Insurance Costs Too Steep? Try Writing Your Own

LONDON — Fed up with rising prices and more stringent terms and conditions for their insurance policies as a result of the coronavirus pandemic, companies are turning to in-house insurance firms.

These so-called “captive” insurers are already common among large firms, with most FTSE 100 and Fortune 100 firms owning one, industry sources say.

But billions of dollars in pandemic claims have led traditional commercial insurers to ratchet up insurance rates, driving firms to use their captives for more classes of business, or set up new ones.

“For many, insurance has become or is becoming more expensive, so people are turning to captives,” said Rodney Bonnard, insurance leader for EY UK Financial Services.

“We are seeing a massive uptick.”

Seventy-six new captives were formed this year globally, a 200% year-on-year growth, according to insurance broker Marsh . That level of growth is “unprecedented,” Michael Serricchio of Marsh Captive Solutions told a recent webinar.

Captives are set up as an insurance company with their own underwriters, though industry sources said regulatory requirements were slightly less onerous. Most captives do not write business for other firms.

This insurer status enables them to buy reinsurance – insurance for insurers.

Company insurance buyers feel unhappy about the current situation, with commercial insurance prices up 19% on average in the second quarter, according to Marsh, while policies have also seen more exclusions, for instance for pandemics.

This combination of events is described by insurers as a “hard” market, but British insurance buyers’ association Airmic has renamed it “harsh.”

“Insurance companies are pricing themselves out of the market,” said Julia Graham, deputy CEO of Airmic.

“If you can’t buy fire insurance or flood insurance for a sensible price, it may well be you choose to underwrite that yourself.”

Half the respondents in an Airmic survey of members already use captives, and another 20% are considering setting one up.

Laurent Nihoul, group head of insurance at steel producer ArcelorMittal, said businesses were facing a “triple crunch” from insurers, who were raising prices, reducing the amount of cover they offered and putting in tougher conditions.

“The relationship with the client is not the same as before – servicing quality is going down,” he told a recent webinar organized by European risk managers’ trade body Ferma, adding that ArcelorMittal was using its captive “more and more.”

More Risk

Insurers, however, say that recent price rises, which started before the pandemic but accelerated through it, follow years of falling rates. Despite the recent rises, premium rates have generally not returned to levels seen a decade or more ago.

Insurers also say they face greater risks due to the pandemic.

One of the classes of business to see steep rises, encouraging a move to captives, is director’s and officer’s insurance, bought by corporates against litigation costs.

This has rocketed as a result of COVID-19, by as much 2,000% for particularly exposed companies, according to insurance broker Gallagher.

More than 200 claims have been filed in U.S. courts against companies allegedly responsible for introducing and spreading COVID-19 in the United States, according to risk modeling firm Praedicat.

Other classes of business written increasingly by captives include cyber insurance, according to a Marsh survey of regulators, while 25 captives are already writing pandemicinsurance, a sector Marsh expects to grow.

Pharma and energy firms are among those seen as likely to make use of captives, given the risk of damage from their products.

But all types of firms are using captives, industry sources said.

Aluminum company Norsk Hydro told Reuters it had the world’s oldest running captive, formed in 1920. A captive can cut insurance costs and any profit stays in the company, it said by email.

Captives are often based in off-shore locations like Bermuda and Guernsey, which may bring tax advantages.

But for some companies, the prospect of setting up an in-house financial institution does not appeal, due to tough capital rules, particularly in Europe.

“The disadvantage is that it’s an insurance company, (European Union) Solvency II regulated,” said Brian Kirwan, head of structured solutions at insurance broker McGill.

“You need to have the regulatory structure.”