The current market is a great opportunity for captives in 2021 to demonstrate their lasting value to middle market companies to finance their Employee Benefits and Property & Casualty insurance.
Businesses are facing a ‘cocktail of uncertainty’ in 2021, and the hardening insurance market is just one ingredient – alongside the pandemic, political risk, and international trade wars.
The global insurance and reinsurance markets are suffering from the impact of COVID-19 claims, which are likely to cost the market over $200 billion in insured losses. At the same time, the market is being negatively impacted by the fall in interest rates and the economic downturn, which will result in businesses reducing their insurance volume as a result of client insolvency, reduced inventory values, lower revenues and fewer employees.
The headwinds in the market have been clear for the last 18 months. In 2019, we predicted that carrier rates would increase for businesses that had historically enjoyed favorable loss ratios and that deductible increases would come under severe pressure. Today, these headwinds have become a reality as we see the pressures brought on by the hardening market looming large across all businesses, all geographies, and all classes of insurance.
The insurance pressure is being felt in terms of:
- Reduced capacity
- Increased premiums
- Increased deductibles
- Restricted coverage
In this environment, it is not surprising that insurance companies are recalibrating their risk tolerance appetite and their pricing outlook. Middle market companies should see this as an opportunity to do the same by utilizing a captive to finance their Employee Benefits and/or Property & Casualty insurance.
Captives In 2021
Captives in 2021 offer their insureds the most flexible solution to manage the impacts of a changing market. Captives can mitigate dangers by stabilizing pricing over the long term, reducing the cost of risk, tailoring wordings to ensure breadth of coverage, and offering companies a new profit center.
Middle market companies can use their captive as a tool to arbitrage the markets and to access the alternative captive reinsurance market to develop stop-loss programs to mitigate the impact of the hardening market. There are a number of additional creative and strategic uses for which a captive can be employed that will heighten the overall financial benefit to a business by monetizing those day-to-day risks that are inherent in an organization but for which the traditional insurance markets are unable or unwilling to deliver.
Captive owners will want to partner with an experienced broker to integrate an Enterprise Risk Management (ERM) process which is an integral part of managing their business. This provides a guide to systematically identify, assess, treat, monitor and review risks with the aim of improving the captive’s ability to reduce the likelihood and/or impact of identified risks that may affect the achievement of business objectives.
Our approach to risk mitigation is to design insurance solutions for middle market companies thereby generating a new revenue stream from the captive. Please connect with BlueStone Advisors if your firm is interested how a captive can benefit your organization.
Andrew Royce, CIC, CRM, CLCS, CRIS is Co-Founder & President of BlueStone Advisors, LLC, an insurance brokerage and consulting firm specializing in Property & Casualty, Executive Risks, Employee Benefits and Captives. He has over 20 years of industry experience and can be reached at aroyce@bluestoneadvisors.com.