Skip to main content

Article

Captive insurance creates options for property market challenges

Increasing losses impact property insurance market.
People meeting for business

The current global property insurance market — one of the most challenging in decades — presents an opportunity for companies to explore captive insurance arrangements.

Increasing losses impact property insurance market

Property owners face the risk of more frequent and severe losses at a time when insurance capacity is shrinking and pricing for available coverage is rising. These conditions are expected to persist into 2024, barring unforeseen changes in circumstances.

Global pricing for property insurance rose 7% in the third quarter of 2023, and 10% in each of the prior two quarters, according to Marsh’s Global Insurance Market Index. In the US, property insurance pricing, on average, has risen for 24 consecutive quarters, including a 14% year-over-year increase in the third quarter. In the Latin America & Caribbean region and in Europe, property insurance pricing in the third quarter rose, on average, 8% and 7%, respectively; IMEA rose 4%; the UK, Asia, Pacific regions all increased 2%; and Canada rose 1%.

Several trends are influencing the property market, including the high cost of reinsurance, which primary insurers typically pass along to policyholders; strong demand for limited capacity; ongoing losses; and inflation of property values. Between 2017 and 2022, the global property insurance market incurred an average annual natural catastrophe loss of $110 billion, compared with $52 billion over the prior five-year period from 2012 to 2017, according to Swiss Re.

In addition to raising pricing, insurers are scrutinizing their property loss exposures and taking actions that include tightening terms and conditions, raising deductibles, and withdrawing capacity for loss-prone geographies. Capacity is particularly constrained in areas such as California, Florida, and Louisiana, but demand is growing as property owners continue to build facilities in the central US, where severe convective storm activity and other perils are increasing. In New Zealand and parts of Europe, underwriters continue to scrutinize flood exposures.  As a result of insurers’ actions, many property owners face the prospect of paying more and/or obtaining less desirable coverage than they had previously.

Captives bring options

Captive insurance offers one of the most effective, established options for property owners that want to ease some of the challenges in the commercial property insurance market.

As in other hard market cycles, more companies are turning to captive insurance, seeking flexibility and risk-financing options, including setting up new entities, expanding the scope of existing captives or increasing limits in existing captives. Captives have shown that they can deliver long-term value to their owners, particularly in providing a stable source of capacity and the ability to respond to specific coverage needs.

If a property owner already has a captive, funding more property risk is relatively simple. If an organisation does not have a captive but can align its resources and risk tolerance to retain more risk, now may be a good time to consider forming one.

Potential advantages of using captives for property risks include:

  • Accessing additional capacity to supplement available commercial insurance.
  • Increasing control over the property risk management program, enabling the captive to set deductibles.
  • Achieving improved rates, terms, and conditions when transferring risk into the commercial market.
  • Addressing specific coverage needs, such as filling gaps in excess layers and difficult to place layers within the property program tower.
  • Quota sharing with and without a front.
  • Accessing a variety of Terrorism Insurance Pools.

Consider the following examples of how a captive can fund additional property risk:

selected option

Captives offer a formal mechanism for retaining and self-insuring risks. By funding more of the working layer through a captive, a property owner may be able to expand coverage capacity and reduce the cost of risk transfer. Corporates can enable subsidiaries to purchase insurance from the commercial market at a higher level than their appetite. Taking a higher deductible or self-insured retention lets commercial insurers reduce their loss exposure, which can lead to more favorable rates, terms, and conditions for the insured.

Sharing property risks with commercial insurers through quota-share arrangements is another way for property owners to reduce risk transfer expenses. For example, a captive could enter a quota-share in which it writes 40% of the risk, with commercial insurers taking the remaining 60%.

Captives also can fill gaps in layered programs, plugging holes and filling out excess insurance programs. Some property insurers prefer to offer “ventilated” layers, in which they provide coverage at different points rather than a single block of capacity. A captive can fund exposures within these ventilated layers, giving the property owner more control over the structure and cost of its excess coverage.

Captives can participate in funding property risks by using a fronting carrier and reinsuring a portion of the underlying risk. One advantage of a fronting insurer is its ability to issue certificates of insurance to satisfy proof of insurance requirements in business contracts, covenants, or loan agreements. International jurisdictions often require local admitted coverage, making a fronting arrangement a logical alternative in some instances.

How Marsh can help

Marsh is the world’s largest captive manager — writing over $10 billion in gross written property premium — and a trusted advisor with global capabilities and market relationships and a deep knowledge of captives and alternative risk transfer. Marsh specialists can help property owners explore their options and help them build an effective risk management program.

When property owners are interested in alternative risk transfer and captives, it is important for them to consider these options early — ideally, 120 to 180 days before policy renewal. Multiple options exist for captive structures, ranging from existing stand-alone captives to forming monoline, fast-track cell captives, which have experienced double-digit percentage growth in the past two years, in part due to their ease of formation.

For more information on how captives can help property owners, contact your Marsh representative.

For information on our latest benchmarking results, please download the 2023 Captive Landscape Report. If you’re new to captive insurance and want to better understand what it is and how it works, we invite you to download The Definitive Guide to Captive Insurance.

This publication is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is  based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. LCPA approval is 23/532

Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) (“Marsh”) arrange this insurance and is not the insurer. The Discretionary Trust Arrangement is issued by the Trustee, JLT Group Services Pty Ltd (ABN 26 004 485 214, AFSL 417964) (“JGS”). JGS is part of the Marsh group of companies. Any advice in relation to the Discretionary Trust Arrangement is provided by JLT Risk Solutions Pty Ltd (ABN 69 009 098 864, AFSL 226827) which is a related entity of Marsh. The cover provided by the Discretionary Trust Arrangement is subject to the Trustee’s discretion and/or the relevant policy terms, conditions and exclusions. This website contains general information, does not take into account your individual objectives, financial situation or needs and may not suit your personal circumstances. For full details of the terms, conditions and limitations of the covers and before making any decision about whether to acquire a product, refer to the specific policy wordings and/or Product Disclosure Statements available from JLT Risk Solutions on request. Full information can be found in the JLT Risk Solutions Financial Services Guide.”