Experts Offer Suggestions for Captive Insurers in "Chaotic" Market

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February 26, 2021

Tan colored graph paper with a grid and one red and three gray trend lines with a large globe in the background

Continuing hardening in the commercial insurance market is creating "chaotic" conditions for some captive insurance companies as they seek reinsurance or fronting insurance, according to some experts.

"It's fairly chaotic. It's a very hard market," Michael Woodroffe, president of Kirkway International, said during Business Insurance's 2021 World Captive Forum.

Speaking as part of a session titled "Declined! Now Where? Reinsurance and Fronting in 2021" during this year's virtual forum, Mr. Woodroffe described the current reinsurance market as "asymmetric."

"The problem's not the primary layer," he said. "The problem is really the working excess layers, the lead umbrella, if you will, for the middle and upper middle market."

Discussing reinsurance rates, Mr. Woodroffe said recent renewals for catastrophe coverage saw increases of 5–20 percent, depending on loss experience. "If you didn't have a loss, it wasn't so bad," he said.

In the US casualty market, reinsurance buyers saw increases of 10–15 percent, depending on industry and line, he said, though adding, "That's not really telling the full story."

"The big problem that's happened to most casualty lines in the US this year has been the layers $4 million excess of $1 million and $5 million excess of $5 million," Mr. Woodroffe said. "Obviously if you're a Fortune 100, that's your retention. But if you're a middle market client in many lines of business, these have rocketed up and some are just not available."

"It's a very asymmetric hard market," he said. "Certain areas are a nightmare, some areas are very straightforward."

Given the difficulty for midsize companies seeking working excess layer reinsurance, Mr. Woodroffe suggested a possible approach. A group captive could provide primary layer coverage, with buyers joining to form another group captive to provide the $4 million excess $1 million layer, using the treaty reinsurance market to provide stable coverage. "The economies of scale work in your favor," Mr. Woodroffe said.

For the $5 million excess $5 million layer, he suggested forming a risk purchasing group to buy a multiyear excess policy with a limited number of reinstatements. Again, allowing the group buyers to achieve economies of scale, he said.

Other suggestions that Mr. Woodroffe offered reinsurance buyers included purchasing multiyear reinsurance contracts where possible with built-in reinstatements to avoid renegotiating midcrisis. Mr. Woodroffe also suggested buyers lock in aggregate protection and that they structure swing-rated deals carefully to avoid reinsurance premium volatility. And he believes they should purchase reinsurance separately from fronting insurance. "Divide and conquer," he said.

For captive insurance companies seeking fronting coverage in the current market, another panelist, Lisa Willitts, owner of Captive Advisory Partners, offered thoughts on what fronting insurers are expecting from captives to enhance their chances of securing coverage.

Captives should expect potential fronting insurers to want to see audited financial statements, Ms. Willitts said. In talking to fronting insurers about what they were seeking from captives, "One of the first things everybody wanted to be sure of was that the captive opportunity had the ability to take on risk," she said.

Fronting insurers will also expect to see a feasibility study and business plan, as well as a long-term mindset from management. They'll also want to see the involvement of an experienced partner such as the captive manager or a program manager. "They want to make sure there's somebody there who can help everyone through this process," Ms. Willitts said.

Captive insurance companies can also enhance their chances with fronting insurers by presenting them a professional submission, including a full list of locations and exposures, details of the business and its goals, and a full loss history. The captive also should provide information on its planned retention, information on the captive's capitalization, and a certificate of good standing from the domicile of an existing captive, Ms. Willitts said.

Nick Frost, president of Davies Captive Management Limited, moderated the session.

February 26, 2021