BURLINGTON, Vermont – Captives have increasingly been used to cover property risks over the past five years as commercial insurance rates have spiked, providing alternative capacity and greater control of rates, a panel of experts said.
The vehicles can also be used with other alternative risk transfer programs such as structured insurance programs and parametric coverages, they said.
About 9% of total captive premium in Vermont is related to property risks, and the $2.63 billion in 2023 property premium written through captives in the domicile is 29% more than in 2022 and 100% more than in 2018, said Christine Brown, director of captive insurance in the state’s captive insurance division.
She was speaking during a session at the Vermont Captive Insurance Association’s annual conference last week.
“Even though we are hearing that the markets may be starting to stabilize a little bit, we’re still seeing that growth,” she said.
The hardening rate environment has driven property owners to consider captives, said Ray Rocchio, executive vice president at Keystone Risk Partners, a Media, Pennsylvania-based unit of Ryan Specialty LLC.
“The last four years of increasing rates and reduced capacity or increasing deductibles has really kind of put people in a position now where they’re just tired of the marketplace and traditional carriers and the pricing that’s going on, and so they’re looking for alternatives,” he said.
But captive owners should carefully review their catastrophe exposures before placing property risks in their captives, Mr. Rocchio said.
As part of that process, the risks need to be run through catastrophe models to assess exposures, but the models vary, he said.
“You really need to understand which model you’re using, what perils you’re looking at, and what version of the model you’re looking at,” Mr. Rocchio said.
For example, one modeling company may be strong in analyzing California earthquake risks, and another may be better for Northeast windstorms, he said.
In addition, while modeling companies have extensive experience analyzing some perils, they are “green” on others, Mr. Rocchio said.
“I’m not looking for them to tell me what the terrorism charge is or wildfires,” he said.
Once organizations understand the likelihood of being hit by a catastrophe, which can be comparatively low, they may be willing to take more of the risk in a captive, Mr. Rocchio said.
Structured programs can be developed through a captive to tailor coverage, access the excess and surplus lines market, and spread coverage over noncancellable multiyear terms, he said.
“Every program can be tailored to the client’s needs from either an exposure or financial cash flow perspective,” Mr. Rocchio said.
Property captives can also be used to access parametric coverage, said Derrick Easton, New York-based managing director, alternative risk transfer solutions, for Willis Towers Watson PLC.
Parametric insurance, which is based on agreed-upon coverage triggers such as wind speed, rainfall or temperature, has become more affordable compared with traditional coverage since the hard market began and can be used to cover previously uninsured exposures, he said.
“A property policy is great, but it doesn’t do everything. There are lots of gaps that it creates, whether that is just simply through deductibles, limits, supplements, exclusions. There are lots of ways that parts of a loss fall outside of that property policy,” Mr. Easton said.
In addition, claims disputes can delay payments for years, he said. Parametric programs pay out in days after coverage is triggered, and the funds can be used to cover any expenses a policyholder may incur, he said.
While parametric coverage is often bought directly, it can be used to reinsure a captive, he said.
“If you’ve been forced into taking massive deductibles because of the challenges in the property market, and you’re putting that into your captive, your captive could be facing a bankruptcy event. So, we’ve got clients who simply put this parametric capacity behind it,” Mr. Easton said.
As the captive grows, it can take on more of the potential catastrophe risk, he said.
