A softening market is the perfect time to reassess your captive’s retained risk position and long-term financial stability. That was a key takeaway from WTW’s Captive Owners’ Forum. The event saw captive specialists share practical guidance on making the most of the current market cycle. Below, we summarize 10 ways to optimize your captive now.
01
By thoroughly reviewing both historical and prospective claim experience, you can identify areas where you could retain more risk, potentially reducing your overall insurance costs.
For example, if a large loss drops off your five-year loss history, you could afford to reduce the captive’s premium using burning claims cost analysis as foundation stone of pricing. If the Balance Sheet of the captive is healthy and can accommodate a maximum loss situation then possibly discount further the premium from captive to group.
By creating such opportunities to reallocate capital to strategic and value-adding initiatives, you can better support long-term performance.
02
Your captive’s capital and surplus position are critical indicators of its financial health. In a soft market, it’s time to check whether your current capital levels are optimal.
Excess capital can provide a buffer but can also offer growth opportunities where you’re able to use freed-up capital to expand and restructure your captive portfolio.
Can you explore new lines of business or increase limits for difficult-to-place risks, such as non-damage business interruption and comprehensive cyber/crime coverage, to make more of excess capital? Now’s the time to find out.
03
Packaging and closing-out historical open-policy years is a strategic move your captive could consider in softening markets.
By working with commercial fronting carriers or third-party runoff specialists, you could release reserves by transferring them off the captive’s balance sheet. However, don’t lose your focus on longer-term performance. Any short-term gains should not come at the cost of the stability and effectiveness of your captive in managing risks.
Getting the balance right here requires calling on advanced analytics and actuarial modeling to make sure your provision reserves and capital strategy for future market cycles remains robust.
04
Is it time to consider adding new lines of business to your captive’s portfolio, for example, including affinity business, key suppliers, or customer-related risks?
Exploring new risk options diversifies your risk profile and can also maximize profitability with insurance linked product supporting your business affinity programs in particular can generate additional profits through insurance sold to customers or business partners, creating stability in your captive’s results and positive cash flow.
05
Reviewing and cleansing historical reserves on your balance sheet is good practice in a softening market. This involves revisiting the provisioning of incurred but not reported (IBNR) or incurred but not enough recorded (IBNER) reserves to ensure your evaluation methods remain best practice and reflective of the current business environment. The ultimate outcome of this process can see you releasing reserves, but again, seek assurances that any shorter-term gain, does not risk long-term financial stability.
06
In a softening market, your captive may be able to benefit from reduced rates on risk transfer elements. You may realize savings in reinsurance (Rate On Line) costs, ranging from 0–20% compared to prior year. You could reinvest these savings into your captive or use them to expand its operations, optimizing your captive’s financial performance and boosting its risk management capabilities.
07
A softening market can create the right conditions to revisit and modernize your approach to managing risk. This may mean you can take on larger limits for difficult-to-place risks to manage these exposures more effectively, or create bespoke solutions that better align with your group’s risk retention appetite. Such moves enable your captive to offer valuable coverage that may not be available from traditional insurance markets.
08
Even in a soft market, you should continue to maintain good relationships with commercial carriers. Markets will harden again and your captive needs carriers’ continued support, and terms that reflect a true picture of your captive’s long-term risk profile.
Commercial carriers can also provide access to new markets or partners that may be able to offer improved risk transfer terms and better security arrangements.
Continuing to invest in carrier relationships can also give you more flexibility to explore additional lines of business or coverage insurers might be more willing to underwrite during a soft market, enhancing your overall risk management strategy.
09
Soft markets can allow your captive to build a war chest of excess capital, which can provide a significant advantage for your captive when rates rise again.
Maintaining a long-term vision means your captive is more likely to be a consistently valuable tool for risk management and financing, especially during inevitable hard market cycles.
Avoid the temptation to focus only on short-term gains that could compromise the stability and effectiveness of your captive, think about what you can do now to put your captive in a stronger position tomorrow.
10
One of the most effective ways to optimize your captive’s performance in a softening market and beyond is to use it as a profit center.
For specialist support to help your captive make the most of softening markets and position for long-term success, get in touch.
