Aon Survey Finds Dramatic Increase in Captive Insurance Growth
September 13, 2021
Captive insurance growth is occurring at a level not seen in two decades, according to the 2021 Captive Benchmarking Survey from Aon.
The Aon report notes that price increases in primary insurance markets over the past 2 years have led captive insurance company owners to retain more risk as they look to maintain appropriate levels of coverage while controlling costs.
The report said that since 2018 Aon has seen a 73 percent increase in premium retention among the captives it manages. That includes a 361 percent increase in property damage/business interruption (PD/BI) retentions and a 26 percent increase in general liability retentions.
Beyond traditional risks, some organizations are using their captives to address risks that are difficult to place or emerging perils, such as cyber and environmental, Aon said. According to the report, over the past 5 years Aon has seen a 650 percent increase in cyber-insurance premiums in captives, while environmental risks have seen a 400 percent premium increase since 2018.
"With ransomware attacks increasing and Environmental, Social, and Governance issues (ESG) at the top of many board agendas, we expect these utilization trends to continue," the report said.
PD/BI and general liability continue to represent the largest amounts of premium volume written by Aon clients' captive insurance companies, according to the 2021 Captive Benchmarking Survey. The company is seeing sizable growth in captives writing such lines as directors and officers, cyber, environmental, and credit insurance, however, largely in response to the hard commercial market.
Aon said that around the world, it has also seen the increasing use of captive insurance to support more flexible employee benefits programs. That activity is being driven by a combination of market capacity and pricing, Aon said, in addition to companies with active diversity and inclusion programs seeking broader coverage than is typically available in the commercial market.
The report said that Aon expects to see greater use of captive insurance in such programs to provide more uniformity in employee benefits coverage across multinational organizations.
Aon noted a "marked increase" in its clients looking to gain access to reinsurance markets and said some of those clients are tapping reinsurance capacity through the use of protected cell facilities. The company's White Rock Group protected cell, incorporated cell, and segregated account facility saw 24 percent growth in the number of cells deployed between 2019 and 2020, the report said, with premium growing at a similar rate.
Captives also are showing an increased interest in exploring ESG investment funds for their assets, the Aon report said.
The report said Aon's captive feasibility studies for clients increased 50 percent in 2020, and 2021 is on pace to top that level. "Feasibility studies are a good indicator of interest in captives, and this surge in interest is indicative of the trend for more captive formations in the coming months," the report said.
When looking at regional captive insurance trends, the Aon survey found that in the Americas, organizations are making increased use of captives for property lines as well as various casualty programs, including workers compensation, general liability, and auto coverages. "On the auto side, this is particularly driven by the trucking industry, where Aon's 2021 Captive Benchmarking Survey shows a significant increase in the non-aviation transportation sector," the report said.
Aon said its survey also showed gross written premium placed in captives by the healthcare sector increased significantly between 2016 and 2020. "This has likely been driven by limited capacity in the commercial market," the report said. "There have been large jury awards in some US states against healthcare providers, which is making some insurers skittish about writing this coverage as social inflation is generally expected to increase."
As in other regions, the Aon survey also found increased captive use in the Americas to write cyber coverages, with gross written premiums for cyber risks increasing 300 percent between 2016 and 2020 among Aon-managed captives.
In the Asia-Pacific region, gross written premiums in Aon-managed captives have increased 23 percent over the last 5 years, the report said.
Among Aon-managed captives in the region, gross written premiums for PD/BI have increased 60 percent since 2016, the report said. Along with PD/BI, existing captives in the region are typically used to write general liability and marine cargo, though there are signs that future captive insurance use in the region might expand to additional lines, Aon said.
And, while India and China are relatively immature captive insurance markets, Aon said that it has been receiving inquiries from organizations in the two countries looking to understand the role captive insurance could play in their risk management programs.
The Aon report said that while captive growth in Europe, the Middle East, and Africa (EMEA) hasn't matched that of some areas of the Americas, the survey indicates an increase in captive and cell formations in the EMEA region from 2019 to 2020 as organizations look to alternatives to the hardening commercial market.
"We've seen particular growth in protected cell utilization for distressed supply chain-reliant sectors such as construction, waste management, paper, and the food industry," the report said of the EMEA region. "Clients have sought to access capacity in the re/insurance market that they are simply no longer able to find competitively in their domestic market."
As in other regions, Aon is seeing an increase in captive use in the EMEA region to address cyber and ESG-related risks, according to the report.
The Aon report noted that the increased use of protected cells and captive insurance companies and their reserving methodologies can help organizations' risk management activities and support them in overcoming short- to medium-term economic volatility. The opportunity to capture risk data that captives provide can also benefit claims activities, the report said, particularly for emerging and evolving risks like cyber and ESG-related risks.
The Aon report noted that while the rate of commercial insurance price increases has moderated in 2021, obtaining coverage remains a challenge in many lines that have experienced large losses, causing organizations to continue to look to alternative risk financing options.
"Looking further down the line, we do not expect an immediate return to soft market conditions," the Aon report said. "This, combined with increased rates in loss-hit lines—including property lines impacted by natural catastrophes—leads us to predict continued steady growth in the usage of existing captives and demand for new captives and protected cells to navigate coverage gaps and the budgetary challenges that organizations are facing."
September 13, 2021