Risks too high for insurers are fueling a $200 billion market boom

Enjoy free access to the best ideas and information – selected by our editors.

(Bloomberg) — As the domestic insurance market tops a record $200 billion, the reasons behind the boom show how a hotter, less stable planet is redrawing the risk map for corporations.

Captive insurance, where companies create their own coverage vehicles, is on the rise, according to insurance broker Aon Plc. Companies use it to avoid restrictions or prohibitively high prices imposed by outside insurers. And it is a development that is particularly pronounced in sectors related to climate change.

Oil and mining companies “are now using their captives to a greater extent,” John Englishexecutive director of captive management and insurance at Aon, said in an interview. That’s as coverage from outside insurers becomes “unaffordable or unappealing from a price and capacity perspective.” In fact, a number of insurers and reinsurers have simply “turned away” from fossil fuel firms, he said.

It’s the latest sign that climate change is changing the rules that underpin how markets work, as well as the economic cost of covering impact balloons. A recent report by Aon noted that the captive insurance market has grown “significantly” in recent years, with about a quarter of the nearly 3,000 companies that surveyed saying they resorted to such arrangements. In 2021, the figure was 17%.

“Climate change has a magnifying effect on all the risks we know,” he said Peter Carterhead of climate and captives at broker WTW. And the captives “play a dampening role,” he said.

Read more: Natural disasters will cause annual insurer losses of $151 billion

How Captive Insurance Works: A captive arrangement typically works as a special purpose vehicle created to insure or reinsure the risk of the parent company that sets it up. Companies transfer premiums to their own insurance SPVs. Construction can sometimes be used to share coverage with outside insurers or to use alternative risk transfer solutions such as parameters.Captives offer tax benefits, and companies using them can reinvest excess cash from their premiums. Captive insurance is used to cover a range of risks, from the environment to the threat of cyber attacks. Captive data do not capture the full extent to which companies insure internally. That’s because a company can also opt for self-insurancewhere he puts money aside to cover future losses without creating a regulated SPV. The global captive insurance market surpassed $200 billion in premiums last year, marking an all-time high, according to data shared by WTW.

This comes as extreme weather is pushing mainstream insurers from the US to Europe to raise prices to levels that make their services increasingly unaffordable. Sectors affected by the development period utility renewable energy operators farms.

“We’re seeing a lot of premiums in weather,” he said Anna Pereirasenior vice president at Strategic Risk Solutions, captive insurance specialist and former head of captive banking and insurance at the Bermuda office of HSBC Holdings Plc.

“Some large insurance companies in the US don’t do certain types of business or in certain geographies that are very exposed, and prices have gone up significantly,” she said.

At the same time, a growing number of insurers and reinsurers are turning away from fossil fuel companies as they try to comply with climate policies and the transition to cleaner energy. Globally, 46 insurers now have some form of restriction on coal, oil or gas companies, according to We secure our futurea coalition of nonprofit organizations.

BHP Group Ltd., TotalEnergies SE, Enel SpA, BP Plc, Glencore Plc and Shell Plc have all created internal entities to hedge their risk, according to company filings. Other commodity companies now Relying in the captive market is Thungela Resources Ltd., the spinoff from Anglo American Plc. Australian coal producer Whitehaven Coal Ltd. said it is in process to establish one.

In some cases, government-funded programs step in as commercial insurers pull back. North Dakotain the meantime, he recommends companies turn to captives. In the state, which is home at 10 percent of U.S. crude oil reserves and one of the world’s largest deposits of lignite coal, the few insurers still willing to cover pure-play coal companies are raising rates and limiting policy renewals, according to a analysis by Bank of North Dakota.

Captive breeding can be bad news for the climate, right Ariel Le Bourdonnecinsurance activist at nonprofit Reclaim Finance.

Captives are a “shadow part of the insurance industry” that allows polluting assets to be continuously insured, he said. Ultimately, the development could delay the transition to green energy, he said.

And companies that insure themselves may underestimate the risks they face. The most notable example in recent history is BP, which in 2010 based on its captive insurance vehicle, Jupiter Insurance Ltd., to cover the Deepwater Horizon oil rig. When that rig exploded and sank, killing 11 people and causing the largest offshore oil spill in US history, BP’s captive insurance settlement was capped at $700 million and there was no reinsurance arrangement. BP is still counting the cost, which it has since had rose up in the tens of billions of dollars.

“If there is no alternative, when things go horribly wrong, the insurer of last resort often ends up being private individuals or the government,” says WTW’s Carter. In the long run, captives can help ensure there is a “fair balance” between who gets to “save the failing capital system,” he said.

Aon’s English said there was a risk that captives could extend the life of high-emitting assets “if one does it blindly”. But such arrangements also help give companies time to adjust to a changing regulatory environment, he said.

“There’s a period of time where we have to phase these things out,” English said. The question then becomes, “what does that step look like?”