Property captives are expanding, forming the basis of alternative programs

BURLINGTON, Vermont – Captives have been increasingly used to cover property risks over the past five years as commercial insurance rates have risen, providing alternative capacity and greater control over 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 Vermont’s total captive premium is related to property risks, and the $2.63 billion in 2023 home captive written premium is 29% higher than in 2022 and 100% more than in 2018, said Christine Brown, director of the department. captive insurance in the state’s captive insurance division.

She spoke during a session at the Vermont Captive Insurance Association’s annual conference last week.

“Even though we’re hearing that the markets may be starting to stabilize a little bit, we’re still seeing that growth,” she said.

The tightening rate environment has led 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 rate hikes and reduced capacity or increased deductibles have really put people in a position where now they’re fed up with the market and the traditional carriers and the pricing that’s going on, so they’re looking 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, risks must be run through catastrophe models to assess exposures, but the models vary, he said.

“You really have to understand what model you’re using, what hazards 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 at analyzing earthquake risk in California, and another may be better at Northeast storms, he said.

Additionally, while modeling companies have extensive experience analyzing some hazards, they are “green” for others, Mr. Rocchio said.

“I’m not looking for them to tell me what the terrorism or wildfire charge is,” he said.

Once organizations understand the probability of being hit by a catastrophe, which can be relatively low, they may be willing to take on more 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 extend coverage over non-cancellable multi-year terms, he said.

“Each program can be tailored to the client’s needs from either an exposure perspective or a financial cash flow perspective,” Mr. Rocchio said.

Property captives can also be used to access parametric hedging, said Derrick Easton, New York-based managing director of alternative risk transfer solutions for Willis Towers Watson PLC.

Parametric insurance, which is based on agreed hedging triggers such as wind speed, rainfall or temperature, has become more affordable compared to traditional hedging since the start of the tough market and can be used to cover previously uninsured exposures, he said .

“A property policy is great, but it doesn’t do it all. There are a lot of loopholes that they create, whether it’s just through deductibles, limits, add-ons, exclusions. There are a lot of ways that parts of a loss don’t fall under that property policy,” Mr. Easton said.

In addition, claim disputes can delay payments for years, he said. Parametric programs pay within days of coverage triggering, and the funds can be used to cover any expenses a policyholder may incur, he said.

While parametric coverage is often bought outright, it can be used to reinsure a captive, he said.

“If you’ve been forced to take massive deductibles due to challenges in the real estate market and you put them into your captive, your captive could be facing a bankruptcy event. So we have customers that are just putting this parametric capability behind them,” Mr. Easton said.

As the captive grows, it can take on more of the potential risk of catastrophe, he said.