, AM Best has observed an uptick in the use of existing captives, as owners seek optimal risk transfer solutions.
A number of captives have increased retentions or limits on existing cover, while in some instances they have expanded into new lines of business as their parents have looked at increasing captive utilisation.
Europe’s top three captive domiciles (by number of licensed captives) are Guernsey, Luxembourg and the Isle of Man. AM Best had expected an increase in the number of registered captives in Europe in 2020, as challenging economic conditions, added to the rising cost of insurance, provide the ideal environment for corporates to look at how they might optimise their risk transfer programmes.
However, according to Captive Review’s World Domicile Update for 2020, among Europe’s top three captive domiciles, only Luxembourg saw a small increase, with the number of new captive formations licensed slightly exceeding the number of licences surrendered.
Guernsey and the Isle of Man saw a small net loss of captive numbers, this is likely due to a combination of the time it takes to set up new captives combined with merger and acquisition activity among corporations leading to redundant captives being closed down.
Just as AM Best had anticipated, the volume of business written by captives globally had increased in 2020 as the re/insurance market continued to harden.
