Captive Insurance: Mitigate The Vulnerabilities From The Pandemic & Geopolitics

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Author

Kaviraj Nuckchedee

Standpoint

Perhaps you, may find some comfort in knowing that in this moment in time — as unprecedented, challenging and uncertain as it may be, self-insuring risk with a captive is an optimal solution for many organisations. The Coronavirus pandemic has contributed largely to make us become aware of the different weaknesses within an organisation as well as abruptly changed the way we operate, resulting in a major digital transformation operation that we all had to accept, whether we liked it or not, notwithstanding the business interruption some organisations had to face.

Add to that the recent Geopolitics crisis that is having a momentous and unfair impact on several countries, if not all, disruptions can happen anytime and anywhere.

We are all observing that these disruptions have an impact on a daily basis to almost all sectors around the world and it is urgent that organisations take one step back to reflect and analyse the situation so that they can take two steps forward to wisely protect their businesses & companies. Now this is exactly how Captive insurance has risen to the top throughout a volatile time which has made organisations more cognizant of their risk exposures. The Captive Insurance industry has made the difference as a solution that is valuable and worthy of investment. Self-insuring risks puts organisations in control of their destiny while providing the added benefit of turning into profit, realising cost-savings and streamlining efficiencies.

The captive concept, as we know it now, took birth during the Boomers generation. Its popularity keeps growing as its demand soars up. While we are now the Booster dose generation, the Captive era has begun, as we see captives flourishing across the globe, being utilised ever more by those who were not previously involved or even aware of the possibility of having a captive.

 

Hardening of insurance market

Captives have been useful during the pandemic years and will become a much more important tool in the years to come as organisations have learnt from the pandemic and are in fact still learning as other global uncertainties be it geopolitics or an environmental crisis arise.

Captives, being a strategic risk management tool, help to support their parent companies to optimise the placement of certain insurance and the recent increase interest for this type of solution is also clearly a reaction to the hardening insurance market with significant premium increases, capacity reductions and coverage restrictions.

Even though the hardening insurance situation is to a large extent attributed to the pandemic, it is also due to the fact that the insurance premiums rates were, over the past decades, more on downward trend and the claims costs were more on an upward trend, impacting the profitability of the insurance market. Through a Captive, insureds create their own insurance companies, reducing their reliance on traditional insurance market.

This approach can shield companies from market fluctuations and provide a level of independence in creating customised insurance programs to meet their own risk financing needs.

 

The numbers speak for themselves

From a more factual perspective, a considerable increase in captive solutions was noted from 2019 to 2020. Captives with North America parents rose by 7%, and those with Europe-based parents grew 3%. Meanwhile, the number of captives with parents based in Asia Pacific grew by 25% from 2019, while Middle East parents’ captives increased by 20%.

Captives are known for providing flexible and customisable insurance solutions and the growth in coverages from a non-traditional risk perspective has experienced an increase of the past years. Cyber risk is one among and is becoming more and more relevant. Other than that, there is Environmental risk, Intellectual property risk, Directors & Officers Liability risk, medical stop-loss amongst others that are emerging as lines of policies under a Captive.

 

Get Going

Captives’ growth over the past years have been substantial, proving their value as a strategic risk management tool for a wide variety of organisations across the globe. With unending market challenges and sprouting coverage needs, organisations should assess whether they are using their existing captives at the optimum level or to embed a Captive in their structure to optimise their risk management, cost reductions as well as preventing erosion of profitability. Captives do remain an effective way to address market uncertainties, new emerging risks as well as known risks.