In the landscape of economic uncertainty and a high rate of elevated claims, many businesses encounter certain common challenges and issues in a hard insurance market. According to Charles Spinelli, during this stage, premiums surge abruptly, underwriting becomes more limited, and the limit of coverage is reduced.

While many businesses strive to maintain comprehensive and relatively affordable insurance protection, the preference of many has become captive insurance as a great strategic alternative. Forming a captive insurance under own control as a subsidiary benefits the organizations to gain greater control, unique risk management, and financial stability while minimizing their tax obligations. This has made ‘captive’ a valuable approach during hard market cycles.

Understanding Hard Insurance Markets

A hard insurance market refers to the phase when the industry witnesses an increase in premiums, stricter underwriting guidelines, and limited coverage. In general, this condition stems from sustained losses in the insurance industry, economic volatility, various other factors like changes in tax rules and government regulations.

During this period, businesses may experience unexpected exclusions, non-renewal of policies, and an abrupt increase in premiums. Under such conditions, many organizations are opting for alternative risk management solutions.

What Captive Insurance Offers

Formed as a self-insurance by a parent company, a business can build its own licensed insurance entity. Despite depending solely on traditional insurers, an organization can invest in the entity that helps manage its own and unique risk areas, like cyber liability, environmental risk, supply chain disruption, etc.

Typically, captives can manage a wide variety of exposures, from general liability to workers’ compensation and more emerging and specialized risks that traditional insurers fail to cover. Some of the unique advantages of captive include.

Greater Stability in Pricing and Coverage

One of the captivating reasons why businesses prefer to invest in captives is to gain control over premiums and stabilize them. Given that traditional insurers have the likelihood to increase premiums depending on market conditions, a captive sets its rate of premium based on the risk profile and loss history, in the opinion of Charles Spinelli.

Moreover, the entity allows its parent company or group of companies (group captive) to individualize coverage that happens to be challenging or costly to obtain from the commercial market. Thus, it offers greater flexibility when it comes to risk management of big companies.

Greater Risk Management

Apart from retaining a considerable portion of the business risk of the parent company, captives invest in effective and relevant safety programs, handle claims, and undertake special measures for loss prevention. Over time, improved risk management measures work effectively to reduce claim frequency and harshness, dropping costs for the captive and its parent business.

Financial Benefits and Return on Investment

When insurance plans are bought from a traditional insurer, premiums typically paid to carriers over the years add to the overall expense of the company. Conversely, captives can retain the underwriting profits and investment income.

When losses are less than what is predicated, the excess capital is retained within the captive, keeping the opportunity to use it for funding future capital needs, increasing coverage, or offering financial returns to its parent.  This facility to recapture premium dollars offers an appealing financial stability while insurance costs in the hard insurance market increase.

Access to Reinsurance Markets

Captives give direct access to the global reinsurance market, usually at a more competitive price than the standard insurance carriers. The reinsurance partners can support captives in risk distribution, empowerment, and loss prevention. Such access enables companies to devise more meaningful and customized risk financing structures.

During hard insurance markets, businesses face challenges to secure stability, control, and affordable coverage options. Captive insurance comes as a strategic solution, enabling organizations to confidently manage increasing premiums, strict underwriting, and coverage restrictions.