Captive Fronting and Collateral Requirements Part 3 · 6 days ago by Dawne Davenport
Follow this link to view this survey’s results. A new window will open.
The last captive.com pulse survey of the three-part Fronting series attracted a modest number of captive owners or their representative managers or consultants. Based on the first question, respondents were split approximately two-to-one between single parent and group captive structures.
The second question on the survey asked, “How important is it that your captive be fronted by an A-rated fronting carrier?” A majority of respondents (55% of single parent captives and 75% of group captives) answered that this issue was either “critical” or “very important.” 46% of single parents and 13% of groups considered this issue “important,” and only one group captive (no single parent captives) considered A-rated fronting to be irrelevant for selection purposes.
Next, survey respondents were queried as to whether changing market conditions had influenced their carriers’ collateral position/requirements. This question elicited responses across the board. While the most common answer was “Not really, requirements and methodology have been consistent,” other answers ranged from “Yes, I’ve experienced considerable accommodations” to “Definitely not, I have a seen a reversal in position.” Responses did not seem to be tied to survey-takers’ affiliation with either group or single parent captives.
Question 4 dealt with captives’ awareness of the availability of collateral buyout options. Not surprisingly, over 90% of single parents believed that no such options were available. However, a majority of groups did know of such options.
Asked whether their collateral requirements were influenced by the perceived quality of their TPA, nearly half of both single parent and group captives said that TPA quality was not a factor. Interestingly, though, around 10% of single parent captive representatives stated that their organization had received favorable terms due to the recognition of high quality TPA services, while no group captives had this answer. However,, 13% of the group captives stated that their captive had received unfavorable terms along this dimension.
In summary, we may conclude that most captive owners (especially owners of fronted captives themselves) consider it very important, some critically so, that their company be fronted by an A-rated carrier. We might expect this response to be even stronger given the recent turmoil brewing in the insurance and financial services industries.
CAPTIVE FRONTING AND COLLATERAL REQUIREMENTS - 2ND OF 3 · 273 days ago by Dawne Davenport
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The second captive.com pulse survey of the three-part Fronting series, active in October & November 2007, attracted 52 captive owners or their representative managers or consultants. Based on the first question, respondents were split approximately two-to-one between single parent and group captive structures.
The second question on the survey asked, “If you have left a fronting carrier, did your previous carrier consider a collateral reduction for expired years?” A majority of respondents (62.5% of single parent captives and 50.0% of group captives) answered that this issue was inapplicable, presumably because they were not fronted or had not changed fronts if they are. Among those having left a fronting carrier, responses varied across single parent and group captives. Half of single parent captives said that they were given no collateral return, while 90% of groups were given either “substantial” or “modest” returns.
Asked about changes in collateral requirements from a multi-year fronting carrier, single parent captives generally reported that the same amount of collateral was required this year as in the prior year. Among groups, however, significantly less collateral typically was required compared to previous years.
Question 4 dealt with captives’ sense of the available capacity of fronting carriers to serve their market. Responses from both single parent and group captives were all over the map, ranging from “There is an abundance of fronting carrier capacity” to “There is an extreme shortage of qualified, financially sound fronting carriers available.” The majority of group captives, in particular, recognized such a shortage. Interestingly, 25% of single parents said there was an abundance of capacity, while none of the groups said this.
Asked whether they had considered the formation of an RRG to act as a fronting mechanism, 25% of single parent captives said yes, while 50% of groups considered this option.
The survey concluded with a question regarding how pure collateral decisions would be made in the future. The modal response among single parent captives was that they would go with reasonable collateral requirements suggested by their fronting carriers. As for group captives, the majority expect to engage in discussions with existing or potential new fronting carriers regarding more lenient collateral requirements.
In summary, group captives have indicated that there is a shortage of qualified, financially sound fronting carriers available to support their captives, and these groups plan to engage in discussions with existing or potential new fronting carriers regarding more lenient collateral requirements and make a decision regarding fronting arrangements based on the outcome of that discussion. Fully half of group captives have considered the formation of an RRG to serve their fronting needs.
Single parent captives generally find that the same amount of collateral is required this year compared to previous years, but in many cases feel that there should be more qualified fronting carriers available to serve them. Only 25% of single parent captives have considered the formation of an RRG to fill the “fronting gap.”
Some of the concerns voiced by the survey respondents are not surprising, especially as regards the group captives. These concerns likely also account for reasons why many others have in fact formed RRGs over the last four to five years. That said, the emergence of new fronting markets (e.g., SPARTA, AmTrust, etc.) may help alleviate some of the pressures, though even then these carriers may provide an option only to the larger captives, as these fronting markets generally target programs with premiums of $10 million or more, or the potential to achieve that premium level quickly.
August 2007 Pulse Survey #14 Analysis: What's Up With Captive Fronting and Collateral Requirements? · 376 days ago by Dawne Davenport
To view the full results of this survey, follow this link. A new window will open.
The recent re-launch of the captive.com pulse survey in August 2007 attracted 58 captive owners or their representative managers or consultants.. Based on the first question, respondents were split nearly evenly between single parent and group structures. The subject was a currently popular theme, fronting arrangements, and is the first in a three-month series on the topic.
A solid majority of respondents to the second question (72.7% of single parent captives and 71.4% of group captives) answered that they have a strong or virtually complete understanding of their fronting carrier’s approach in determining collateral requirements. Approximately 14% of single parents and 18% of groups expressed “some” understanding, with a handful admitting to little or no understanding, or an inability to obtain an explanation from the fronting carrier.
Asked what forms of security are required by fronting carriers, Question 3 revealed that letters of credit (LOC) were most popular with 36.4% of the single parent captive votes and 42.9% of group captive votes; hybrids (LOC/trust account/cash/parental guarantee) came in second with 22.7% and 39.3%, respectively. Good old fashioned cash was a near third for single parent captives with 18.2% of responses, but zero responses for groups. A relatively small number of survey takers answered that parental guarantees, trust accounts, or letters of indemnity (a write-in response), comprised their collateral requirement.
Question 4 dealt with fronting carriers’ interactions with captive owners regarding collateral amounts. Results indicated divergent trends between single-parent and group captives. For single parents, a dead-even split existed between the “completely or fairly collaborative” and “fairly or completely inflexible” category pairs. For groups, the ratio was weighted to the inflexible side, with 71.4% of votes versus 21.5%. In only one case for each of single parents and groups, a captive representative stated that its fronting carrier wanted things “my way or the highway.”
In summary, the survey results indicate that captive owners generally have a good understanding of their fronting carriers’ approaches to determining collateral requirements. However, it seems that carriers may be unwilling to negotiate these terms to any great extent, especially for group captives. Collateral requirements are most often satisfied with LOCs or hybrid arrangements.
We note that in recent years we have seen first hand among our client base that captives have been gravitating away from LOCs, often to trusts, in an effort to reduce costs and/or unencumber corporate credit lines.
While it is still too soon to ascertain whether credit demands may change as the credit markets tighten their reins in other areas (e.g., mortgage financing), liquidity issues may rise to the surface even in the seemingly unrelated insurance domain. Hopefully this pulse survey has shed some light on the often perceived cloudy landscape of fronting collateral requirements; the upcoming two surveys will delve further into related matters.
Pulse Survey #13: Drilling Deeper on Fronting Relationships, · 678 days ago by Christina Mancini
[Captive.com thanks the analysts at Towers Perrin for writing this analysis]
Follow this link to view complete survey results. A new window will open.
The October Pulse Survey, which queried the value of fronting services, elicited 47 responses. Respondents were offered five degrees of value, with responses ranging from “no value,” “some value,” “real value,” “great value” to “of utmost value.” We also wanted to learn what questions were asked of fronting carriers, whether they had manuscripted policies, and who drafted those policies.
Here is what the respondents valued, from the most to the least:
|
|
|
1 (least) to 5 (most) |
|
|
| 1 |
Financial strength of front |
3.74 |
Great value |
43% |
| 2 |
Collateral demanded |
3.49 |
Great value |
36% |
| 3 |
Flexibility when business plans change |
3.43 |
Great value |
34% |
| 4 |
Flexibility in bundling/unbundling claims |
3.38 |
Great value |
36% |
| 5 |
Price for services |
3.23 |
Great value |
43% |
| 6 |
Willingness to accept manuscripted policies |
3.15 |
Great value |
38% |
| 7 |
Flexibility in bundling/unbundling reinsurance |
3.11 |
Some value |
36% |
| 8 |
Ability to handle emerging risk transfer rules |
3.04 |
Great value |
38% |
| 9 |
Allowing own claim audits independent of fronting companies |
2.91 |
Some value |
36% |
| 10 |
Being available as a surrogate advisor |
2.33 |
Some value |
53% |
We were a bit surprised by some of the results. Pricing, which always seems to be a primary concern, is ranked just fifth in value. (In hindsight, maybe we should have asked about the “importance” versus the “value” of fronting services—results may have changed based on the interpretation.) We suspect it reflects the fact that prices are considered tolerable, so pricing ranks lower than the four other categories. Yet it is the second most frequently asked question of fronters when soliciting services, being asked by 87% of the respondents; hence, price is important, but not a problem in respect to its value.
We were also surprised (but not disappointed) that the financial strength of the front was the top priority, especially as this ranked just fourth on questions asked of the front when choosing services. In fact, 23% of captives never asked this question when first choosing a front.
As important as how much collateral is demanded was to respondents (it ranked second in valued services and was asked by everyone when soliciting services), there was less attention paid to how collateral was calculated in later years, as 19% did not explore this issue up front. “Stacking” is a major issue for many captives, which is the compilation of several years of collateral demands on open claim years.
There was consistency in the value of services and what questions were asked of the front in the areas of wanting bundled versus unbundled claim services and having less interest in separating reinsurance services from the front.
For claims, there was less interest in having the ability to conduct independent claim audits versus relying just on the fronting carriers’ audits. Our concern here is that many captive owners may be better off conducting their own audits, independent of the front, to have better control over audits’ focus and depth of review.
A willingness to accept manuscripted policies was ranked nearly as important as price for services. However, just 55.8% actually have manuscript policies. A possible concern is who drafted those policies. In our October article in Captive Insurance Company Reports, “Drilling Deeper on Fronting Relationships,” Carol Frey was concerned about the poor fit between manuscripted policies and standard insurance practices, which could lead to claim coverage problems. Of the 24 respondents to this question, 54.2% said they used their brokers; 16.7%, the captive manager; 33.3%, internal counsel; and 12.5%, the risk manager. Multiple responses were acceptable. Of the 33.3% that used others, just one (2.1%) used an outside attorney and four (8.5%) used the insurer. Ms. Frey recommended using an outside attorney familiar with insurance coverages.
Pulse Survey #12: Collateral Alternatives · 721 days ago by Christina Mancini
[Captive.com thanks the analysts at Towers Perrin for writing this analysis]
View this survey’s results in a new window
This September Pulse Survey asked a series of questions involving collateral and captives. The survey elicited 43 responses: 46.5% from single-parent captives and 53.5% from group captives.
Respondents report a heavy need to post collateral. For single-parent captives, 84.2% said they were required to post collateral, whereas 90.9% of group captives had to post collateral.
Of the single parents, 64.3% use only letters of credit, just 14.3% use only trusts, and 21.4% use both. Groups said 73.7% use only letters of credit, just 5.3% use only trusts, and 26.3% use both. (The remaining 5.3% used cash.) Towers Perrin is not surprised about the mix of collateral between LOCs and trusts, though we found it interesting that a quarter of the respondents used both. We suspect that sometimes it is required to have both in play, as the fronting insurer may insist that some collateral is from an LOC, as it is more readily accessible for near-term claim payments and not subject to possible bankruptcy constraints. We also expect that the reason fewer group captives use trusts is the difficulty in funding a trust because the ownership structure makes using trusts more complicated.
However, the survey revealed an increasing concern of letter-of-credit users. For the 14 respondents from single parents, 50% said they are getting expensive, 50% said the amount required by insurers is getting too high, and 28.5% said they are getting hard to arrange with banks. Another 7.1% said it is difficult to administer the LOCs. Only 14.3% had no problem with them. [Note: Multiple responses to this question were permitted.]
Groups had similar concerns. For the 19 respondents, 52.6% said the fees charged are getting too expensive, and 47.4% said the amounts required are getting too high. Only 10.5% said they are hard to arrange, much lower than with the single-parent captives, and just 5.3% said they are difficult to administer. Just 15.8% had no problem with them. [Again, multiple responses were permitted.]
In the lead article in Captive Insurance Company Reports in August, “Trusts as Collateral Alternatives,” these concerns were cited as the bases for why trusts are increasingly being looked into as an alternative to an LOC, as banks now have to load credit-risk factors into their pricing for LOCs. Also, the question involving difficulty in administering LOCs had to do with the issue of stacking of collateral over several years of open reserves, which is a problem (or at least a nuisance) for many organizations. As such, the fact so few listed this as a problem is noteworthy.
Accordingly, there has been a shift toward considering, if not actually using, trusts. In fact, 57.1% of single-parent captives responding to this survey have looked at trusts, while 70% of group captives have done so. However, just 12.5% of single parents and 38.5% of group captives said they liked what they saw.
The concerns cited by single parents included, among others, uncertainty of its value (12.5%), their insurer wouldn’t accept them (25%), and concerns about the terms and conditions (another 25%).
Groups were more accepting, though they too had concerns, a few of which follow: 15.4% of the 13 respondents were uncertain of the value, 15.4% felt it would be difficult to sell to their treasurers/finance, 15.4% were concerned about a trust’s costs and the terms and conditions, and 7.7% said their insurer wouldn’t accept a trust.
So why haven’t the others looked at a trust? For both single-parent and group captives, the significant majority said it was mostly because they didn’t understand them. Half also said they didn’t see how the benefits were more than what they had now.
Towers Perrin is not surprised that many still don’t understand trusts. For most, LOCs have been the common approach to collateralizing, but as LOC problems continue, we expect more and more captive practitioners will become educated about the alternatives to letters of credit. That was the reason behind the lead article in the August issue of Captive Insurance Company Reports, “Trusts as Collateral Alternatives.”
In that article, the primary arguments put forth in favor of trusts were that trusts can save money versus an LOC, they don’t tie up valuable credit lines, and a trust can convert “contingent liability” (which LOCs are) to “restricted assets” (which trusts are). There were a few other administrative advantages cited in the article as well, supporting use of a trust.
July 2006 Pulse Survey: Getting Your Captive Rated · 777 days ago by Christina Mancini
[Captive.com thanks the fine analysts at Towers Perrin for writing this analysis]
View this survey’s results in a new window
The July Pulse Survey asked questions about having a captive rated by an outside rating agency. The survey elicited 43 responses, with 26 being from single-parent captives and 17 being from group captives.
Towers Perrin asked whether or not captive owners had considered having their captives rated. Of the 37 respondents to this question, most (43.2%) said no. Another 32.4% have considered it, but haven’t explored it further. Another 13.5% have considered it and have done some in-depth study as to its value. Finally, 10% have already had their captive rated.
Of the 20 respondents to the next question about which rating service they would use, most (55%) would use A.M. Best, while 15% would use S&P and another 25% are not sure who they would use. One response said they would also consider Moody’s. Analysis: Towers Perrin was not surprised by these results, given A.M. Best’s reputation as the primary rating agency for insurers, and its greater visibility at captive conferences and in the press. Nevertheless, S&P is frequently used because, outside of the insurance industry, S&P is more well-known and, depending on the reason for the rating, there are instances when using S&P is more in line with the captive’s and its parent’s needs. This was discussed in the Captive Insurance Company Reports article in July 2006, Case Study: Obtaining an S&P Captive Rating. The Moody’s response is a bit of a surprise, given it is primarily a credit agency, not an insurer rating service. Nevertheless, we do believe, when tracking financial strength of insurers in general, that Moody’s is also an excellent resource.
Why would someone want to have their captive rated? The majority (52.6%) of the 19 respondents to this question wanted help with reinsurance. Another 47.4% wanted help with fronting issues. A smaller group of 26.2% wanted to write third-party coverages, and just 21.1% felt they needed to assuage executive management. Three additional comments from respondents indicated it would be valuable to obtain market approval, to satisfy vendors who require rated paper, and for securitization. (Note: Multiple answers were acceptable.) Analysis: Again, these are in line with expectations. Nevertheless, another reason many captive owners might want to have their captives rated has to do with assisting in setting a financial strategy and determining a better capital management structure, including forecasting capital direction. This approach is more in line with using the rating process as a tool for more effective capital management, as opposed to reacting to insurance market conditions.
Why would someone not want to have their captive rated? A sizable majority (61.5%) of the 13 respondents did not believe it was necessary or of significant value. Another 38.5% felt there might be negative ramifications if the rating is either poor or subsequently downgraded. Another 15.2% felt it was too expensive. (Again, multiple answers were acceptable.) Analysis: Good concerns, but from what we understand, a captive owner can go through most of the rating process without actually having the results published. This allows the captive owner to take advantage of the process without having anything made public. Of course, this needs to be arranged carefully to make sure the process does not go too far beyond the point of no return, or that point in time where the rating agency has to make the results public.
June Pulse Survey: What's New With Captive Fronting? · 812 days ago by Christina Mancini
[Analysis written by the analysts at Towers Perrin]
View this survey’s results in a new window
The June Pulse Survey asked questions about fronting and reinsurance. The survey elicited 59 responses, with 37 being from single-parent captives and 22 being from group captives.
When asked how their most recent fronting costs changed over the previous year, 50% of the single-parent captives said the same or less; 22.7% said costs were up just 1%-10%; 18.2% said they were up 11%-20%, and 9.1% expect costs to be up more than 20%. For group captives, an even higher percentage of 63.6% said the costs were the same or less; 27.5% said they rose 1%-10%, and just 9.1% reported increases of 11%-20%.
What about possible difficulties in the upcoming year? Fifty percent of single-parent captives and 36.4% of group captives are concerned about collateral demands. A lesser percentage of 13.6% of single-parent and 9.1% of group captives are worried about cost increases.
The majority of group captives (63.6%) and 31.8% of single-parent captives expect everything to be about the same.
Comment: We were surprised as to the lack of concern among group captives. Collateral demands have been increasing across the board in this hard market, and it is hard to believe group captives won’t be affected as much as single-parent captives.
We were also interested to see the linkages between fronting and reinsurance. When we asked whether the front also provided the organization or captive with coverage immediately above the retained layers, 40.9% of single parents and 72.7% of group captives said yes. For those that didn’t, 18.2% of single parents and 18.2% of group captives said the captive bought reinsurance from an unrelated insurer; 22.7% of single parent captives said the parent or organization bought excess insurance from an unrelated insurer (this question is not really relevant to group captives), and 18.2% of single parent and 9.1% of groups bought no coverage excess of the captive retained layers.
Comment: Wow! No coverage above the captive? Maybe the captives are quite large (not likely), insure just the top layers of programs (only slightly more likely, especially if it is a captive designed to access terrorism) or the risks are uninsurable (more likely); or the costs are prohibitive (also more likely). We were also struck by the high percentage of group captives that buy their excess coverage from their fronts. We believe this might raise a question as to the added value of their reinsurance brokers and could question the fees they may earn.
So why does the front provide this coverage? For single-parent captives, the leading reason was it was easy (27.3%), followed by being the most economical (18.2%), they had to (13.6%) and finally they got better terms (9.1%). (Almost half said the question was not applicable to them.)
For groups, being the most economical was tied with “they had to” (both at 27.4%), followed by being easy and getting better financial terms (both at 9.1%). No one said no one wanted them, but 18.2% said they had never been given or considered another option.
Comment: Again we ask, what is the role of the retail and reinsurance brokers in these cases?
May Pulse Survey: Catastrophe Modeling · 838 days ago by Christina Mancini
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[Analysis written by the analysts at Towers Perrin]
The May Pulse survey asked questions about catastrophe modeling, developed from issues raised in the lead Captive Insurance Company Reports article in May. The survey elicited 63 responses.
Respondents included captive owners/risk managers (34.9%), captive managers (27.0%) and a quite a smattering of others (38.1%) such as from insurance underwriters or service providers (six responses), consultants (seven responses), brokers (two responses), and students and risk analysts (two responses), several risk managers or related others who did not own captives (five), among a few others.
When asked whether they have recently done within the past two years or expect to do catastrophe modeling this year, 66.7% said no, while 33.3% said yes.
Of those respondents that answered yes, 17 actually completed the next part of the survey. Of these, 76.5% were doing it for windstorm and flood (hurricane-related), 76.5% for terrorism, 58.8% for earthquake, 47.1% for flood (non-hurricane) and 47.1% for tornado/hail. One each was doing it for bird flu and fire.
Fully 64.7% were using RMS models; 17.6% were using EQECAT, and 11.8% were using AIR. Others said they did not know what models were used, or the model was under development, or it was a customized/risk calculation.
Of the 17 responses, 64.7% said they would do the modeling in-house; 17.6% said they would use a broker or captive manager, and 11.8% said they would use a modeling firm. One said they would use an actuarial firm and another hadn’t decided yet. Comment: We were surprised by this answer. Does this mean captive owners/risk managers have actually purchased these sophisticated models themselves? This seems quite surprising. Then again, maybe this question was answered by those already in the industry (consultants, underwriters, etc.), which explains why they would buy the models. Unfortunately, our survey doesn’t allow us to drill down on this.
What was the purpose of the modeling? Respondents could answer any or all of the following. Again, of the 17 respondents, the modeling was done mostly to determine the appropriate retention levels (76.5%), followed by 52.9% to determine appropriate insurance limits, 47.1% to gauge the reasonableness of premium to be charged, another 35.3% to determine or satisfy capital demands on the captive, and 35.3% to determine loss-control needs. Just 23.5% said they needed to satisfy underwriters’ or marketing needs. A couple of other responses included a need to gauge potential to self-insure, determine potential stop loss needs, and to track accumulations and exposures.
How comfortable were the respondents in understanding catastrophe modeling? Of those 16 that are doing modeling, just one person said he was admittedly weak; 25% said they understand some basic concepts; 50% are comfortable with understanding the results when presented, and 18.8% were capable of challenging the analytics.
Of those 41 respondents that were not doing any catastrophe modeling, these respondents were weaker in understanding the technical aspects of modeling: 22.0% said they were quite weak; 41.5% understood some basic concepts; 22% were comfortable with understanding the results when presented; just 9.8% could actually challenge the results, and two people (4.9%) said they could practically do the analytics themselves.
April 2006 Pulse Survey: Employee Benefits in Captives · 872 days ago by Christina Mancini
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[Analysis written by the analysts at Towers Perrin]
The April Pulse survey queried respondents as to their interest and activity in looking into employee benefits in through their captives. We solicited specific responses from single-parent captives only, as generally group captives would not normally insure employee benefits (EB) for their members. Single-parent responses were 25 of the 34 total respondents who answered the survey.
When asked how seriously they have been in considering placing EB into their captive, slightly more than half had done some reading on the subject or nothing at all. The majority, or 35.3%, said they had done some serious reading about the subject. A lesser number, 17.6%, said they had not done any reading at all or had done some light reading.
Over 40% had taken more serious action in looking into the matter: 5.9% said they are considering doing a feasibility study of placing EB into their captive; 11.7% said they had discussions (including other departments within their organizations) about this; another 11.7% have engaged a study to evaluate the feasibility; an equal number have finished the study and are looking to place some EB into the captive; and finally 5.9% already have placed EB into their captive.
No one said they had finished the study and decided NOT to place any EB into their captive.
When asked what EB benefits are the best candidates to put into a captive, participants’ responses were:
•Group term life (52.9%)
•Disability (47.1%)
•Medical for active employees (29.4%)
•Non-U.S. benefits (11.8%)
•Non-qualified benefit plans (11.8%)
•Post-retirement medical (5.9%)
•Not sure (17.6%)
•No opinion (5.9%)
•Pension or termination payments (5.9% each).
What are the primary three reasons for seriously considering using a captive to write EB?
•Cost reduction (56.2%)
•Improved cash flow (50.0%)
•Control of assets (31.2%)
•Tax advantages (31.2%)
•Improved centralized program control (25%)
•Improved claims control (18.8%)
•Improved data (12.5%)
•Improved underwriting (6.2%)
•No comment/not sure (12.5%)
This topic was the focus of the lead article entitled “EB in Captives: Finding the Savings”, in the April issue of the Captive Insurance Company Reports.
Our comments: We compared the Pulse results to a Towers Perrin 2004 survey on the same topic, which asked HR people, and found similarities in the level of interest by captive owners. In the 2004 survey, 38% of 60 respondents had implemented or were considering implementation of benefit insurance transactions in their captive. An additional 35% indicated that the topic would be considered in the next two to five years. Some respondents in the 2004 survey did indicate a lack of interest in EBs for their captives (20%), primarily because they were unsure of the advantages or had other pressing short-term priorities
March Pulse Survey Analysis: Reinsurance and Captives · 907 days ago by Christina Mancini
View this survey’s results in a new window
[Analysis written by the analysts at Towers Perrin]
The March Pulse Survey on the topic Reinsurance and Captives elicited 40 responses.
Two-thirds of the captive respondents said they purchase reinsurance of the captive, whereas the remaining third do not. For the third that don’t purchase reinsurance, we suspect many captives reinsure an underlying program, and insurance layers are placed separately above the captive layer as opposed to the captive buying reinsurance directly.
Given the difficulties in meeting increased creditworthiness requirements of reinsurers, we were surprised that so many captives still purchase reinsurance. (This could reflect the interest of those completing the survey, more than a true picture of the captive market, or the respondents could include many healthcare captives, which traditionally buy lots of reinsurance).
Of those that purchase reinsurance, 56.5% have changed reinsurers within the past five years or since captive inception, whichever is more recent. Though this is a slight majority, it reflects that 43.5% still have the same reinsurers they had five years ago — a testament to long-term relationships many captives still have with their reinsurers.
Why have the 56.5% switched reinsurers? Sixty percent of this group said the cost was too high, 30% said reinsurance became unavailable, and 20% said the terms were too onerous. This reflects what we have seen in the increasingly volatile reinsurance market.
Eighty-one percent said they buy traditional excess of loss (guaranteed cost) reinsurance and 42.9% said they purchase aggregate stop loss insurance. Only 3% purchased finite risk and 3% purchased swing plan reinsurance coverage. This reflects the straight-forward uses of most captives and the few more sophisticated uses of reinsurance being purchased (i.e., swing plans and finite risk plans).
The lead article in the March issue of the Captive Insurance Company Reports focused on this topic. That article dealt with the challenges with reinsurers, especially the mass disappearance of reinsurers over the past 13 years. The article points out that only 10 of 25 reinsurers from 1993 are still actively writing business as the same company today. Many are out of business.
Furthermore, last year’s hurricanes also hurt many reinsurers’ balance sheets, making them more demanding of smaller insurers such as captives. We expect that reinsurance would become much more difficult than the responses suggest. Possibly it is still early in the year, and problems may arise later.