Hardening Insurance Market Could Spur Europe Captive Sector Growth

With the commercial insurance market continuing to harden, Europe's captive insurance segment is likely to experience an uptick in new captive formations and greater use of existing captives, according to a new report from A.M. Best.

Best's report notes that since the beginning of 2020, commercial insurers and reinsurers have frequently reported double-digit percentage increases in rates and a tightening of terms and conditions. Casualty lines in particular have experienced significant price increases, the rating agency said, as insurers have responded to the impact of "social inflation" resulting from increased litigation and so-called "nuclear verdicts."

As renewal discussions have become more difficult, Best said it has seen an uptick in the use of existing captives, with a number of captives increasing retentions or limits on existing coverages or looking at expanding into new lines of business as captive parents look to make greater use of the vehicles.

The report said Best also believes the current market environment could lead to an increase in captive formations as challenging economic conditions combined with the insurance market environment prompt companies to look more closely at optimizing their risk transfer programs.

The report said the rating agency expects regulatory tweaks in some European captive domiciles. It noted that Europe's three largest domiciles—Guernsey, Luxembourg, and the Isle of Man—saw reductions in their number of registered captives in 2019, though Best expects that trend to be reversed in 2020 and 2021 as a hard insurance market increases the appeal of captive insurance.

Best said that captives it has rated in Europe have been resilient to the COVID-19 shock, generally maintaining stable rating fundamentals in 2020. Best-rated European captives have generally benefitted from conservative investment allocations and a generally limited impact of COVID-19-related claims, the report said.

The report does note that some of the captive insurance companies Best rates in Europe write credit insurance and surety business. "These are likely to encounter increased loss experience as the recessionary impact of the COVID-19 pandemic has the potential to lead to higher levels of corporate defaults," the report said.

To this point, however, the loss experience in those lines has been limited as state-sponsored support initiatives across Europe have so far curbed the number of corporate delinquencies, Best said.